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Classical Economic Theory and the Modern Economy

Author(s):Kates, Steven
Reviewer(s):Numa, Guy

Published by EH.Net (November 2020)

Steven Kates, Classical Economic Theory and the Modern Economy. Cheltenham: Edward Elgar, 2020. vi + 264 pp. $125 (hardcover), ISBN: 978-1-78643-356-5.

Reviewed for EH.Net by Guy Numa, Department of Economics, Colorado State University.

 

This book is about how little Steven Kates thinks of the “modern economy,” an umbrella term for all variants of Keynesian economics. Bold and pretentious statements abound. “Just about the whole of modern economic theory is perniciously wrong … there is virtually nothing useful one can learn from a modern economics text in how to manage an economy” (p. 1). “Economists know nothing whatsoever about the analytical depth of the classical economists” (p. 16). Kates aims “to explain why classical economics is vastly superior” (p. 17). Kates wants to convince us that he is “almost uniquely placed” to do so, though he acknowledges “how obscure [he is] within the world of economics” and notes that “virtually no one sees things as [he does]” (p. 17). This does not prevent him from boasting about how, as chief economist of Australia’s national employers’ association, he “never made a single wrong call on the economy or the effects of public policy” (p. 20). Unfortunately, the book is filled with errors. Relevant quotes and texts are omitted or distorted for the sole purpose of justifying his anti-Keynesian narrative.

Throughout the book, Kates acts more like a pamphleteer than a convincing analyst. In almost all of the twelve chapters that comprise the book, he rants about Keynesian macro, his long-standing target. He even scolds Austrian economists for being too cozy with Keynes (p. 215). Kates asserts that “the number of jobs is unrelated to the level of demand for goods and services … It is a proposition that is … absolutely correct both in theory and also from the evidence of every attempt to use a stimulus to increase the level of employment” (p. 4). He insinuates that a legal mandate on employers to pay higher wages is tantamount to theft (p. 18)! Kates is more persuasive when he reminds the reader that classical economists considered recessions and government intervention, though the topic is superficially discussed. Overall, Kates’s arguments are quite repetitive.

The centerpiece of Kates’s anti-Keynesian manifesto is his own definition of Say’s Law. His mantra is that “Say’s Law is different in meaning and implications from the nineteenth century’s loi des débouchés … properly attributed to Say” (p. 13). Kates makes three claims: i) Say’s arguments was that “demand is constituted by supply” (pp. 13, 69); ii) “Fred Taylor noted that the principle denying the possibility of overproduction and demand deficiency did not have a name … He supplied that name, calling it ‘Say’s Law’ after J.-B. Say. ‘Say’s Law’ is, however, not Say’s loi des débouchés” (p. 14; see also pp. 67-69). Ironically, the claim contradicts a previous statement, where Kates (1998, p. 151) argued correctly that “Taylor was the first to use the term ‘Say’s Law’ to describe what had previously been referred to as ‘the law of markets’ or the ‘théorie des débouchés’;” iii) “Keynes was not trying to deny that demand is constituted by supply. He was denying that economies never enter recession because of a deficiency of demand” (p. 15).

In fact, all three propositions are erroneous. Kates’s faulty definition of Say’s Law has previously been demonstrated (Jonsson 1999). The problem is that Kates conveniently avoids quoting relevant passages which disprove his manufactured arguments. In some instances, these passages follow immediately Kates’s quotes, but they are conspicuously omitted.

First, apparently Kates is not familiar with Say’s writings. It is no wonder that he never quotes Say. Contrary to Kates’s claims, Say’s loi des débouchés (law of outlets) cannot be reduced to the argument that goods buy goods (pp. 67, 91). Indeed, in the first edition of Say’s Traité the discussion of the law is not limited to the chapter on outlets (Book I, chapter XXII). In Book IV, chapter V, Say ([1803] 2006, p. 688) wrote: “the scope of the total demand for means of production, does not depend upon the scope of consumption. Consumption is not a cause: it is an effect. One must buy in order to consume; yet one can buy only what has been produced. The quantity of products demanded is therefore determined by the quantity of products created? Undoubtedly so” (original emphasis). Thus, Say never declared that “demand is constituted by supply.” Say’s focus was production not supply, an important distinction. For him, products consisted of goods or services produced or traded at cost-covering prices. Kates recognizes that this element “was the core of classical thought” (p. 12), but he fails to apply this crucial reasoning to Say’s thinking. Moreover, Kates maintains that “following the publication of Malthus’s Principles, Say agreed completely with Malthus’s critics and denied the possibility of demand deficiency” (p. 68). This statement, too, is incorrect. Recent studies have demonstrated, with ample evidence, that in several instances Say admitted that a general demand shortfall was possible and could cause economic crises (Béraud and Numa 2018, 2019). Following Say, most classical economists believed that production was the source of demand. That is the essence of what later became known as Say’s Law. However, for Say the law need not imply that supply was necessarily equal to demand, nor that demand deficiency could not cause crises. Because Say and other classical economists carefully distinguished supply from production, Say’s law of outlets differed from Keynes’s interpretation.

Second, it is true that Taylor invented the term “Say’s Law.” However, it is incorrect to claim that Taylor created the term “to describe … the impossibility of demand deficiency as a cause of recession.” Page 73 of the book is the perfect illustration of Kates’s selective quoting and blatant distortions of the historical record and the textual evidence. Kates quotes Taylor twice. The first quote does not contain any reference to the term “Say’s Law.” In reality, Taylor (1925, p. 196) discussed “general demand fallacies;” nowhere in this passage is “Say’s Law” defined as “the impossibility of demand deficiency as a cause of recession,” which is nothing but Kates’s own version of the law. The second quote ends with Taylor’s explicit reference to Say (1803), but Kates omits what follows immediately after, that is, the actual statement of the principle which begins on the same page by the following words. “This principle may be stated as follows: Principle — Say’s Law. The Ultimate Identity of Demand and Product. In the last analysis, the demand for goods produced for the market consists of goods produced for the market, i. e., the same goods are at once the demand for goods and the supply of goods; so that, if we can assume that producers have directed production in true accord with one another’s wants, total demand must in the long run coincide with the total product or output of goods produced for the market (Taylor 1925, pp. 201-202; original emphasis). This passage, Taylor’s actual definition of Say’s Law, is never quoted or mentioned in Kates’s book. The irony is that in the past, Kates (1998, p. 150) correctly quoted it. It should be noted that, like Say, Taylor (1925, p. 203) acknowledged that general demand deficiency could cause economic crises. He also admitted that public expenditures could have expansionary effects, a position that Say also supported. Taylor rightly credited Say with the earliest and clearest formulation of the law of outlets; hence the term “Say’s Law.”

Third, the question is whether Keynes’s definition of Say’s Law is the same as Kates’s. Keynes was very clear. He ([1939] 1973, pp. xxxiv-xxxv) criticized “the doctrines associated with the name of J.-B. Say” and explicitly interpreted Say’s Law as the principle “that demand is created by supply.” For Keynes ([1936] 1973, p. 18), the expression means that “in some significant but not clearly defined sense that the whole of the costs of production must necessarily be spent in the aggregate … on purchasing the product” (see also Keynes [1936] 1973, p. 26). He deduced from this principle the idea that, for classical economists, a lack of demand was not the cause of recessions, but Keynes never defined Say’s Law as “recessions are never caused by demand deficiency.” Kates’s “definition” of Say’s Law is just a straw man to justify his anti-Keynesian propaganda.

The book suffers from other flaws. Kates reduces classical economic theory to John Stuart Mill’s Principles. Even though Mill was a prominent classical economist, this is incredibly simplistic. Kates even admits that much, conceding that “Mill’s economics is very different from the economics of Smith and Ricardo” (p. 32). Kates’s reading of Mill is also incomplete. There is no discussion of Mill’s radicalism (Persky 2016), other than the fact that he was a self-proclaimed “socialist” (pp. 5, 32, 73). Furthermore, the secondary literature is rarely considered. On topics such as Say’s Law, classical political economy, and the Keynesian revolution, one would expect a comprehensive discussion of recent and older studies. Instead, Kates’s volume is a true preacher’s monologue .

There may be legitimate reasons to criticize modern economic theories and policies. However, protesting against Keynesian economics should not be done at the expense of the historical record and the textual evidence.

References:

Béraud, Alain, and Guy Numa. 2018. “Beyond Say’s Law. The Significance of J.-B. Say’s Monetary Views.” Journal of the History of Economic Thought 40 (2): 217–241.

Béraud, Alain, and Guy Numa. 2019. “Retrospectives: Lord Keynes and Mr. Say: A Proximity of Ideas.” Journal of Economic Perspectives 33 (3): 228-242.

Jonsson, Petur. 1999. “‘Say’s Law and the Keynesian Revolution: How Macroeconomics Lost Its Way’ by Steven Kates.” Southern Economic Journal 65 (4): 967–970.

Kates, Steven. 1998. Say’s Law and the Keynesian Revolution: How Macroeconomic Theory Lost its Way. Cheltenham: Edward Elgar.

Keynes, John Maynard. (1936) 1973. The General Theory of Employment, Interest and Money. London: Macmillan. Reprinted in Vol. 7 of The Collected Writings of John Maynard Keynes. London: Macmillan.

Keynes, John Maynard. (1939) 1973. “Preface to the French Edition.” Reprinted in The General Theory, pp. xxxi–xxxv. Vol. 7 of The Collected Writings of John Maynard Keynes. London: Macmillan.

Persky, Joseph. 2016. The Political Economy of Progress: John Stuart Mill and Modern Radicalism. New York: Oxford University Press.

Say, Jean-Baptiste. [1803, 1814, 1817, 1819, 1826, 1841] 2006. Traité d’économie politique ou simple exposition de la manière dont se forment, se distribuent et se consomment les richesses. Édition variorum in Œuvres Complètes de Jean-Baptiste Say. Paris: Economica.

Taylor, Fred Manville. 1925. Principles of Economics. Ninth edition. New York: Ronald Press.

Guy Numa is an Assistant Professor of Economics at Colorado State University. Recent publications include “Retrospectives. Lord Keynes and Mr. Say: A Proximity of Ideas” (with Alain Béraud), Journal of Economic Perspectives (2019); “Jean-Baptiste Say on Free Trade” History of Political Economy (2019); “Money as a Store of Value: Jean-Baptiste Say on Hoarding and Idle Balances” History of Political Economy (2020).

Copyright (c) 2020 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (November 2020). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):History of Economic Thought; Methodology
Time Period(s):18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Walters, Leone

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Artunc, Cihan

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The Russian Economy: A Very Short Introduction

Author(s):Connolly, Richard
Reviewer(s):Voskoboynikov, Ilya

Published by EH.Net (November 2020)

Richard Connolly, The Russian Economy: A Very Short Introduction. Oxford: Oxford University Press, 2020. xv + 151 pp. $12 (paperback), ISBN: 978-0-198-84890-5.

Reviewed for EH.Net by Ilya Voskoboynikov, Department of Economics, HSE University.

 

The Russian economy is, modifying Winston Churchill (1939), “a riddle wrapped in a mystery inside an enigma”; Russian economic performance is volatile. In the last three decades its institutional environment changed from a command to a market economy. Its industrial structure shifted from overinvestment in manufacturing and agriculture in the late 1980s to market services and mining (Voskoboynikov 2020). Trade conditions seem to be unpredictable. This is a sensitive issue for the economy, which depends on oil and gas exports. How can one understand the Russian development pattern over its centuries-old history and, possibly, outline Russia’s prospects for the future?

Perhaps there is a key. Richard Connolly dubs that key the “Russian system of political economy” — the System. For centuries, Russia could be characterized by (1) the weakness of its legal system, (2) the underdevelopment of modern economic activities, (3) technological underdevelopment and (4) lower living standards in comparison with major developed economies. The System explains why these features have proven to be so persistent.

Connolly departs from the system of political economy of Robert Gilpin, who highlights three main respects of any economy: the primary purpose of economic activity, the role of the state in the economy and the structure of private business. Historically, in Russia, this purpose was the subordination of economic activity to national security, both external and internal. This has predetermined the primary role of the state in the economy, reallocating resources to national security. Consequently, the position of private business is relatively weak and is characterized by weak property rights. To be successful, it is much more important to connect with state officials and block competition, rather than to produce competitive products.

The System explains the persistence of features (1)–(4). The central state delegated to the so-called state agents — pomeshchiki (landowners), governors or individual communist party bureaucrats — power to extract and reallocate resources and match target objectives at the cost of other activities. The central state granting agents autonomy and overlooking some abuses of power fueled the weakness of the legal system and of property rights. The threat of expropriations reduced the incentives of local private businesses to invest in new production, qualified workers, new technology and innovation. As a consequence, modern economic activities remained underinvested and technology underdeveloped. All these factors impacted productivity growth negatively and led to the deterioration of living standards.

The chapters of the book demonstrate effectively how this framework was formed and how it has worked throughout Russian history. Chapter 1 covers the four centuries from the formation of the Tsardom of Russia (later the Russian Empire) in sixteenth century to the October Revolution in 1917. This period demonstrates that the subordination of economic activities to national security originated from threats from several strong powers in the West and nomadic raiders in South and East. Russia was not alone in dealing with such external pressures, but with no natural geographically defined borders, such as mountains, coastlines, border lakes or rivers, the challenge for Russia was much stronger than for other Eurasian empires. Chapter 2 shows that the Soviet system of political economy, which formed by the mid-1930s and remained unchanged until the end of 1980s, turned out to be the extreme version of the traditional Russian System. Chapters 3, 4, and 5 discuss the formation of the modern system of political economy, which passed through the stages of market stabilization, liberalization and privatization in 1990s; the recovery of the role of the state in 2000s, accompanied by soaring growth rates; and the economic stagnation of 2010s.

The book is worth reading for economic historians. It provides a very simple and consistent conceptual framework, which helps to deal with the wealth of facts and data on the last five centuries of Russian economic history. This framework also demonstrates the difference between modern Russia and its predecessors – the Soviet Union and, to a lesser extent, the Russian Empire. Although national security remains one of the priorities for modern Russia, general social and macroeconomic stability are also the priorities (pp. 78, 85-89). The level of inflation is now at the historically lowest level since 1990. The budget deficit and unemployment are more than reasonable (pp. 83, 87).

The real challenges for Russia are demography, energy dependence and, probably the biggest, the weak legal system. The origins of this weakness are of specific interest and are of my main concern about the book. Connolly states (pp. 6-9) that the use of agents helps the central government to extract revenue, control vast territories and the population, and mobilize resources in times of the crisis with few formal controls. Most of the time the agents ruled their areas as their own domain and sometimes ignored the law. The central government needed the agents and controlled them weakly. As a result, national laws and informal local rules co-existed and collided, weakening the legal system and fueling the conflict between the central government and its agents for centuries.

A related issue is the lack of clarity on the ambiguous concept of the state in the book – specifically, a lack of clarity about the role of the state or its agents in proizvol (the arbitrary treatment) of serfs by their landlords or of a collective farmer by the local Communist Party authority. The same conflict appears in relations among the Soviet government, the ministries and managers of state enterprises (Gregory and Harrison 2005) and in the illusion of State Planning Committee control (p. 14). In all these cases, the state is both strong and weak. It is strong, because the landlord in eighteenth century and the local Communist Party authority in the Soviet era had power within their responsibilities or communities. It is weak, because the central government usually lacked the capacity to keep such agents under control and overlooked the abuse of law by its agents.

The central government made multiple attempts to enforce law and bind its agents. Kormlenie (feeding — the practice in pre-modern Russia of maintaining local officials at the expense of those they governed) was cancelled in sixteenth century. These attempts can also be seen in the constraints of serfdom up to the Emancipation Manifesto (1861) of Aleksandr II, which abolished serfdom. Unfortunately, the abolition of serfdom and its consequences are not discussed in the book, except the short paragraph of consequences of reforms after the Crimean War (p. 11). Scholars link Russian economic growth in the second half of nineteenth and early twentieth centuries to these reforms, including the abolition of serfdom and the subsequent progressive judicial reform. This was an important step forward, which improved the legal system and had a strong impact on economic performance (see, e.g., Markevich and Zhuravskaya (2018)). That is also an important lesson for Russia today.

Another concern is the issue of human capital, closely connected with the middle class and prospective future growth and development. Connolly notices that the Russian population now is highly educated by global standards (p. 114). I would add that the advances of education at all levels and healthcare system are achievements of the Soviet period (see, e.g., Nove 1992, pp. 359–62). This legacy of the Soviet Union makes the position of modern Russia in the global economy different from the Russian empire. In the early twentieth century, the illiteracy rate in Russia was 60% (1913) versus 11% (1900) in the US (Gregory and Stuart 2001, tab. 2.5).

These aspects, however, do not diminish the merits of the book, which helps us reflect on the centuries of Russian economic history and outline its future. Demography, energy dependence and the weak legal system (chapter 7) are particular challenges. The latter was explicitly exposed by the case of Russian oligarch Mikhail Khodorkovsky (pp. 44-45, 60-61) with the questionable legacy of privatization of oil company Yukos in the early 1990s, his payments to deputies in Russia’s parliament to support legislation of his business interests in the early 2000s and the transfer of the main oil-producing arm within Yukos to the state-owned company Rosneft. However, the Russian economy now is in a better position in comparison with 1917 or 1991. In spite of the importance of security issues and the high military expenditure, nobody seriously considers the big push approach or mass property confiscations and deportations, similar to the industrialization or collectivization of late 1920s–early 1930s. The primary purpose of the state is not only security. The role of the state is high, probably excessive, but not as high as three decades ago, and the chances of returning to a Soviet-like planned economy are negligible. In contrast with the period of the empire, the level of education in Russia now is much higher. In contrast with the Soviet period, the middle class, formed in 1990s, is also remarkable. Success will come when not only the government, but also Russian citizens, start considering improvements to the legal system as the top priority. The new book of Richard Connolly is very supportive of this idea.

References:

Churchill, Winston. 1939.  “The Russian Enigma.” London: BBC. The Churchill Society. http://churchill-society-london.org.uk/RusnEnig.html.

Gregory, Paul, and Mark Harrison. 2005. “Allocation under Dictatorship: Research in Stalin’s Archives.” Journal of Economic Literature 43 (3): 721–61.

Gregory, Paul, and Robert Stuart. 2001. Russian and Soviet Economic Performance and Structure. 7th ed. Boston, MA: Addison-Wesley.

Markevich, Andrei, and Ekaterina Zhuravskaya. 2018. “Economic Effects of the Abolition of Serfdom: Evidence from the Russian Empire.” American Economic Review 108 (4–5): 1074–1117.

Nove, Alec. 1992. An Economic History of the USSR. 1917-1991. 3d ed. Penguin Books.

Voskoboynikov, Ilya B. 2020. “Economic Growth and Sectoral Developments, 1990-2008.” In The Economic History of Central, East and South-East Europe: 1800 to the Present, edited by Matthias Morys, 520. Routledge (forthcoming).

 

Ilya Voskoboynikov is a Leading Research Fellow and an Assistant Professor at National Research University Higher School of Economics in Moscow. He is currently focuses on consequences of a command economy period for development and long run growth.

Copyright (c) 2020 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (November 2020). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Economywide Country Studies and Comparative History
Geographic Area(s):Asia
Europe
Time Period(s):16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

The WEIRDest People in the World: How the West Became Psychologically Peculiar and Particularly Prosperous

Author(s):Henrich, Joseph
Reviewer(s):Root, Hilton

Published by EH.Net (October 2020)

Joseph Henrich, The WEIRDest People in the World: How the West Became Psychologically Peculiar and Particularly Prosperous. New York: Farrar, Straus and Giroux, 2020. xxv + 680 pp. $31.50 (hardcover), ISBN: 978-0-374-17322-7.

Reviewed for EH.Net by Hilton Root, School of Policy and Government, George Mason University.

 

 

Harvard anthropologist Joseph Henrich’s latest book, The WEIRDest People in the World: How the West Became Psychologically Peculiar and Particularly Prosperous, differs from most contemporary scholarship in one big way. It tackles a cross-disciplinary topic and makes giant claims. Henrich asserts that the West became Educated, Industrialized, Rich, and Democratic owing to traits that have their genesis in a little appreciated tenet of early Christianity, that it is wrong for cousins to marry each other. Through “accidental genius,” the Church dismantled kin-based power networks in order to spread its own norms and institutions.

The book comprises three sections. The first describes the traits of WEIRD people; the second, how societies have always used religion to scale up, which builds on another book of his, The Secret of Our Success; the third, how the Catholic Church and its offshoot, Protestantism, shaped early institutions and psychology, paving the way for modernity.

Henrich claims that starting in the fourth century, the Roman Church assumed control of marriage by making the institution dependent on its blessing and banning cousin marriages. In great synods, it proclaimed the ban 88 times into the twentieth century.

What Henrich calls the Church’s “Marriage and Family Program” restructured medieval populations and directed the evolution of European society along a pathway no other society in world history has ever traveled. In another unforeseen consequence, it fertilized the West’s responsiveness to individualistic religious faith and eventually opened the doors for the Reformation, which split the Church and accelerated still more cultural changes that created modernity.

With its emphasis on personal responsibility for one’s salvation, the Reformation stressed literacy and the need to know the Bible, leading the Reformed states of Northwestern Europe to promote education. This was to have unintended consequences as well. As Henrich explains, recent clinical discoveries relate reading to alterations to brain tissue and connectivity that expand the capacity for analytical reasoning.

Henrich emphasizes that the Church did not foresee the long-term cultural changes its actions were to have, and he reiterates throughout the book that much of the downstream transformations the Church initiated — representative government, universal law, and democracy — were “accidental.” So why did the Church persist in defining incest, even up to the sixth cousins and widowed in-laws, pushing it far beyond other major religious denominations? Self-interest, he speculates. The Church competed for influence against tribal loyalties and intensive kin-based networks and institutions. It used the relentless taboos and punishments to weaken the traditional patriarchal authority and dissolve clan affinities, creating more opportunity for believers to devote themselves, their children, and their estates to the Church.

Henrich thus aligns himself with other scholars of Christianity, which sees the early Church as self-serving and aggressive in its pursuit of power. William Jack Goody (1983), a leading figure in cultural anthropology, makes this very point about the Church’s heirship policies.

If Henrich is correct, he is onto something big. His major discovery draws upon the research of two German historians, Karl Ubl (2008) and Michael Mitterauer (1991), along with papers that he worked on with other colleagues, and especially the econometric verification of George Mason economist Jonathan Schulz (2020).

The most widely known books on early Christianity place little emphasis on incest bans when discussing Church contributions to Western civilization. The proscriptions are also passed over by historians as being more aspirational than effectual. Late antiquity, which lasted into the seventh century, was a world in which monasteries were often owned by founding families; the sons of married priests followed them into office; and divorce and illicit marriages were rife. Christianity’s greatest impact was in its written laws that eventually took precedence over the oral diffusion of tribal customs on marriage and inheritance. Even so, it took centuries of Church influence to establish that the legality of marriage required ecclesiastical blessing. During the Early Medieval Period (500–1000), the supervision of an episcopate was not even sufficient to ensure celibacy of the priesthood. The ban forbidding divorce or the marriage between persons within prohibited degrees required repeated reaffirmation, suggesting that the Church faced a long uphill battle to enforce its rules.

Nevertheless, even if the incessant marriage and family campaign were merely aspirational, Henrich’s findings suggest that we need to change our thinking of the early Church. The aggressive pursuit of the marriage program cannot be explained as solely a result of narrow self-interest and self-aggrandizement, which Henrich explains as the absorption of Church leaders in their own institutional ambitions. It seems instead that its ideological zeal aimed to stem the polarization of the European population and the constant breakdown of order due to frequent war among the barbarian tribes and to ensure the very survival of Christendom as a kingdom, or society, of Christians. This interpretation of the cousin marriage ban would be more consistent with the research of Ubl and the synthesis of St. Augustine.

One of the great intellectual achievements of early Christianity addressed this polarization. St. Augustine’s City of God, was written in the early fifth century and links Church and state with war and peace, and with sex and marriage. It is an entreaty to the Catholic Church for a state that can act as an instrument of justice. In the fractured political reality of his era, the fourth and fifth centuries, a state built on top of kinship was not stable. A just state, Augustine reasoned, is a community bound by caritas, or agapē in Greek, love that is selfless and directed toward humankind.

Exogamy extends the scope of caritas Augustine (354–430 AD) writes: “Because siblings cannot marry … the separation of relationships extended universal love (caritas) to a greater number and enhanced the social life of human beings, among whom concord should be useful and honorable.” He advocates impediments on marriage to keep familial relationships separate from each other: “because of both the expansion of charity and the beauty of the church, it was instituted that marriage should not take place where there is already natural love, as among blood relations and people sharing a common parent, but only between non-kin” (Reynolds 2016, 340, 342).

Henrich’s genius and the source of his methodological originality reside in his application of contemporary social science to uncover universal laws, and to classify and categorize social reality in a context-free approach. He often works backward from outcomes to causes — for example, describing what European society might have been if the Church had not undertaken its marriage and family program. He draws comparisons with contemporary non-European societies that have retained more kinship-intensive ways of organizing. With cross-cultural empirical data, he illustrates these differences in terms of corruption, violence, obedience, business ethos, contributions to public goods, impersonal fairness, and receptivity to tradition, guilt, shame, and democracy. With this approach we can identify correlations not previously observed. The evidence strongly supports the importance of repressing “kinship intensity” in trajectories toward modernity.

Yet tracing causality without locating the mechanisms of transmission — the nuts and bolts of political history — is problematic. In the case of the marriage ban, it will take further research to resolve the question of intentionality and the ban’s diffusion across the continent. What we do not get from Henrich’s approach is the larger-system context or architecture that also defined Europe. We must understand how the Church as one network connected with other key actors and networks in European society and statecraft. It is not enough to know that the Church published edicts and proclamations unless we know how, when, where, and by whom they were put into practice all the way down to the parish level — another puzzle that seems well suited for Henrich’s consideration.

The Western Church from the fourth century found itself in a fragile geopolitical environment; the Roman empire was split between two capitals, and Church in the West was beset with political machinations from within and tension with the Eastern Church. Invading heathens made constant incursions from the north, east, and south. What made the Church-state dynamics of western Europe unique was its great wealth dating from the fourth-century, when the Emperor Constantine (306–337), hoping to unify the empire, transferred to the western Church the wealth of the pagan temples, making it the greatest landed proprietor in the world.

Nevertheless, Christendom needed an enduring partnership of Church and state to survive. In 800 Pope Leo III crowned Charlemagne (Charles I) as Emperor of the Holy Roman Empire. With Charlemagne both Europe’s most powerful ruler and the Church’s protector, the Church now gained great leverage over education, monastic life, and a large role in the management of civic relationships at the parish level. This alliance was to become the cultural scaffolding of the Middle Ages and from it the Church gained support in its campaign against incest. Charlemagne, Ubl tells us, wanted to diffuse the power of regional aristocracies by forcing them to marry out and thereby reduce the centrifugal forces causing divisiveness within the empire.

Feudal knights constituted another essential actor on Europe’s path to modernity. The knights, along with the monks and country friars, consumed a large portion of Europe’s surplus production. Feudalism, Europe’s nascent system of governance, sprang from the political arrangement designed to sustain the knights’ services to the monarch, which affected the economy as well as morality and aesthetics. This alliance was so critical that starting in the eleventh century, the Church developed special ceremonies to sanctify knighthood. A warrior girded with the belt of knighthood entered the church and placed his sword upon the altar as an offering. The promise to God of services of the sword bound the knight to perpetual service to the Church.

Moreover, Germanic society did not have to wait for the Church marriage ban to develop bonds beyond kinship. Among the Germanic tribes, loyalty to a chief was personal not tribal; chiefs attracted followers from many tribes, and when the claims of the lord conflicted with those of the kindred, duty to the lord would come first. Rather than opposing the Germanic principle of loyalty, the western Church willingly asserted that the binding force of duty was owed to a man’s lord and added sanctity to that oath (Whitelock 1952).

With Church support, the knights evolved into a noble class separated by blood ties from the rest of the population. In every country, the highest positions in the Church typically were preserved for the nobility, and great lords filled the church councils. Strengthening the hereditary rights of kings and knights, the Church embedded greater inequality into the system, the traces of which marked European social history until the early twentieth century. Only in passing does Henrich note that the Church did not apply the marriage rules on elite lineages with the same rigor as it did on peasant communities (p. 180). Elites remained embedded in intensive kin-based institutions. It took two centuries of absolutism and one of revolution to weaken the power and prestige of the aristocracy that the Church had reinforced.

The main shortcoming of Henrich’s analysis is its reliance on linear causality. Tracing an outcome, e.g., the distinctive psychology of Western society, to an original cause, the Church ban on cousins wedding, is in itself WEIRD. And his perspective is written for other WEIRD-minded folk who interpret causal pathways in history as proceeding in a straight line.

A different way to understand the Church’s role in European history is to view it as a social network that interacts and coevolves with other complex social networks. As a subsystem among other important subsystems (secular powers, towns, civil law, and royals, for example) that made up the larger system of the medieval West, it was the constant subject of the pull of those social forces around it, co-adapting within a changing environment (Root 2020), exerting sufficient influence, as events called for it, among the exalted monarchs or the most vulnerable village folk, to ensure its own continuity.

What makes the Church-state dynamics of Western Europe unique in world history is the considerable autonomy the former enjoyed because of its immense wealth. Its administrative capacity far exceeded that of the barbarian kings as it had become the repository of knowledge of Rome. This gave it great stature in a distributed system among other important subsystems, The Church had organizational capacity to mobilize and intellectual capacity to inspire, but it did not act alone. To succeed it needed to cooperate with Europe’s intermarried elites, especially the royal families. Being anointed by the episcopate, monarchs could claim eminence above all other lay leaders, and both the clerical and royal realms depended on the landed nobility to act locally and to recruit foot soldiers from the peasantry, from which the Church drew monks and parish priests.

As a chronicle of history, the narrative falls short, jumping from the fifth century to the High Middle Ages. Even so, the book makes a significant contribution to the study of what makes the West unique and will be a landmark of early twenty-first-century social science. It is persuasive that social psychologists have underestimated the degree to which western behavior once assumed to be universal is actually parochial. It illustrates the need for social psychologists to start to include people living in non-modern environments in their experiments — something Henrich has been doing since early in his career.

Henrich ambitiously tries to reunite economic anthropology with its cousin disciplines, economics and sociology, and places culture and social psychology on center stage. The bold claims he makes will keep a generation of historians busy running back to the archives to prove, disprove, or amend them. This could bring new attention to Church history and contribute to a renewed appreciation of religion’s formative role in making the modern world. It should also fertilize the study of economic history by giving researchers a reason to further explore the role played by the Church in long-term cultural change.

Now that we know how WEIRD Westerners really are, we might question the utility of using its experience to benchmark policy that is designed to help modernity happen in the rest of the world. What if you are the leader of a country that is not filled with culturally WEIRD people? How do you modernize? The book also leaves open the question of what happens when you have met one of the criteria of modernization and are only partially WEIRD — China and East Asia’s high-performing economies, for example, succeed on education and industrialization, but fall short on democracy. What kind of world order and governance of international relations will be possible when kinship intensity causes such significant variation in the performance of institutions?

There is one clear conclusion: the study of social networks will be essential if we are to understand and motivate long-term cultural change.

References:

Goody, Jack. 1983. The Development of the Family and Marriage in Europe. Cambridge: Cambridge University Press.

Mitterauer, Michael. 1991. “Christianity and Endogamy.” Continuity and Change 6 (3): 295–333.

Reynolds, Philip L. 2016. How Marriage Became One of the Sacraments: The Sacramental Theology of Marriage from Its Medieval Origins to the Council of Trent. Cambridge: Cambridge University Press.

Root, Hilton L. 2020. Network Origins of the Global Economy: East vs. West in a Complex System’s Perspective. Cambridge: Cambridge University Press.

Schulz, Jonathan F. 2020. “Kin-Networks and Institutional Development.” Working Paper. SSRN.

Ubl, Karl. 2008. Inzestverbot Und Gesetzgebung. Die Konstruktion Eines Verbrechens (300-1100). Berlin: Walter de Gruyter.

Whitelock, Dorothy. 1952. The Beginnings of English Society. Baltimore: Penguin Books.

 

 

Copyright (c) 2020 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (October 2020). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Economic Development, Growth, and Aggregate Productivity
Economywide Country Studies and Comparative History
Historical Demography, including Migration
Social and Cultural History, including Race, Ethnicity and Gender
Geographic Area(s):Europe
Time Period(s):Ancient
Medieval
16th Century
17th Century
18th Century
19th Century
20th Century: Pre WWII
20th Century: WWII and post-WWII

Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400-1700

Author(s):Harris, Ron
Reviewer(s):Artunç, Cihan

Published by EH.Net (September 2020)

Ron Harris, Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400-1700. Princeton: Princeton University Press, 2020. xiii + 465 pp. $40 (hardcover), ISBN: 978-0-691-15077-2.

Reviewed for EH.Net by Cihan Artunç, Department of Economics, Middlebury College.

 

In 670 CE, a merchant in Turfan, Central Asia, disappeared while traveling to trade goods he received on a loan from another, foreign, merchant. The debtor’s demise (and with him, one copy of the contract) called into question whether the terms of the loan could be satisfied. The question was finally settled, remarkably in the creditor’s favor. In 1469, Jakob the Elder, the managing partner of the Fugger family firm — one of the largest commercial enterprises in Europe at the time — passed away. Despite being wildly successful, the business almost collapsed as it convulsed through ad hoc arrangements for 43 years until finally transitioning to Jakob the Rich’s stewardship in 1512.

These are just some of micro case studies Ron Harris elegantly weaves to demonstrate the many different problems firms faced in long-distance Eurasian trade. Some risks were outside of merchants’ control. Pirates, bandits, and storms were real threats. But price fluctuations could be just as ruinous. It was difficult to verify any one associate’s claim. In a world with incomplete information, and where information flowed slowly, monitoring different agents, ships, partners, or branches became vital for any growing business. The risks were immense but so were the rewards. But, even if the firm successfully solved these problems and enjoyed growth, it could simply dissolve after the death of its controlling members, with no heir willing to take the reins and risk the fortune they inherited.

Today, businesses wrestle with many of the same issues. To solve the problems of information, agency, and different sources of risk, firms have to come up with a way to effectively monitor agents, coordinate the actions of different actors in the organization, and assign liability to members appropriately. Harris, a legal and economic historian at Tel Aviv University, takes advantage of his expertise in these literatures that are not always in conversation with one another. His careful study combines insights from contract theory and institutional economics with the rich body of evidence the history literature produced to show the similar and different ways in which societies responded to the organizational challenges involved in Eurasian trade, one of the most capital-intensive and risky economic activities before the 1700s.

Some solutions were simple and addressed related problems; these institutions appeared spontaneously in many places. Single ownership like itinerant traders (“peddlers”) or plain bilateral contracts such as loans or agency were endogenous to many areas and endemic across Eurasia. They became the building blocks of more sophisticated institutional arrangements.

Other solutions, like the commenda or the sea loan, emerged in one place but migrated all across Eurasia, through the expansion of empires or religion, the movement of people, and the merchants involved in Eurasian trade themselves. The sea loan allowed for more flexible assignment of liability. The lender took up the sea risk, the borrower assumed the business risk. It permitted the use of ships or goods as collateral. Originated in Phoenician and Greek practices, it was integrated into Roman law, survived Christian rules against usury, and spread across the Mediterranean and much of Eurasia. It remained an attractive way of organizing maritime trade until the arrival of the commenda. In its simplest version, the commenda resembled other bilateral contracts between an investor and a traveling partner to share profits from a venture. Commenda’s innovation was in separating the invested capital from both parties. Creditors could only make claims on the commenda capital, effectively giving both the investor and the traveling partner limited liability. One traveling partner could pool capital from many different investors by combining different commendas and could even entrust these pooled assets to another traveling partner through a new commenda. The form’s flexibility made it a popular organizational choice across Eurasia. Wherever the form migrated, the form could be adapted easily depending on that region’s institutional setup. The profit-sharing rule varied from place to place, as did what the investor could actually invest. But the broad contours remained the same.

Other institutions were so entrenched in the context where they first emerged, they could not migrate easily. The grand example Harris stresses is the business corporation. The idea of a legal person was developed in Western Europe within the Catholic Church. The Eastern Orthodox Church did not enjoy the same robust separation from a higher secular authority; Islam was too decentralized and non-hierarchical to make the corporate form an attractive option. The corporation migrated from the Catholic Church to European cities, which came to be somewhat autonomous as they became independent from the rural feudal system. Municipalities, universities, and guilds all took advantage of the corporate form. In other parts of the world, cities did not enjoy the same level of independence. But it was only the English and the Dutch who innovated by attaching joint stock to the corporation for a commercial objective. Harris argues that the commitment of the government to not arbitrarily expropriate assets was vital for this development. The corporation’s equity, a large pool of assets drawn from many investors, would be a tempting target for the executive. The firm had to convince its potential subscribers that their investment would be safe from expropriation or unexpected taxation, thus locking in capital for long periods of time. Harris further argues the business corporation, by allowing the English and the Dutch to scale up their operations and set up repeatable voyages from East Asia through the long and expensive Cape route, led to their ascendance in Eurasian trade at the expense of the Portuguese and the local players.

Perhaps the book’s most important contribution is the new typology of indigenous, migratory, and embedded institutions. Previous arguments on why certain institutions emerged or were adopted in some places but not others inevitably focused too much on the supply side. Harris improves on the existing views by comparing the complexity of said institutions and their reliance on other building blocks. It’s not that the Islamic Middle East or the Chinese Empire lacked sophisticated solutions. Far from it, the institutions that these regions developed — the waqf or the family lineage organization — also depended on the Islamic or the Chinese institutional complex to function effectively. These institutions, just like the business corporation, could not migrate alone without other complementary institutions. And because these regions had their own alternatives, they did not necessarily need the corporation until the corporation’s advantage in exploiting scale and scope became clear. The book thus develops a nuanced argument that demonstrates the depth of institutional solutions that different societies created and distances itself from the essentialist, Eurocentric arguments that unfortunately characterize some of this literature.

In explaining the corporation’s embeddedness in English and Dutch institutions, the analysis falls back to the all-too-familiar claims about commitment and checks on the executive. The recent reevaluation of that literature notwithstanding, this raises a question about whether the success of the English and Dutch East India Companies can be truly attributed to their organizational advantage or to some other English or Dutch institution that allowed the corporation to emerge there in the first place. Harris is careful in not pushing this line of argument too far and admits that private-state partnerships might have been functionally similar. Disentangling the state’s role from the organizational efficacy of the corporation will be an important question with which future research will have to grapple. Going the Distance makes an important step in this direction and provides an important analytical framework that will be useful in taking up this question.

 

Cihan Artunç is an Assistant Professor of Economics at Middlebury College. Recent publications include “Partnership as Experimentation” (with Timothy W. Guinnane), Journal of Law, Economics, and Organization (2019).

Copyright (c) 2020 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator (administrator@eh.net). Published by EH.Net (September 2020). All EH.Net reviews are archived at http://www.eh.net/BookReview.

Subject(s):Business History
International and Domestic Trade and Relations
Geographic Area(s):Asia
Europe
Time Period(s):Medieval
16th Century
17th Century