EH.net is owned and operated by the Economic History Association
with the support of other sponsoring organizations.

The Rise of Commercial Empires: England and the Netherlands in the Age of Mercantilism, 1650-1770

Author(s):Ormrod, David
Reviewer(s):Hohenberg, Paul M.

Published by EH.NET (December 2003)

David Ormrod, The Rise of Commercial Empires: England and the Netherlands in the Age of Mercantilism, 1650-1770. New York: Cambridge University Press, 2003. xvii + 400 pp. $75 (cloth), ISBN: 0-521-81926-1

Reviewed for EH.Net by Paul M. Hohenberg, Department of Economics, Rensselaer Polytechnic Institute.

The late Charles Kindleberger liked to quote an unnamed physicist to the effect that “everything is much more complicated than most people think.” He was an economist who turned to economic history, yet it is usually scholars coming to the subject from history who assert the complexity of the individual case as a critique of the sweeping generalizations and simplified, universal models that economists favor. The present volume can stand as evidence in favor of the view that things indeed get complex when one digs deeply into any subject. David Ormrod (Senior Lecturer in Economic and Social History at the University of Kent in Canterbury, England) has been exploring the commerce of England and Holland in the early modern period for many years. The present book is an outgrowth of research begun for his doctoral dissertation (completed in 1973) and presented at a Montreal colloquium the next year, whose bi-lingual Proceedings this reader happened to co-edit (1975). In fact, the book limits itself pretty much to the commerce of the North and Baltic Seas and to the related industries. Long-distance trade and financial matters get much less attention.

Ormrod has cast his progress through the thickets of history in the framework of recent debates on the role of institutions, notably the central state, in the process of economic development. He sides with those, such as Epstein (2000), who see a positive role for the activist state, and by inference against the view championed by Douglass North and others that government’s main contribution is to reinforce property rights and then stay out of the way. The rise of Britain can be attributed, Ormrod argues, largely to successful and sustained mercantilism. Messy and drawn out its execution may have been, but the combination of policies represented by the Navigation Acts, a strong navy, and protectionism resulted in Britain’s capturing gains from trade as well as achieving fruitful import substitution. The argument is fairly persuasive, although one thinks of the year 1776, after a century or so of such “success,” and recalls two events: the rebellion of the most populous colonies and Adam Smith’s magisterial rejection of the whole mercantilist paradigm.

The book focuses tightly on England and the Netherlands (really Holland), and somewhat more on the first. It is clear that including France and Spain, for instance, would have brought out the limits of British government action and the beneficial effects of this relative restraint. The binary comparison points up the role of the British state, and may therefore slight the crucial response of the private sector to the opportunities that mercantilist policies opened up. Still, the idea that development owed a lot to long-sustained and purposeful political action in an age of radical social inequality is worth pondering since it is so distinctly unfashionable — somewhat akin to challenging the prevailing skepticism regarding China’s current strategy of vigorous economic reform coupled with glacial political change. Can it really work for any length of time?

The book does address the long-running debate about Holland, of course. Did the Republic “decline” in the eighteenth century, and if so, why? Here Ormrod takes issue with Jan de Vries and Ad van der Woude who defiantly label the Dutch economy “modern” (1997). In Ormrod’s view, since state formation and action proved critical to development, the Dutch Republic should be seen by contrast as the last — and most highly developed — of the pre-modern city states (really a federation of city states). A strong central state presiding over a unified domestic market is the true sign of modernity, on this showing, something the Dutch did not develop. And, of course, if British growth indeed owed much to mercantilist policies, then Dutch decline is a direct corollary. Mercantilism was after all based on a view of the world as very nearly a zero-sum game. Growth and decline may be relative, but hegemony or leadership is not.

English mercantilism was in large part about acquiring market power in trade, as well as reducing that of their rivals. What had made the Dutch prosperous was not just trade, but trade with market power, along with efficient intermediation, from shipping and entrepot trade to banking. Competition, notably from England, hurt Dutch profits even more than the volume of Dutch trade, even as Britain adopted effective Dutch practices. In fact, Ormrod appears to argue that part of the Dutch problem came from tying up capital in low-margin lines. Another economic aspect that figures strongly in the book is the trade-off between tariffs and taxes to finance the state, especially in times of frequent conflict. While protection can be costly in partial equilibrium — less so when one works the infant-industry game as well as the English did — tariff revenues, even net of rebates, etc., did help keep taxes in Britain lower than in the Netherlands.

Of course another, more materialistic interpretation of Dutch difficulties is consistent with the evidence, and it too is part of Ormrod’s story. The Republic was vulnerable as a (natural) resource-poor country heavily dependent on trade for its subsistence, its wealth, and its employment, including processing industries such as dyeing, printing, and food processing. The energy sector is telling. The one domestic Dutch source, wind aside, was peat, a depletable asset with no real scope for innovation. England, on the other hand, had enough coal for a couple of centuries of industrial development, and developed steam engines as well as coal-based metallurgy to help mine, transport, and consume the superior fuel. Diminishing returns on one side and a stimulus to enormous technological change on the other: who cares about institutions!

I have tried to bring out the bones of Ormrod’s thesis, but the potential reader needs to be warned that they are pretty well buried in the book itself. This is no easy read. Most of the text consists of dense discussion of details, significant to be sure, but not always easy to relate to the larger questions. Sources, data, business organization, and earlier interpretations are subjected to thick description and close analysis. Long chapters cover trade in wool, linen, grain, and coal, as well as shipping, commercial policy, and the Dutch staplemarket. Part of the problem no doubt stems from the fact that this is a reworking of much older material, part also from a Weltanschauung that shuns simplification and revels in the fruits of archival research. Still, the patient reader can find here much information and fodder for some important questions. As for what is modern, that debate will no doubt go on.

References:

Jan de Vries and Ad van der Woude, The First Modern Economy: Success, Failure and Perseverance of the Dutch Economy, 1500-1815 (New York: Cambridge University Press, 1997).

Stephan R. Epstein, Freedom and Growth: The Rise of States and Markets in Europe, 1300-1750 (New York: Routledge, 2000).

Frederick Krantz and Paul M. Hohenberg, editors, Failed Transitions to Modern Industrial Society: Renaissance Italy and Seventeenth-Century Holland (Montreal: Interuniversity Centre for European Studies, 1975).

Paul M. Hohenberg is Professor Emeritus of Economics at Rensselaer Polytechnic Institute. He is the author, with Lynn Hollen Lees, of The Making of Urban Europe, 1000-1994 (Harvard University Press, 1995).

Subject(s):Markets and Institutions
Geographic Area(s):Europe
Time Period(s):18th Century

Poverty from the Wealth of Nations: Integration and Polarization in the Global Economy since 1760

Author(s):Alam, M. Shahid
Reviewer(s):Eng, Pierre van der

Published by EH.NET (January 2003)

M. Shahid Alam, Poverty from the Wealth of Nations: Integration and

Polarization in the Global Economy since 1760. Basingstoke: Palgrave, 2000.

xv + 215 pp.$69.95 (hardcover), ISBN: 0-312-23018-4.

Reviewed for EH.NET by Pierre van der Eng, School of Business and Information

Management, Australian National University.

This book basically seeks to answer a question that has confounded many

authors: Why did the West become so much richer than the rest? Where David

Landes took more than 500 pages to address this question, M. Shahid Alam,

Professor of Economics at Northeastern University in Boston (USA), requires

just 180 pages of text. Of course it is possible to give a brief answer if you

keep it simple. Alam’s answer is simple: today’s less-developed countries

suffered from a lack of autonomy as a consequence of European imperialism since

the mid-eighteenth century. As colonies and dependencies, they were not allowed

to map out their own future, invest in education and infrastructure, and —

more importantly — use trade barriers to pursue import-substituting industrial

policies on which to base their further industrialization and development.

There are some nuances, but that’s basically it.

How does Alam arrive at this conclusion? Not by meticulously dissecting the

economic history of less-developed countries and the processes of colonization,

but by raking over some of the existing literature and by cranking

cross-country panel data in chapter 6 that seems to be the meat in this slender

publication.

The author is so taken by his thesis that every chapter, including the preface,

restates it at some stage in some form. For instance, the introductory chapter

is not a preamble to the issue that will be investigated and the hypotheses

that are to be tested, but is a summary of the rest of the book. Without having

read the substantiation in other chapters, a reader who expects an introduction

may find it hard to understand why Alam churns out one sweeping statement after

another, without substantiation or explanation. For instance: “…lagging

countries which were free [i.e., not colonized] and chose to resist the logic

of international integration — to save, shore up and modernize manufactures,

enterprises and skills — continued to industrialize, to grow and to narrow

their economic distance behind the advanced countries” (p. 5). It is unclear

which countries are meant, or whether any concrete examples actually fit this

typification. Perhaps Japan does, but does Mexico or Afghanistan?

Chapter 2 may be of interest to economic historians, because it surveys the

available literature on the history of global disparities in income and living

standards. For instance, Shahid Alam compares historical estimates of GDP per

capita provided by Bairoch and Maddison. Largely by accepting Bairoch’s

estimates, he establishes that around 1760 per capita incomes in Western Europe

and the rest of the world were broadly comparable and that disparities have

increased since. The author omits a probing of the sources that led Bairoch and

Maddison to arrive at different estimates for the early nineteenth century. Had

he done this, he may not have accepted Bairoch’s estimates for the early period

so readily.

Chapter 3 is an historical overview of the views of economists on international

trade and investment. The bad guys are Smith and Ricardo and ‘orthodox

economists’ who propagated the concept of comparative advantage, and the

benefits of free trade as ideology rather than science, oblivious of the

“growing polarization between advanced and lagging countries” (p. 66). The good

guys include List, Myrdal and Wallerstein who “identify with the interests of

the lagging countries” (p. 66).

Chapter 4 presents a taxonomy of sovereignty, outlining the characteristics of

his categories of sovereign countries, dependencies, quasi-colonies and

colonies. A curious twist is that the author prefers to leave countries such as

Australia and Canada (but not South Africa, which is characterized as a

‘sovereign country’) out of the taxonomy and out of the story, even though they

used to be colonies. His argument is that some colonies, and also the lagging

countries of Europe and South America, escaped this downside of colonization

because of what Alam considers as their racial and cultural affinities with

Western Europe. Hence, due to the racism that was rife in Western countries,

only countries without racial/cultural affinities were colonized and exploited.

Chapter 5 shoehorns countries and regions with lagging economies into this

classification: peripheral European countries and South America are sovereign;

dependencies are in Central America; Africa and Asia are (quasi) colonies. The

chapter provides dates to gauge the length of time since countries were

subjugated in some form by Western countries. It then hones in on the

suggestion that becoming a dependency or colony reduced the sovereignty of

using tariff policies and therefore protection of manufacturing industry.

Chapter 6 uses these categories, the length of colonization and other variables

to crank the cross-country panel data and statistically substantiate the thesis

with which the reader is by now already very familiar. Controlling for a range

of variables, the chapter demonstrates that a lower degree of sovereignty did

enhance the economic integration of a country into the world economy (measured

with the trade/GDP ratio) but not the levels of manufacturing industry

(measured with the share of manufacturing in GDP) and human capital formation

(measured with adult literacy rates and average years of schooling) in 1960 and

1980 or economic growth in general since 1870 (based on Maddison’s data). Alam

even concludes that switching the status of colonies to sovereign countries

would have increased their annual growth rates by 1.59 percentage points (p.

158).

Chapter 7 is not a conclusion but an epilogue. The author compares two phases

of industrialization (1760-1950s and since the 1950s) to argue that the

conspiracy of the West continues. Most of the chapter is a repeat of earlier

chapters, but new are sweeping statements suggesting that since the 1980s

Western countries, led by the United States and assisted by the IMF, World Bank

and OECD, have crafted a new imperialism based on the ‘Washington consensus’ to

delay the process of manufacturing development in lagging countries and to

capture the markets and investment opportunities there.

Alam describes himself as a crusader against ‘Eurocentrist’ explanations of

underdevelopment. A b?te noire is David Landes, who is dismissed as “the chief

defender of the Eurocentric faith” (p. xiii). In a twisted way, Alam seems to

be more Eurocentric than Landes. Unlike Landes, he makes no serious effort to

understand the past development problems of any less-developed country in

particular. Moreover, his book assumes that only Western Europe engaged in

colonialist pursuits. It says nothing about colonization by non-Western

European countries, for instance Russia’s colonization of Siberia and Central

Asia, Japan’s colonization of Korea, Taiwan and Manchuria, or China’s

colonization of Mongolia and Tibet.

The tone of the book is defensive. It seems that Alam’s crusade has been

fraught with difficulties, because the academic world does not subscribe to his

views and analysis. In the preface of the book, the author’s recounts his

struggle to expose that “the social sciences” have justified and perpetuated

“Western hegemony” in understanding underdevelopment (p. xii). It mentions the

author’s efforts in getting his papers, on which this book draws, published in

peer-reviewed established academic journals. He suggests that his views and

analysis were not accepted, presumably by the ‘orthodox economists’ who

determine editorial policies of journals. After receiving refusal after

refusal, he tried instead to get book publishers interested: “Predictably, they

offered a warmer welcome” (p. xi). At US$70 for a slender booklet, that may not

be surprising.

A major problem with the book is that Alam does not make an effort to write

history. His only discussion of historical developments serves the purpose of

establishing the date when colonization started or ended. The complex processes

of colonization and the economic histories of countries are simply reduced to a

few dummy variables that represent the time since independence until 1960 or

1980. A selected number of variables in those two years is assumed to represent

the outcomes of earlier decennia of colonization. They ignore that colonization

was largely a pre-World War II phenomenon, and that ex-colonies since felt the

economic impacts of World War II and independence wars, and, worse, the

consequences of poor economic management since independence, often exactly

because they tried to implement what the author perceives as the successful

strategy towards sustained economic growth: inward-looking, import-substituting

industrialization.

Consequently, implicit in Alam’s analysis are various assumptions that are not

probed in any depth. For instance, the author implicitly assumes that, before

they were colonized, countries inhabited by non-European races were all heading

for industrialization, education, and economic growth, had it not been for the

West European colonization drive. This of course assumes that nation states

existed, which had enlightened national governments that were imbued with the

will and ability to further economic development through the kind of industrial

policies pursued by, say post-Tokugawa Japan. The book does not contain any

hint of counterfactual analysis to make this seem plausible. Of course, that

would have been a difficult task, as it requires detailed knowledge of the

areas that became colonized countries.

Still, the issue could have been addressed by contrasting the development

record of countries that never fell under colonial rule — such as Ethiopia,

Afghanistan, Nepal or China — with that of countries that did. In fact, Alam

could for that purpose have drawn on existing literature. For instance, Lloyd

Reynolds’ (1983, 1985) extensive survey of the problems of underdevelopment

based on detailed scrutiny of secondary literature for individual countries

addressed this issue. Surprisingly, Reynolds’ work is entirely missing in the

references of Alam’s book. Why? Perhaps because Reynolds (1983, p. 957)

answered his question ‘Would these areas have developed faster before 1950 if

they had been completely independent countries rather than colonies?’ as

follows: ‘There is no magic in independence.’

Anyone interested in simple explanations for economic underdevelopment will

like this book. It offers some new nuances, but basically confirms the view

that the West is to blame for the problems of underdevelopment in the world.

Anyone interested in a more profound understanding of such problems will find

this a frustrating book. It ignores the wide range of factors that play a role

in a holistic explanation of underdevelopment in the past and present: low

rates of capital formation, high population growth, low agricultural

productivity, low formation of domestic markets due to poor infrastructure

development, poor or rigid financial systems, internal political turmoil etc.

Except as variables in the regression, the book largely ignores the

idiosyncrasies of individual less-developed countries.

References:

Landes, David (1998) The Wealth and Poverty of Nations: Why Some Are So Rich

and Some So Poor. New York: W.W. Norton.

Reynolds, L.G. (1983) “The Spread of Economic Growth to the Third World:

1850-1980,” Journal of Economic Literature, 21 (3), pp. 941-980.

Reynolds, L.G. (1985) Economic Growth in the Third World, 1850-1980. New

Haven: Yale University Press.

Pierre van der Eng is Senior Lecturer at the Australian National University

and is currently visiting professor at Seikei University in Tokyo. Research

interests include various aspects of the economic history of Southeast Asia, in

particular Indonesia. Recent publications include “Food for Growth: Trends in

Indonesia’s Food Supply, 1880-1995,” Journal of Interdisciplinary

History (2000); “Indonesia’s Growth Performance in the Twentieth-Century”

in Angus Maddison et al. (editors) The Asian Economies in the Twentieth

Century (London: Edward Elgar, 2002); and “Bridging a Gap: A Reconstruction

of Population Patterns in Indonesia, 1930-1961,” Asian Studies Review

(2002).

Subject(s):Economic Development, Growth, and Aggregate Productivity
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

Capitalism, Socialism and Democracy

Author(s):Schumpeter, Joseph A.
Reviewer(s):McCraw, Thomas K.

Joseph A. Schumpeter, Capitalism, Socialism and Democracy. New York: Harper & Row, 1942, 381 pp.; Third edition, 1950, 431 pp.

Review Essay by Thomas K. McCraw, Harvard Business School.

The Creative Destroyer: Schumpeter’s Capitalism, Socialism, and Democracy

Does Joseph Schumpeter’s Capitalism, Socialism and Democracy rank with the most important works of economic history of the twentieth century? Of course it does. Has there been a more penetrating analyst of capitalism than Joseph Schumpeter? No, I do not think there has.

Schumpeter led a melodramatic life (1883-1950), moving from Austria to England to Egypt to Germany before coming to Harvard for good in 1932. He was a phenomenally productive scholar, despite occasional forays into business and government in addition to a plethora of romantic liaisons that included three marriages. His first published article appeared in 1905, his last in 1950. His output included fifteen books (several of immense length), six pamphlets, about one hundred book reviews, and 148 articles, comments, and occasional pieces.

Long after his death, his influence continues to grow. Massimo M. Augello’s Joseph Alois Schumpeter: A Reference Guide appeared in 1990 and ran to over 350 pages. Since then, several dozen articles on Schumpeter have appeared, in addition to biographies by Eduard M?rz, Robert Loring Allen, Richard Swedberg, and Wolfgang Stolper. All of this work has enriched our knowledge of this remarkable polymath.

Just how great was Schumpeter? Tibor Scitovsky places him at the very top: “America’s most brilliant economist.” The intellectual historian Martin Kessler agrees, arguing that Schumpeter was, apart from Keynes, “the only truly great economist the twentieth century has produced.” Oskar Morgenstern sensibly comments that at this level rankings become pointless, that “all will agree that [Schumpeter] belongs to that small top group where a further ranking becomes almost impossible.”1

Many scholars of business history, most notably Alfred D. Chandler, Jr., have looked to Schumpeter as the economist who best understood the rise of big business and the central roles of innovation and entrepreneurship.2 In economic history, the work of Nathan Rosenberg and William Lazonick, among others, is imbued with Schumpeterian insights.3 In the study of “business strategy,” a term probably coined by Schumpeter in Capitalism, Socialism and Democracy, Michael Porter’s seminal work places a distinctly Schumpeterian emphasis on relentless innovation as the essence of competitive strategy.4 Within economics, Schumpeter’s influence in America is perhaps best exemplified by the work of F. M. Scherer and Richard R. Nelson. Scherer, a prolific scholar and author of a standard textbook in industrial organization, acknowledges his intellectual debts in a book entitled Innovation and Growth: Schumpeterian Perspectives . Nelson’s Schumpeterian proclivities are on display in An Evolutionary Theory of Economic Change , co-authored with Sidney G. Winter.5 A few other economists have tried to implement parts of the Schumpeterian system, particularly those having to do with innovation.6

Most mainstream economists have been frustrated by the difficulty of operationalizing Schumpeter’s models. His aversion to equilibrium as a realistic picture of capitalist economies restricts the mathematicization of his system. Then, too, because he insisted on fusing economics with history, sociology, and psychology, the number of variables becomes almost impossible for the analyst to control.7

As a scholar Schumpeter never advanced a program of economic reform. He believed that doing so compromised “scientific” work. In particular he criticized Keynes and other English economists for their “Ricardian Vice” of leaping into policy debates with abstract models as general prescriptions for change.8 Schumpeter himself took a very different approach in Capitalism, Socialism, and Democracy.

Capitalism, Socialism, and Democracy and Its Predecessor Book

Schumpeter’s core argument in Capitalism, Socialism, and Democracy is reducible to three major tenets:

1. The essence of capitalism is innovation (“creative destruction”) in particular sectors. Certain standard tools of economics, such as static equilibrium and macroeconomic analysis, can therefore disguise reality and mislead scholars and students.

2. The virtues of capitalism–in particular its steady but gradual pattern of growth–are long-run and hard to see; its defects, such as inequality and apparent monopoly, are short-run and conspicuously visible.

3. It is dangerous for economists to prescribe “general” recipes, because political and social circumstances are always changing.

Capitalism, Socialism, and Democracy was Schumpeter’s most popular success by far. Translated into at least sixteen languages, it still sells widely in paperback editions. Although the author often compared it unfavorably with his more scholarly books, it retains its seminal quality three generations after it appeared.

Despite the book’s title, it contains little of lasting interest about either socialism or democracy. But it bursts with ideas about capitalism, and as a “performance”–a term Schumpeter liked to apply to others’ works–it may be the best analysis of capitalism ever written.

Only three years before the appearance of this great work, Schumpeter had brought out another book he thought would be his magnum opus: the 1100-page Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. The virtues of the second book, Capitalism, Socialism, and Democracy, can be fully understood only against the shortcomings of this prior work.

The first problem with Business Cycles was its extraordinary and wholly unnecessary length. A second characteristic was the author’s misguided attempt to turn business cycle patterns into predictive scientific wave theories borrowed from physics. As Schumpeter wrote, “Barring very few cases in which difficulties arise, it is possible to count off, historically as well as statistically, six Juglars [8-10-year business cycles] to a Kondratieff [50-60 years] and three Kitchins [40 months] to a Juglar–not as an average but in every individual case.” Why this was so, he admitted, “is indeed difficult to see.”9 As his former student Paul Samuelson wrote thirty-five years later, the whole exercise “began to smack of Pythagorean moonshine.”10

The third noteworthy aspect of Business Cycles was its remarkable richness of historical detail and understanding. Though the explanation of cycles remained problematical, the historical vision was squarely on point: that capitalism–not all economic activity, just capitalism–is fundamentally an unstable, disequilibrating process.11

Simon Kuznets, a macroeconomist and future Nobel laureate, wrote for the American Economic Review a fifteen-page analysis of Business Cycles. It was the most thorough and important of the reviews, kindhearted in tone but still devastating. Kuznets conceded that Schumpeter had written a “monumental treatise” that raised all the right questions and did relate short-term business cycles to long-run economic movements. Still, Kuznets wrote, business cycles are essentially quantitative phenomena. Instead of robust statistical argument, Schumpeter had presented the reader with “an intellectual diary,” an account of his own “journey through the realm of business cycles and capitalist evolution, a journal of his encounters there with numerous hypotheses, diverse historical facts, and statistical experiments.” These efforts could not substitute for robust quantitative analysis.12 Two other reviewers noticed Schumpeter’s implicit distaste for macroeconomics, referring to his “vigorous stand against ‘the curse of aggregative thinking.'”13

Given the harsh reception of Business Cycles, published only three years earlier, the content and also the detached and ironic tone of Capitalism, Socialism and Democracy appear in a different light. It is as though Schumpeter, now deeply pessimistic about the state of the world, decided to unburden himself not only on economics but on a broad array of other subjects as well. Hence the candor and breadth of the 1942 book, which produced thousands of future citations by scholars in sociology, history, economics, and other disciplines.14

Some of the major themes represent reworkings of ideas Schumpeter had first presented in articles published long before, while in his twenties (he was fifty-nine in 1942). A capitalist economy, he now wrote in Capitalism, Socialism and Democracy, “is not and cannot be stationary. Nor is it merely expanding in a steady manner. . . . Every situation is being upset before it has had time to work itself out. Economic progress, in capitalist society, means turmoil.”15

In a 54-page analysis of Karl Marx at the beginning of Capitalism, Socialism and Democracy, Schumpeter considers Marx as Prophet, Sociologist, Economist, and Teacher. It’s hard to avoid the thought that the author construed himself in the same roles. Certainly his critique of Marx is full of insight: “Now Marx saw this process of industrial change more clearly and he realized its pivotal importance more fully than any other economist of his time.” He accomplished a fusion of history and theory whose result represented something different from either one alone. Marx “was the first economist of top rank to see and to teach systematically how economic theory may be turned into historical analysis and how the historical narrative may be turned into histoire raison?e.” Nevertheless, Schumpeter’s final verdict is negative, because of the “failure of [Marx’s] prediction of increasing misery,” which in turn derived from “wrong vision and faulty analysis.” Although Marx the economist and sociologist was mostly correct, Marx the prophet and teacher proved to be disastrously wrong.16

As prophet, the same might be said of Schumpeter himself. On page 61 of Capitalism, Socialism and Democracy Schumpeter asks, “Can capitalism survive?”, then replies, “No. I do not think it can.”17 This provocative passage may have been sincere, or simply Schumpeter’s way of getting the reader’s full attention. His purpose was to lay bare the core nature of capitalism–to show how it works, to demonstrate why, on balance, it is a good thing; and then to highlight its fragility.18

In response to the standard charge that capitalism distributes its fruits inequitably, Schumpeter points out that “Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort. . . . the capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.”19

A by-product of capitalism is the dominance of all life by an economic calculus, which Schumpeter calls “rationality.” He shows how powerfully the economic way of thinking bestows rewards and penalties: “Prizes and penalties are measured in pecuniary terms. Going up and going down means making and losing money. . . . The promises of wealth and the threats of destitution that [this arrangement] holds out, it redeems with ruthless promptitude.” Constant, relentless change is the hallmark of capitalism. “It may seem strange that anyone can fail to see so obvious a fact which moreover was long ago emphasized by Karl Marx.”20

Underscoring the deficiencies of any conceptual system that proceeds from static assumptions, Schumpeter compares the universe of Adam Smith and other classical economists with the reality of modern industry. The classicists “recognized cases of ‘monopoly,’ and Smith himself carefully noticed the prevalence of devices to restrict competition.” Yet neither Smith nor most other classical and neoclassical economists “saw that perfect competition is the exception and that even if it were the rule there would be much less reason for congratulation than one might think. If we look more closely at the conditions . . . that must be fulfilled in order to produce perfect competition, we realize immediately that outside of agricultural mass production there cannot be many instances of it.”21

Schumpeter contrasts this situation with modern business, parts of which involve constantly evolving oligopolies. These new situations do not easily lend themselves to mathematical modeling. In oligopolies, “there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoves, an indefinite state of warfare between firms.”22

The contemporary structure of business is best understood as having evolved from long “organizational development.” It reflects a “process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”23

In sum, the process is one of “creative destruction”–the sweeping out of old products, old enterprises, and old organizational forms by new ones. It is what capitalism consists in and what every capitalist concern has got to live in.”24 For the scholar, this necessitates a lengthy time frame for analysis: “Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull. . . . As long as this is not recognized, the investigator does a meaningless job.25

One result of this approach should be a sharper focus on product quality and on marketing, and a reduced emphasis on price. “[I]n capitalist reality as distinguished from its textbook picture, it is not [price] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)–competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” A theoretical analysis that “neglects this essential element of the case . . . even if correct in logic as well as in fact, is like Hamlet without the Danish prince.”26

Schumpeter then turns to the question of monopoly. He mounts a devastating attack on what he regards as popular American attitudes toward this subject, which, in his judgment, spill over onto big business in general. Much of what Schumpeter says here was conditioned by what happened in the 1930s, and specifically by New Dealers’ assaults on big business. He argues that the very nature of giant, capital-intensive enterprise requires strategic behavior not contemplated by orthodox economic theory except to the extent that the theory holds such behavior monopolistic. As a matter of historical record, Schumpeter insists, long-run price rigidities are practically unknown. The same is true of long-run cases of monopoly, which are rarer than instances of perfect competition.27

It seemed plain to Schumpeter that big business, instead of exploiting consumers, had radically elevated their living standards. Organizational innovation, not monopolistic profits, accounted for the prosperity of most great companies. They should be viewed with pride and awe, not with detestation and fear. “These units not only arise in the process of creative destruction and function in a way entirely different from the static scheme, but in many cases of decisive importance they provide the necessary form for the achievement. They largely create what they exploit.” Monopoly rents might flow for awhile, but they are inevitably temporary, “the prizes offered by capitalist society to the successful innovator.” Under capitalism, the idea of a permanent monopoly is ludicrous, especially in manufacturing.28

Schumpeter next mounts a savage assault on the idea of perfect competition. He implies that it has evolved from an analytical tool of theoretical economics into an ideal toward which theory should guide public policy. This, he suggests, is catastrophic:

If we try to visualize how perfect competition works or would work in the process of creative destruction, we arrive at a still more discouraging result. . . . In the last resort, [cases approaching perfect competition, such as] American agriculture, English coal mining, [and] the English textile industry are costing consumers much more and are affecting total output much more injuriously than they would if controlled, each of them, by a dozen good brains.29

Pushing his analysis to its limits, Schumpeter identifies capitalist entrepreneurship with technological progress itself. As a matter of historical record, they were “essentially one and the same thing,” the first being “the propelling force” of the second.”30

At this point in the book, Schumpeter begins to lay the foundations for his famous argument that capitalism contains the seeds of its own destruction–not for economic reasons but for sociological ones. His reasoning proceeds as follows:31

1. In pre-capitalist times, no sheer economic achievement, by itself, could advance anyone into the ruling class.

2. When capitalism began to develop, persons of “supernormal ability and ambition” became upwardly mobile provided they would “turn to business.”

3. It was hard to succeed in business, yet success remained inglorious: “no flourishing of swords about it, not much physical prowess, no chance to gallop the armored horse into the enemy. . . . The stock exchange is a poor substitute for the Holy Grail.”

4. There can be no assurance that people are “happier” or “better off” under industrialism than in the medieval manor or village. Efficiency is only one of many human desiderata, and perhaps not the most important one.

5. So the future of capitalism can’t be assured purely because of its economic superiority. “I am not going to argue, on the strength of that performance, that the capitalist intermezzo is likely to be prolonged.”

6. Capitalism all but destroyed most of the secular underpinnings of civilized society–the manor, village, and craft guild. Yet it replaced these institutions with nothing: no idealism, no sense of organic life, no essential ability for social organization of a non-economic nature.

7. In particular, the talents necessary for economic success don’t translate well into other realms of life. “A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose–both in the drawing room and on the platform.”

8. So, without protection from some other source, “the bourgeoisie is politically helpless and unable not only to lead its nation but even to take care of its particular class interest.”

9. Because capitalist evolution, and particularly the rise of big business, attacks masses of small producers and merchants, it alienates its natural allies, indirectly giving reinforcements to the enemy.

10. The substitution of a share of stock for tangible goods “takes the life out of the idea of property.” If this process goes on long enough and thoroughly enough, “there will be nobody left who really cares to stand for [property].”

11. Capitalism works gradual changes within the psyches of individuals. By reducing everything to an economic calculus, it “rationalizes” thinking. It “creates a critical frame of mind which, after having destroyed the moral authority of so many other institutions, in the end turns against its own.”

12. The philosophical case for capitalism is beyond the intellectual capacity of most persons, even most economists. “Why, practically every nonsense that has ever been said about capitalism has been championed by some professed economist.”

13. Most important, the case for capitalism “must rest on long-run considerations.” In the short run, it is impossible for most people, even intellectuals, to ignore exasperating “profits and inefficiencies” and focus instead on long-range trends.

14. Uniquely among types of societies, capitalism is so successful economically that it “creates, educates and subsidizes a vested interest in social unrest.” It underwrites a class of hostile intellectuals who have no “direct responsibility for practical affairs” and little experience in managing anything.

15. The rise of mass media makes this situation more dangerous by multiplying the access of demagogues to short-run human instincts and desires. In the process, “public policy grows more and more hostile to capitalist interests.”

16. Bureaucracies in Europe antedate the capitalist epoch and owe no allegiance to bourgeois values. Bureaucracies in America, however, with no real civil service tradition, hold onto their antipathy toward capitalism because they don’t grasp the vast stakes at issue. Given the “legislative, administrative and judicial practice born of that hostility, entrepreneurs and capitalists–in fact the whole stratum that accepts the bourgeois scheme of life–will eventually cease to function.”

17. Most alarming of all, the bourgeois family may disintegrate. As soon as men and women “introduce into their private life a sort of inarticulate system of cost accounting,” they will become aware that “children cease to be economic assets.” When this happens, the last pillar of bourgeois society will fall.

Much of Schumpeter’s argument here might be interpreted as a cry from the heart of a brilliant but unlucky European elitist, who had witnessed one catastrophe after another during the bloody first half of the twentieth century. Even in contemporary America, a unique opportunity for the development of an advanced capitalist society stood on the edge of disaster. It was happening in the United States because of the Great Depression, the ascendance of fascism and communism in Europe, and the onset of World War II. It had not happened earlier because “The scheme of values that arose from the national task of developing the economic possibilities of the country drew nearly all the brains into business and impressed the businessman’s attitudes upon the soul of the nation.”32

Schumpeter professed to see not only the decline of capitalism but also the ultimate triumph of socialism. “Can socialism work?” he asks. “Of course it can.” In large part, it can work because it inspires people to noble ends, to something larger than themselves. Socialism implies “a new cultural world” whose psychic rewards may be worth the price of optimal economic efficiency. For true believers, “Socialist bread may well taste sweeter to them than capitalist bread simply because it is socialist bread, and it would do so even if they found mice in it.”33

Despite memorable aphorisms such as this one, Schumpeter’s analysis of socialism and democracy is a good deal less compelling than his dissection of capitalism. He says of democracy that it is best understood not as a system but merely a “method”–an “institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote.” Of course there is much more to democracy than this, but Schumpeter’s real interests lie elsewhere.34

At the very end of Capitalism, Socialism and Democracy, Schumpeter delivers a philippic about the intrusion of modern government, and specifically the New Deal state, into economic life. He mentions counter-cyclical policies, redistributive taxation, antitrust, price controls, monetary policy, the regulation of labor, securities legislation, and the “indefinite extension of the sphere of wants” to be supplied by public enterprise. Yet, ever the “scientist” reluctant to succumb to the Ricardian Vice, Schumpeter closes with this remarkable statement: “It would spell complete misunderstanding of my argument if you thought that I “disapprove” or wish to criticize any of these policies. Nor am I one of those who label all or some of them “socialist.”35

The Book’s Reception

Capitalism, Socialism and Democracy received a modicum of attention in 1942, when it was first published. A second edition, which appeared in 1946, attracted wider notice, and the third, in 1950, became an international best-seller.

Reviewing the first edition, the Cambridge economist Joan Robinson found that Schumpeter “has little love for socialism, and none at all for socialists. His natural sympathy is all with the heroic age of expanding capitalism.” Herself a leading theorist of imperfect competition, Robinson found Schumpeter’s analysis of that subject the “most brilliant” part of the book: “his argument blows like a gale through the dreary pedantry of static analysis.” Although Schumpeter had little to say about contrary evidence, especially in his argument about the fadeout of capitalism and its replacement by socialism, “The reader is swept along by the freshness, the dash, the impetuosity of Professor Schumpeter’s stream of argument.” Whether or not the reader was totally convinced, “this book is worth the whole parrot-house of contemporary orthodoxies, right, left, or centre.”36

Reviewing the 1946 edition of Capitalism, Socialism and Democracy, Arthur M. Schlesinger, Jr. wrote that the book “burst into the generally sterile atmosphere of political discussion like a collection of firecrackers and skyrockets.” Schumpeter’s analysis made it pointless to keep repeating mindless slogans about the evils of monopoly. Even if he were wrong, “there is no percentage in dodging the uncomfortable points he raises. The intellectual rigor of his analysis sets a standard that liberal writers should try to meet.” The book “is the performance of an intellectual virtuoso, brilliant, complex, perfectly controlled.”37 In 1981, a retrospective analysis of the book appeared, entitled Schumpeter’s Vision: Capitalism, Socialism, and Democracy After 40 Years.38 Here several of Schumpeter’s former students and associates joined with some European scholars in evaluating the book’s legacy. Paul Samuelson led off, conceding that the subject under discussion was “a great book.” He added that from a game theoretic viewpoint Schumpeter might have taken account of the propensity of democratic groups to change the nature of capitalism and to bend it to their own self-interest. Schumpeter’s praise of Marx for “being learned, bold to speculate, and broad in his dynamic vision” describes Schumpeter himself, Marx thereby being “a veritable chip off the new block.” Yet “Schumpeter was of all my teachers the one whose economics was essentially farthest from Marx’s.”39

The sociologist Tom Bottomore, a man of the Left, lamented Schumpeter’s disinclination to cast his analysis in terms of economic and social class. Thus, he had overlooked some important changes that now (in the 1980s) were clearer: “A very large part of the middle class, in spite of variations. . . has maintained a political orientation which is much more favourable to parties of the right and the centre than to those of the left. . . . [Schumpeter] thought that the ‘march into socialism’ was well-nigh irresistible, and deplored the fact. I, on the contrary, think that this ‘march’ has come to an untimely halt, and regret the eclipse of the highest ideal that has emerged in modern Western culture.”40

In a third essay, Schumpeter’s fellow Austrian and longtime Harvard colleague Gottfried Haberler wrote that although Schumpeter never said so in Capitalism, Socialism and Democracy, it was clear that his “real feeling” was “that capitalism or the ‘bourgeois’ society is very much worth fighting for.” Schumpeter’s forecast of capitalism’s downfall “has shocked and puzzled many people. If all qualifications, reservations, and elucidations are given their proper attention, however, the forecast of capitalism’s early doom becomes less apodictic and the demise of capitalism loses much of its inevitability.” Then, too, Schumpeter’s emphasis on rising resentment of taxation anticipated the American tax revolt that began in the 1970s, a movement of extraordinary importance.41

The economist Robert L. Heilbroner, a first-rate stylist himself, judged Capitalism, Socialism and Democracy partly on artistic terms: “There is [in the book] a great deal of attitudinizing. . . an open delight in epater le bourgeois and tweaking the noses of radicals. There is also pomposity and pedantry, mixed with an arrogance that teeters on the edge of a dangerous elitism.” Yet the book remains full of “perceptive insights,” such as Schumpeter’s remark that “The evolution of the capitalist lifestyle is best described ‘in terms of the genesis of the modern lounge suit,’ a remark worthy of Thorstein Veblen.”42

Arthur Smithies, Schumpeter’s former student and colleague, saw Capitalism, Socialism and Democracy in part as a reaction against Keynesianism. Schumpeter had openly derided the “stagnation thesis” introduced in Keynes’s General Theory. This thesis holds that as a country grows richer investment opportunities shrink but the propensity to save increases; therefore savings and investment balance only at high unemployment. “If valid,” wrote Smithies, “the long-run Keynesian argument provided an impregnable case for socialism.” Yet Schumpeter saw that the underpinnings of the stagnation thesis were the atypical conditions of the Great Depression. He “maintained his sanity” and insisted that such problems were not permanent but cyclical. As for Schumpeter’s concern with inflation, in the 1940s Anglo-American economists thought it “obsessive,” but in fact Schumpeter proved remarkably prescient.43

Herbert K. Zassenhaus, another economist from the generation just behind Schumpeter, detected “a certain mysticism” in Capitalism, Socialism, and Democracy. “In the shape of the ‘entrepreneur,'” Schumpeter introduces “a social miracle in the precise sense of the word: an event beyond the laws of nature and society.”44

In perhaps the most telling of all the retrospective comments, the Dutch scholar Henrik Wilm Lambers recalled Schumpeter’s influence on him as a youth and the continued appeal of his book. In Capitalism, Socialism and Democracy, Lambers wrote, “Schumpeter accomplished the feat of moving five layers of thought–the firm, the markets, the institutions, the cultural values, the leaders of society–as one interwoven dynamic process. With incomparable skill he made history go through time as one stream.” Lambers’ own students were invariably taken with the book: “After many an oral graduate examination, I have often heard remarks like: ‘to be honest, the one stimulating book was Schumpeter’.” Radical and conservative students alike “say, each in their own way, ‘he keeps me puzzled: is it my fault or did he intend to?'”45

Capitalism, Socialism, and Democracy continues to puzzle and provoke readers–to make them think, to question their own perceptions measured against their own ideologies and to wonder about the author’s intentions. Only the very greatest books do this, and age so well.

Endnotes:

1. Tibor Scitovsky, “Can Capitalism Survive? — An Old Question in a New Setting,” Ely Lecture, American Economic Review, 70 (May 1980), p. 1; Martin Kessler, “The Synthetic Vision of Joseph Schumpeter,” Review of Politics, 23 (July 1961), p. 334; O. Morgenstern, “Obituary,” Economic Journal, 61 (March 1951), p. 203.

2. Chandler, Strategy and Structure: Chapters in the History of the Industrial Enterprise, Cambridge, MA: MIT Press, 1962, p. 284; and Chandler, Scale and Scope: The Dynamics of Industrial Capitalism, Cambridge: Harvard University Press) pp. 597, 830-831 n1.

3. See, for example, Lazonick, Competitive Advantage on the Shop Floor, Cambridge: Harvard University Press, 1990, pp. 3, 10, 323-324; and Rosenberg, “Joseph Schumpeter: Radical Economist,” in Exploring the Black Box: Technology, Economics, and History, New York: Cambridge University Press, 1994. Schumpeter often spoke on the relationship between history and theory: “Personally, I believe that there is an incessant give and take between historical and theoretical analysis and that, though for the investigation of individual questions it may be necessary to sail for a time on one tack only, yet on principle the two should never lose sight of each other”; see Schumpeter’s 1949 essay, “Economic Theory and Entrepreneurial History,” reprinted in Richard V. Clemence, editor, [Schumpeter’s] Essays: On Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism, New Brunswick, NJ: Transaction Publishers, 1989. See also Schumpeter, “The Creative Response in Economic History,” Journal of Economic History, 7 (November 1947).

4. Porter, The Competitive Advantage of Nations, New York: Free Press, 1990, p. 778 n.46.

5. Frederic M. Scherer, Innovation and Growth: Schumpeterian Perspectives, Cambridge, MA: MIT Press, 1984. Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change, Cambridge, MA: Harvard University Press, 1982. Part V of this book (pp. 273-351) is entitled “Schumpeterian Competition,” and in it the authors try, mathematically, to apply Schumpeter’s insights to the process of innovation.

6. See, in general, Richard V. Clemence and Francis S. Doody, The Schumpeterian System, Cambridge, MA: Addison-Wesley, 1950. For more specialized efforts, and critiques of them, see Carolyn Shaw Solo, “Innovation in the Capitalist Process: A Critique of the Schumpeterian Theory,” Quarterly Journal of Economics, 65 (August 1951), pp. 417-428; Franklin M. Fisher and Peter Temin, “Returns to Scale in Research and Development: What Does the Schumpeterian Hypothesis Imply?” Journal of Political Economy, 81 (January/February 1973), pp. 56-70 [see also Comments by Carlos Alfredo Rodriguez and Reply by the authors in Journal of Political Economy, 87 (April 1979), pp. 383-389]; Morton I. Kamien and Nancy L. Schwartz, “Market Structure and Innovation: A Survey,” Journal of Economic Literature, 13 (March 1975), pp. 1-37; Carl A. Futia, “Schumpeterian Competition,” Quarterly Journal of Economics, 94 (June 1980), pp. 675-695; Meir Kohn and John T. Scott, “Scale Economies in Research and Development: The Schumpeterian Hypothesis,” Journal of Industrial Economics, 30 (March 1982), pp. 239-249; and Horst Hanusch, editor, Evolutionary Economics: Applications of Schumpeter’s Ideas, Cambridge: Cambridge University Press, 1988.

7. During the 1990s the Schumpeter literature became especially voluminous, with articles in such publications as the Journal of Evolutionary Economics and the Journal of Institutional Economics. These pieces often drew as much on Schumpeter’s sociology as on his economics. Several sought to apply biology to Schumpeter’s evolutionary analysis.

8. Schumpeter actually used the word “sins”: “I did not exactly wish to put Ricardo and Keynes on the same level, but I do think that there is striking similarity between their sins.” (Letter to Arthur W. Marget, Feb. 24, 1937, Schumpeter Papers, Harvard University Archives.)

9. Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, New York: McGraw-Hill, 1939, Volume I, pp. 169, 173, 174.

10. Samuelson, “Joseph A. Schumpeter,” Dictionary of American Biography, Supplement Four, 1946-1950, New York: Scribner, 1974, p. 723.

11. In this book the orientation appears most clearly in some vivid passages on pages 220-245 of Volume I.

12. Simon Kuznets, American Economic Review, 30 (June 1940), pp. 257, 266-271.

13. E. Rothbarth, Economic Journal, 52 (June-Sept. 1942), p. 229; J. Marschak, Journal of Political Economy, 48 (Dec. 1940), p. 892.

14. An insightful analysis of Schumpeter’s state of mind when he wrote Capitalism, Socialism, and Democracy may be found in Chapter 7 of Richard Swedberg, Schumpeter: A Biography, Princeton, NJ: Princeton University Press, 1991.

15. Capitalism, Socialism, and Democracy, New York: Harper Torchbook Edition, 1976, pp. 31-32.

16. Capitalism, Socialism, and Democracy, p. 32, 34, 44.

17. Capitalism, Socialism, and Democracy, p. 61.

18. In the revised edition of Capitalism, Socialism and Democracy appears Schumpeter’s final paper, “The March into Socialism” (December 1949). Here he speaks candidly about capitalism’s social implications: “Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans; or that the youngster may choose whether he wants to work in a factory or on a farm; or that plant managers have some voice in deciding what and how to produce: it means a scheme of values, an attitude toward life, a civilization–the civilization of inequality and of the family fortune” (p. 419).

19. Capitalism, Socialism, and Democracy, pp. 67-68.

20. Capitalism, Socialism, and Democracy, pp. 73-74, 77 n1, 82. In History of Economic Analysis, published posthumously (New York: Oxford University Press, 1954), Schumpeter wrote that in capitalism, “Disequilibrium prevails throughout, but Marx saw that this disequilibrium is the very life of capitalism” (p. 1051).

21. Capitalism, Socialism, and Democracy, pp. 78-79.

22. Capitalism, Socialism, and Democracy, p. 79.

23. Capitalism, Socialism, and Democracy, p. 83.

24. Capitalism, Socialism, and Democracy, p. 83.

25. Capitalism, Socialism, and Democracy, pp. 83-84.

26. Capitalism, Socialism, and Democracy, pp. 84-86.

27. Capitalism, Socialism, and Democracy, pp. 93, 99.

28. Capitalism, Socialism, and Democracy, pp. 101-102.

29. Capitalism, Socialism, and Democracy, pp. 104-106.

30. Capitalism, Socialism, and Democracy, p. 110. Schumpeter adds that making such a distinction is “quite wrong–and also quite un-Marxian.”

31. My summary here is abstracted from Capitalism, Socialism and Democracy, pp. 124-157.

32. Capitalism, Socialism, and Democracy, p. 331. This point echoes one of Schumpeter’s pet themes: that all societies suffer from a paucity of first-rate talent. Legal issues, labor problems, price control issues, and antitrust prosecutions add up to a “drain on entrepreneurial and managerial energy.” So much effort is expended on such issues that an executive often “has no steam left for dealing with his technological and commercial problems.” One consequence is that except in very large companies, which can afford numerous specialists, “leading [management] positions tend to be filled by ‘fixers’ and ‘trouble shooters’ rather than by ‘production men'” (p. 388.)

33. Capitalism, Socialism, and Democracy, pp. 167, 170, 190.

34. Capitalism, Socialism, and Democracy, p. 269.

35. Capitalism, Socialism, and Democracy, p. 418. This passage is from Schumpeter’s last address, delivered to the American Economic Association in December, 1949, three weeks before his death. The address was entitled “The March into Socialism.”

36. Joan Robinson, in the Economic Journal, 53 (December 1943), pp. 381-383.

37. Arthur M. Schlesinger, Jr., in The Nation, April 26, 1947, pp. 489-491.

38. Arnold Heertje, editor, Schumpeter’s Vision: Capitalism, Socialism and Democracy after 40 Years, New York: Praeger, 1981.

39. Paul A. Samuelson, “Schumpeter’s Capitalism, Socialism and Democracy,” in Schumpeter’s Vision, pp. 1, 13, and passim.

40. Tom Bottomore, “The Decline of Capitalism, Sociologically Considered,” in Schumpeter’s Vision, pp. 22-29, 44.

41. Gottfried Haberler, “Schumpeter’s Capitalism, Socialism and Democracy after Forty Years,” in Schumpeter’s Vision, pp. 70, 71, 74-75, 83, 84, 89.

42. Robert L. Heilbroner, “Was Schumpeter Right?” in Schumpeter’s Vision, pp. 95, 96, 99-100, 101-102, 106.

43. Arthur Smithies, “Schumpeter’s Predictions,” in Schumpeter’s Vision, pp. 130-132, 145-146.

44. Herbert K. Zassenhaus, “Capitalism, Socialism and Democracy: The ‘Vision’ and the ‘Theories,'” in Schumpeter’s Vision, pp. 173, 176, 181, 189.

45. Hendrik Wilm Lambers, “The Vision,” in Schumpeter’s Vision, pp. 107-129.

Thomas K. McCraw is the Isidor Straus Professor of Business History at the Harvard Business School and editor of the Business History Review. He is author of Morgan Versus Lilienthal (William P. Lyons Award, 1970), TVA and the Power Fight (1971), co-author of Management Past and Present (1996); and editor of Regulation in Perspective (1981), America Versus Japan (1986), The Essential Alfred Chandler (1988), and Creating Modern Capitalism (1997). His book Prophets of Regulation won both the Pulitzer Prize in History for 1985 and the Thomas Newcomen Award for 1986. His American Business, 1920-2000: How It Worked (2000) was recently reviewed on EH.NET.

?

Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

Peasants, Merchants, and Markets: Inland Trade in Medieval England, 1150-1350

Author(s):Masschaele, James
Reviewer(s):Clark, Gregory

EH.NET BOOK REVIEW

Published by EH.NET (April 1998)

James Masschaele, Peasants, Merchants, and Markets: Inland Trade in Medieval England, 1150-1350. New York: St Martin’s Press, 1997. xii + 275 pp. $45.00 (cloth), ISBN: 0-312-16035-6.

Reviewed for EH.Net by Gregory Clark, Department of Economics, University of California, Davis.

Medieval Commerce: Too Much of a Good Thing

You have got to feel sorry for our colleagues in medieval economic history. This bright and energetic group – Richard Britnell, Bruce Campbell, Christopher Dyer, Derek Keene, Maryanne Kowaleski, John Langdon, Mavis Mate, Larry Poos, Ambrose Raftis, to name just a few – are model scholars. To practice their craft they master Latin and paleography, they learn the subtleties of the documents, they spend the time in the archives. And the archives themselves are glorious: a mine of economic information so much richer than even what we find for eighteenth century England. But what reward do they get for all this effort and all this erudition? The more we learn about medieval England, the more careful and reflective the scholarship gets, the more prosaic does medieval economic life seem. The story of the medieval economy in some ways seems to be that there is no story.

Back in the bad old days, when the scholarship was less careful, the medieval economy was mysterious and exciting. Marxists, neo-Malthusians, Chayanovians, and other exotics debated vigorously their pet theories of a pre-capitalist economic world in a wild speculative romp. But little by little, as the archives have been systematically explored, and the hypotheses subject to more rigorous examination, medieval economic historians have been retreating from their exotic Eden back to a mundane world alarmingly like our own.

This book, by James Masschaele, a historian at Rutgers University, is a nice piece of scholarship which constitutes a few more steps in this long retreat from paradise. His book is really a collection of essays exploring various aspects of the English medieval market before the Black Death. In successive chapters, through skilled and convincing use of tax records and other sources Masschaele shows that the medieval economy was thoroughly permeated by markets and market activities.

Thus the occupants of medieval towns engaged in a wide variety of specialized commodity production, of which the main were victualling, leather making, textiles, clothing, vending, metal working, and building. Those in towns were all engaged in the market. Some peasants were able to produce a substantial surplus of grain and animal products which must normally have been sold on the market. Many peasants were thus also in the market. Much, and perhaps even most, of the great cash crop of medieval England, wool, was produced on peasant holdings and not on the lay and clerical estates.

Those with the right to hold markets defended that right vigorously and tried to limit competition. But the English courts generally interpreted this right as excluding only other markets held on the same day within 6.7 miles. Thus in the East Midland counties of Northampton and Bedford we see even before 1250 many markets within 6.7 miles of their neighbors. Indeed it seems from the map given in the book that the average location in these counties would about 5 miles from a market by 1250. By 1690 I know from other sources that the average distance to market in these counties had shrunk to 3.3 miles. But this seems a very modest gain in the prevalence of markets over these years. If the monopoly right to hold a market exercised much restriction on the medieval economy, then markets should have generated significant incomes for their owners through market tolls. In fact toll rates were generally seldom more than 1% of the value of goods traded, and there were many who were by one custom or another exempted from toll. Thus goods bought for household consumption typically did not pay toll. Similarly small goods such as apples, or butter in earthen pots, produced by peasant households were also apparently often exempt.

Towns similarly seem to display an expected urban hierarchy, with a few major trade and manufacturing centers and a large array of smaller places with very little evidence of commercial or manufacturing activity. Using records of disputes over toll payments and toll exemptions Masschaele shows that there were significant trade relations between towns that could be quite distant from each other. Thus, for example, in 1315 the town of Sandwich seized the almonds, figs and raisins of a merchant refusing to pay toll, where the merchant was from London, 63 miles away.

Using again records of toll disputes Masschaele is also able to get some information about the marketing activities of rural producers. By the early thirteenth century English kings, as pious acts, had granted exemption from toll in all markets to most major ecclesiastical corporations. This exemption was held to apply to their manorial tenants also. The exemption was meant to apply to rural produce sold by the tenants to meet their rent payments to the houses. Tenants on the royal demesne had by custom a similar privilege. Tenants of both types, however, seem to have availed themselves of the exemption to further general trade activities. Thus even in the fourteenth century many court cases appear where rural tenants of religious orders or of the king are alleged to be buying goods with intent to resell, or selling goods they had bought.

In one of the later chapter Masschaele documents carrying costs by land and water per ton-mile in Cambridgeshire and Huntingdonshire between 1305 and 1346. These costs suggest, for example, that if wheat was transported by water is would cost about 1.4% of its final value per additional ten miles carried. These costs seem relatively modest.

The concluding chapter begins with the statement, “By the end of the thirteenth century, England had developed a sophisticated commercial economy that embraced all levels of society” (p. 227). There is no doubt that this statement is well supported by the evidence of the book. But if medieval England was just a low-tech version of Kansas, why would anyone be interested in its economy? The early economy had, I believe, some very interesting features. But focused as this tradition is on the existence and extent of the market, I fear that further excellent scholarship such as this can only provide more compelling evidence of the utter dullness of the medieval economy. For this erudition to be more interestingly employed, at least as far as economic historians are concerned, it needs to be directed at a richer set of issues than just the existence of the market.

Gregory Clark Department of Economics University of California- Davis

Among Gregory Clark’s recent publications are “The Political Foundations of Modern Economic Growth: England, 1540-1800,” Journal of Interdisciplinary History, 26 (Spring, 1996), “Commons Sense: Common Property Rights, Efficiency, and Institutional Change,” Journal of Economic History, 58 (March, 1998) and “Land Hunger: Land as a Commodity and as a Status Good in England, 1500-1914,” Explorations in Economic History, 35 (1), (Jan., 1998).

?

Subject(s):Markets and Institutions
Geographic Area(s):Europe
Time Period(s):Medieval