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

Timken: from Missouri to Mars–A Century of Leadership

Author(s):Pruitt, Bettye H.
Reviewer(s):Mazzoleni, Roberto

Published by EH.NET (June 1999)

Bettye H. Pruitt. Timken: from Missouri to Mars–A Century of


Boston, Mass.: Harvard Business Scholl Press, 1998. xvii + 514 pp. Tables,

figures, photographs, appendices, notes, and index. $39.95 (cloth), ISBN


Reviewed for H-Business and EH.Net by Roberto Mazzoleni, Department of

Economics, University of Vermont.

Continuity and Change in the Growth of a Family Controlled U.S.

Manufacturing Firm

Established in 1899 by Henry Timken to commercialize tapered roller bearings

axles for carriages, the Timken Company today is a multinational corporation

with sales of about $2.6 billion (1998), 21,000 employees,

engaged in the manufacture and sales of bearings and alloy steel products that

find application in a wide variety of industries. To celebrate its

centennial, the Timken Company commissioned the Winthrop Group Inc. to write a

history of the firm. Timken: from Missouri to Mars–a century of leadership

in manufacturing is the result of historian Bettye H. Pruitt’s research

(with the assistance of Jeffrey R. Yost and others). Pruitt uses a variety of

sources, including internal corporate documents, personal correspondence of

several members of the company, as well as interviews with numerous individuals

from the company itself, its affiliates, and outsiders. The book’s rich detail

testifies to the quality and thoroughness of the author’s research. While

primarily focused on the business aspects of Timken’s life, the book also

discusses the firm’s relationship with the surrounding communities, its

philanthropic activities, and provides biographical sketches of many


associated with the firm,

including Timken family insiders as well as outsiders. These sections

contribute to establishing a link between the personalities of the firm’s

leaders and the culture of the organization. This is an important element in

the author’s assessment of Timken’s evolution. Pruitt emphasizes the firm’s

identity and sense of purpose as an anchor of stable values enabling the

strategic and organizational adaptation that allowed it to survive and

prosper. These cultural factors are linked to the Timken’s family continuing

control of the firm after a century of activity.

While the family ownership and control constitutes a distinctive feature of the

firm, the events in Timken’s history are in many respects quite representative

of U.S. manufacturing industries more generally, not only from a technological

and economic viewpoint but also from a cultural one,

as the author acknowledges in the book’s early pages. The chronological

sequence of chapters is punctuated by two focus chapters that describe the

company’s establishment of new production plants (see infra). These, Pruitt

argues, symbolize the technological and cultural differences between the mass


and the flexible manufacturing eras in Timken’s corporate history.

The origins of the Timken company can be traced as far back as 1855, to a

carriage business set up by Henry Timken, the son of German immigrants in

St.Louis, Missouri. During the 1890s,

Henry became involved in the development of anti-friction bearings and,

together with his nephew Reginald Heinzelman, he invented a tapered roller

bearing for which they received a patent in 1898. One year later, the Timken

Roller Bearing Axle Co. was incorporated for the commercialization of carriage

axles mounting their patented bearings. The growth of the bearing business

followed that of the automobile industry, although since the 1910s Timken began

to develop other markets for its products. Timken bearings were sold at a

premium over competing products, but over time, increased competition and the

possibility of vertical integration by car manufacturers threatened the

company’s future growth. Under the stewardship of Henry Timken’s son, Henry H.,


firm committed itself to competing on price and quality to sustain revenue

growth, a strategy that prompted Timken to seek cost savings by establishing an

in-house facility for steel production.

Pruitt suggests a transaction cost rationale for integration related to

Timken’s steel quality requirements which resulted in high steel prices,

monitoring and testing costs. Timken was also experiencing difficulties in

securing reliable supplies of high quality steel from electric arc furnaces.

These factors pushed Timken (and its main rival, Swedish firm SKF) to invest

in a facility for steelmaking. The decision was based on fairly inaccurate

estimates: the final investment costs exceeded the initial forecast by a full

order of magnitude (p.74). As a result, Timken was forced to seek external

finance from banks first, and to offer part of the company’s stock to the

public in 1922. In spite of the earlier reference to transaction and

manufacturing costs, Pruitt’s account indicates that the internal capability i

n steel production proved to be of fundamental value for the innovative

performance of the firm as it provided Timken with control over the interface

between bearing design and steel quality. Thanks to the learned capabilities in

product, process, and sales engineering, Timken experienced profit and revenue

growth throughout the 1920s.

Until the Great Depression, Timken’s policy of paying high wages had succeeded

at keeping unions out of its production plants. Only in the 1930s efforts by

the United Steel Workers to unionize the company’s plants in Canton, Ohio,

succeeded. The firm’s relationship with the union was marred by hostility. The

management spurned any interference with its control of shopfloor activities.

Timken was committed to a managerial style informed by hierarchical command

and control, a practice whose continuity inside the firm was facilitated by

recruiting executives through internal promotions.

The management’s anti-union stance played a role in 1950 when a

state-of-the-art production plant was set up in Bucyrus, Ohio, a rural area

that Timken hoped could provide a union-free environment. The new plant

featured extensive automation of the manufacturing process and focused on the

mass production of standardized products. Timken’s management could benefit

from vastly improved information systems and hoped that its control over the

production process would be unfettered by conflict with its labor force.

Generous employee compensation was expected to avert the unionization of the


At the same time, the firm intended to provide workers with the training needed

to realize job rotation programs and with team-based performance incentives.

The scale economies realized at the Bucyrus plant were the basis for Timken’s

retention of a firs t-mover advantage in the market for standardized tapered

roller bearings. In contrast with competitors whose product lines encompassed

alternative bearing designs, Timken remained committed to its time-honed

strategy of competing on price and quality in the tapered roller bearing

segment. The same conservatism was also visible in the company’s structure,

where the organization continued to be along functional lines. Pruitt

identifies these facts as symptoms of the incipient divergence of Timken’s


strategy and structure from the pattern typical of U.S. manufacturing firms.

These differences notwithstanding, Timken enjoyed a prolonged period of growth

and profitability. It developed a network of international affiliates whose

integration became an

important focus of managerial attention. Driven by the objective to coordinate

sales and production on a worldwide basis,

efforts were made to establish uniform quality and dimensional standards that

could realize interchangeability of products across plants. Whereas Timken’s

management effectively addressed these operational needs, it was not quite as

successful at developing an appropriate business strategy model for its

international affiliates. The business model behind the Bucyrus plant that

succeeded in the U.S. did not enjoy the same fate in other markets, partly

because the firm did not have a first-mover advantage vis-a-visits


The competitive pressures in the U.S. bearing market increased during the

1960s. In the usual pattern, Japanese entrants first targeted the low-cost end

of the ball bearing business. Having succeeded in that market segment,

the Japanese firms began to aim at the low-end of the tapered roller bearings

market. Timken’s ability to withstand their competitive threat was the result

of its continuing commitment to modernize manufacturing facilities and expand

capacity. New plants were set up in Gaffney, South Carolina, in 1971 and in

Lincolntown, North Carolina, in 1979. To be sure,

competition put a squeeze on pro fit margins in the bearings business during

the 1970s, but Timken weathered the storm satisfactorily thanks to the

profitability of its steelmaking division. In that area too, Timken upgraded

and expanded manufacturing facilities (notice the acquisition of Latrobe Steel

in 1975) and developed other markets for its steel products in addition to


By the late 1970s the firm’s ability to sustain continuous improvement in

bearings’ performance was diminishing. Problems had emerged in regard to the

quality of internal steel supplies. The response to this crisis,

initiated in 1978 as the Clean Steel Program, included a benchmarking exercise

conducted at steelmaking plants in Europe and Japan which revealed that Timken

needed to catch up with the industry’s best practice in order to secure its

competitive standing in the bearings business. In 1981 Timken decided to build

a new steel plant at Faircrest, Ohio.

These events were a watershed in the firm’s history. A prolonged period of

internal change ensued that wrought radical transformations in Timken’s

organization of shopfloor work as well as its corporate structure and culture.

Existing organizational practices had created an inward-looking culture that

failed to absorb useful managerial and technological knowledge from the

outside. The outcomes of the benchmarking exercise shook the management’s

confidence in the organization’s ability to identify and solve problems

internally and to generate the technological and organizational improvements


to sustain the competitive position of the firm.

Outside consultants from McKinsey & Co. collaborated with insiders to

restructure the company. Even more important, they facilitated the overhaul of

the corporate culture, and particularly the abandonment of the strict top-down

approach to management that had characterized Timken since its early years. The

book’s final chapters portray Timken as an organization alert to the need for

strategic adaptation and willing to embrace change in response to external

events. In what may be considered a radical departure from the company’s

conventional wisdom, Joseph Toot Jr. described the Timken Company as having

moved from “a strict , traditional, product orientation toward the application

of certain skills which we

believed we possessed in an exceptional way” (p.393).

The book’s strength is without a doubt in its detailed account of the corporate

history, which a reader without an all encompassing interest in the matter may

find dizzying at times. While I found the

book pleasant and engaging to read for the most part, occasionally, the

author’s attempt to provide details ends up clouding the story line more than I

thought desirable, particularly toward the final chapters of the book. Perhaps

inevitably, the book touches only briefly upon events and issues that

interested readers will want to know more about. For example, Pruitt tells us

that while British Timken had been using Statistical Process Control

(SPC) after World War II, the U.S. headquarters’ efforts at standardizing

procedures across plants were responsible for its elimination. Pruitt says that

British Timken promptly conformed to the orders from Canton

(pp.232-234), but there is no way to tell whether British Timken benefited from

SPC, and if so, why did it simply conform to the orders? Considering that

quality control processes were resumed twenty years later, it would have been

interesting to learn more about the circumstances of SPC’s demise.

While the book rarely attempts to generalize from Timken’

s experience on specific issues, the introductory chapter places Timken’s

corporate history in a broader perspective provided by the scholarly debate

concerning the factors promoting corporate success and longevity. Pruitt lays

out two views, contrasting

Chandler’s [1] emphasis on a firm’s strategic focus on core businesses and

investments in organizational capabilities, with the cultural approach found in

Collins and Porras [2] and de Geus [3]

emphasizing a core ideology that “guides and inspires people

throughout the organization and remains relatively fixed for long periods of


(p.xiii). This contrast does not receive much analytical attention in the rest

of the book. As Pruitt reckons, both themes appear in Timken’s history. This

suggests that the views presented as mutually exclusive need instead to be

integrated with one another. In fact, I would argue that Pruitt’s own narrative

supports the broad proposition that an organization’s culture (intended as a

constellation of values and norms of interaction) is an important determinant

of its capabilities. While the rich evidence discussed in the book clearly

bears on the nexus between culture and capabilities, the nexus is not

adequately developed. Pruitt’s recurring references to the legacy of “a

compelling sense of purpose and a cohesive corporate culture” (p.31), or the

“timeless importance of corporate purpose and identity” (p.xvi) seem to

identify these cultural factors as the key determinant of Timken’s longevity

and success. These emphases

are not supported, in my opinion, by adequate analytical arguments clarifying

the relationship between these concepts and corporate success.

Pruitt’s book provides interesting insights on a much broader range of themes

than my review suggests. Among them

, I would mention the discussions of patent litigation, the effects of

antitrust restrictions on its relationships to foreign subsidiaries, lobbying

for antidumping tariffs,

the development of internal R&D programs, technological developments in steel


bearing technologies, the firm’s relationship with standard-setting

organizations, as well as its marketing efforts with respect to particular

customers or industries. As a result, the book deserves the attention of a wide

audience of scholars, from business and economic historians to scholars of

industrial organization, strategic management, and technological innovation.


[1] Chandler, Alfred D. Jr., Scale and Scope. The Dynamics of Industrial

Capitalism. Cambridge, Mass.: Belknap Press, 1990.[

2] Collins, James C. and Jerry I. Porras, Built to Last: Successful Habits

of Visionary Companies. New York, N.Y.: HarperCollins, 1994.

[3] de Geus, Arie, The Living Company: Habits for Survival in a Turbulent

Business Environment. Boston, Mass.: Harvard Business School Press, 1997.

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

The Defining Moment: The Great Depression and the American Economy in the Twentieth Century

Author(s):Bordo, Michael D.
Goldin, Claudia
White, Eugene N.
Reviewer(s):Cain, Louis P.

Published by EH.NET (September 1998)

Michael D. Bordo, Claudia Goldin, and Eugene N. White, editors, The Defining

Moment: The Great Depression and the American Economy in the Twentieth

Century. An NBER Project Report. Chicago: The University of Chicago

Press, 1998. xvi + 474 pp. $60.00 (cloth). ISBN: 0-226-06589-8

(cloth), 0-226-06589-8 (paper).


for EH.NET by Louis P. Cain, Departments of Economics, Loyola University of

Chicago and Northwestern University.

The “moment” is the Great Depression; what is being “defined” is public policy.

The editors have assembled twelve papers from a distinguished cast of authors

who are closely associated with their subject. The papers discuss almost all

of the programs that persisted from the First and,

particularly, the Second New Deals, but few of those that did not. In their


the editors discuss that this is potentially a controversial hypothesis, but

most of the papers simply explain why they agree or disagree with the

proposition, and some do find this was NOT a

“defining moment.” Whether each reader ultimately accepts or

rejects the hypothesis may be little more than a matter of definition.

In any event, each of the papers makes a substantial contribution to our

understanding of the depression. Most will be widely cited. Many readers,

including undergraduates, will want to consult the volume for more than one

paper. Thus, in the interest of disclosure, a thumbnail sketch of each of the

papers is appropriate. These brief synopses emphasize the relation of each

paper to the volume’s general theme. Each contains much more.


collection is divided into four sections of three papers each. The first is

entitled “The Birth of Activist Macroeconomic Policy.” Charles Calomiris

and David Wheelock ask whether the substantial changes in the monetary

environment of the 1930s had lasting effects? Those familiar with Wheelock’s

work will not be surprised to note they find little change in the thinking of

the Federal Reserve System. One effect of the New Deal banking laws was to

shift power from the Fed toward the Treasury,

a shift they feel imparted an inflationary bias, especially when conjoined with

the more activist approach to policy that was undertaken concurrently. The

most important legacy of the depression was the departure from gold creating

“the permanent absence

of a ‘nominal anchor’ for the dollar” (63).

The Bretton Woods dollar system allowed the Fed to “stumble” into the inflation

of the 1960s, and the continued absence of something like the gold standard

“provides an enduring legacy of uncertainty” (63) as to monetary policy in the

long run.

Brad De Long notes that the U.S. did not have a fiscal policy

in the

contemporary sense of the term before the Great Depression. It borrowed

heavily during periods of war and tried to redeem the debt as quickly as

possible during periods of peace. Government deficits in peacetime were rare


the 1930s, when they proved unavoidable despite the fiscal conservatism of both

Hoover and FDR. Yet, even before Keynes, there was an understanding that

“deficits in time of

recession helped alleviate the downturn” (83). After the second World War, a

fiscal policy consensus emerged that De Long characterizes as: “set tax rates

and expenditure plans so that the high-employment budget would be in surplus,

but do not take any steps to neutralize automatic stabilizers set in motion by

recession” (84).

That consensus proved hard to maintain: “The U.S. government simply lacks the

knowledge to design and the institutional capacity to exercise discretionary

fiscal policy in response

to any macroeconomic cycle of shorter duration that the Great Depression

itself” (82). What has persisted is the willingness to adopt a fiscal policy

stance that imposes a cost — perhaps higher than necessary (higher inflation,

lower saving and productivity) — to insure that there is no return to

Depression-era conditions.

Deposit insurance, the topic of Eugene White’s essay, was a result of the

Depression and is generally considered to be one of its great successes.

Banks became a scapegoat, and the

restrictions placed on the banking business diverted part of what they once

did to other parts of the financial sector. Banking became smaller than it

might have been. Deposit insurance was an attempt to insure the banking system

did not fail again.

White attempts to estimate bank failures under the assumption that deposit

insurance was not adopted. He finds that a stronger, larger banking system

would have resulted in lower failure rates and higher recovery rates.

Thus, it is possible the FDIC increased bank losses. A more important outcome

is that the FDIC changed the distribution of losses. The cost of those losses

is now “distributed to all depositors and hidden in the premialevied on banks”

(119). Thus, even if losses increased, they were unseen by individual

depositors, with the result that a marginal institution remains extremely


The second part, “Expanding Government,” begins with a paper by Hugh Rockoff on

the expansion of the government sector, largely as a result of a large number

of new federal programs. As Rockoff notes,

“it is easy to see that there was an ideological shift … it is harder to see

what produced it” (125). This ingenious article looks back at the publications

of economists in the 1920s and earlier and finds there were champions for

almost all of the New Deal programs. Curiously, one of the programs economists

did not endorse, one measure that FDR did not champion, was deposit insurance.

When the Depression came and the economic doctors were called, microeconomists

had what they considered successful prescriptions. Some part of that must have

been conditioned by the role of the government in World War I. But another

part is something that Rockoff does not discuss, and it surely is one of the

factors producing an ideological change within the profession.

Even before the Great Depression, the competitive paradigm was under attack.

The merger movement at the turn of the century called into question the

assumptions of constant returns to scale and easy entry and exit. The

emergence of a consumer society called into question the assumption of

homogeneous products. Robinson and Chamberlin’s models are independent of the

Depression, and what impact they would have had in the absence of the

Depression is unclear. It is clear that FDR came into the White House with a

mandate to do something, and the economic doctors had a long list of things to

try, things that had been used successfully elsewhere.

John Wallis and Wallace Oates argue persuasively that the New Deal had a

profound effect on the nature of American federalism through its use of a

little used fiscal instrument — intergovernmental grants. Before the

Depression, different levels of government operated with a much greater degree

of independence than they would thereafter. Intergovernmental grants created

the necessity for cooperation that has characterized the fiscal federalism ever

since; “fiscal centralization and administrative decentralization” (170). They

argue that the new structure was conducive to the growth of government. Like

Rockoff, they note the growth of the federal government did not come at the

expense of state and local governments; both grew. They show how this new

pattern was “the result of the struggle between state and national

governments, and also between the president and Congress, for control over

these programs” (178). How much of this has to do with a states rights’ bias

in the legislative and judicial branches, and how much with the depression

itself, is uncertain.

Gary Libecap examines the regulatory laws effecting agriculture between 1884

and 1970 and the budgetary expenditures that were derived from those laws

between 1905 and 1970. His contention is that “the New Deal increased the

amount and breadth of agricultural regulation in the economy and …

shifted it from providing public goods and transfers to controlling supplies

and directing government purchases to raise prices” (182).

Acreage restrictions and government purchases were the most apparent of what

he terms, “unprecedented, peacetime government intervention into agricultural

markets” (216). Abstracting from those policies, Libecap asks what

agricultural policy might have been in the absence of the Depression.

He believes it would have been more like it had been, but that is the result

of an exercise in which he subtracts laws passed after 1939 with a direct link

to “key New Deal statutes.” One wonders how many any of those statutes would

have been passed in any event; some represent ideas that pre date the


In the first paper of Section III, “Insuring Households and Workers,”

Katherine Baicker, Claudia Goldin, and Lawrence Katz note that there are three

differences between the system of unemployment compensation in the U.S. and

elsewhere: experience rating, a federal-state structure, and limitations on

benefit duration. The question they address is how that system would have been

different had it not been created during the New Deal. There is an implicit

assumption the U.S. ultimately would have adopted some form of unemployment

compensation in the absence of the Depression. To how many other New Deal

programs is this assumption relevant? The authors point to the federal-state

structure as the key difference. Their counterfactual

system is strictly a federal system with no experience rating, a system

consistent with the administration’s recommendation. We got the system we did

because, “The federal-state structure and the manner in which the states were

induced to adopt their own

UI legislation assured passage of the act and guaranteed its

constitutionality” (261). They criticize the system for not having

“changed with the times,” but that is no surprise after reading Wallis and


While most people look to the labor legislation of the 1930s as “a defining

moment,” Richard Freeman argues that to be defining an event must “lock in

certain outcomes that persist … when, given a blank slate, society could have

developed something very different” (287). This test creates two interesting

dichotomies in Freeman’s story. The first concerns the framework versus the

results. The legal framework for private sector labor relations has persisted,

and Freeman considers that framework to be

“outmoded.” On the other hand, the unionization attendant to the adoption of

that framework “looks more like a diversion from American

‘exceptionalism’ … than a critical turning point in labor relations”

(287). The density of private sector unions today is similar to what it was

just after the

turn of this century; the voice of those unions in national political discourse

is barely audible. The second dichotomy concerns private versus public unions.

State regulation of the latter has resulted in a relatively stable environment

in which collective bargaining proceeds with less confrontation, but that may

be because public sector managers are not as accountable to the taxpayers as

private sector managers are to the company’s profits. In sum, Freeman

acknowledges that the framework in which lab or relations takes places was

defined during the Depression, but that was not a “defining moment” for labor


In their study of the creation and evolution of social security, Jeffrey Miron

and David Weil do not examine the role the Great Depress ion might have played

in the program’s adoption. Their emphasis is on the evolution of the program

since its inception. They find that “in a mechanical sense,

there has been a surprising degree of continuity in social security since the

end of the Great

Depression” (320). That is, there has been little change in what each of the

parts does; it is clear the balance between them has changed and that change

has had an impact on the economy. As the population has aged, the balance

between the old-age assistance component,

the basic response to the depression, and the old-age and survivors insurance

component has transformed what was an insurance program benefiting few to a

transfer program benefiting many.

Doug Irwin’s paper on trade policy begins the final section, “International

Perspectives.” Irwin shows that, during the 1930s, the locus of control of

trade policy passed from the legislative to the executive branch of government

largely as a result of “the depression as an

international phenomenon”

(326). Smoot-Hawley marked the end of the old approach. By the end of the

1930s, the average tariff rate had decreased from over 50% to less than 40%.

In another ten years it would be below 15%. While part of this change is

attributable to trade policy,

part should be attributable to fiscal policy (a return to the days of the

Underwood tariff) as the federal income tax came to play a much larger role,

especially in the 1940s. Similarly, the Reciprocal Trade Agreements Act was

passed during the depression, but it was not “institutionalized”

until after World War II. When, during the war, Republicans moved to seek

congressional approval and to protect domestic firms competing with imports, it

was clear that the policy changes of the 1930s would persist. Then, after the

war, “the new economic and political position of the United States in the world

… made a return to Smoot-Hawley virtually unthinkable” (350).

The paper by Maurice Obstfeld and Alan Taylor is in many ways the most

expansive in the volume. They begin by investigating more than a century of

data on capital mobility, then propose a framework in which both the downtrend

initiated by the Great Depression and the uptrend of recent years can be

understood. The framework is a policy “trilemma” faced by all national

policymakers: “the chosen macroeconomic policy regime can include at most two

elements of the ‘inconsistent trinity’ of (i) full freedom of cross-border

capital movements, (ii) a fixed exchange rate, and (iii) an independent

monetary policy oriented toward domestic objectives” (354). To the authors,


Great Depression was caused by subordinating the third element to the second.

Under the classic gold standard, monetary policy was concerned with exchange

rate stability, not

domestic employment, and capital mobility was facilitated. The abandonment of

gold led to a system

“based on capital account restrictions and pegged but adjustable exchange

rates, one whose very success ultimately led to increasingly unmanageable

speculative flows and floating dollar exchange rates….” (397).

The gold standard plays an equally prominent role in the paper by Michael Bordo

and Barry Eichengreen. To address the question of what the Great Depression

meant for the international monetary sy stem, they examine a counterfactual

world without the Great Depression — but with World War II and the Cold War.

They assume the gold standard would have persisted through the 1930s, been

suspended during the war, and resumed in the early 1950s. Under

these assumptions, “the depression interrupted but did not permanently alter

the development of international monetary arrangements”

(446). The system that did develop in the U.S. was very different than the

hypothesized one, but the factors that ultimately led to the collapse of the

Bretton Woods arrangements would have caused the collapse of the gold standard

— and possibly at an earlier date. Those factors include “the failure of the

flow supply of gold to match the buoyant growth of the world economy and hence

of government’s demand for international reserves” (447).

This, in turn, led to questions about U.S. official foreign liabilities and the

gold convertibility of the dollar. Bordo and Eichengreen believe that,

in these circumstances, a floating system would have resulted leaving us with

more or less what we have today. If one accepts the “ifs” in their argument,

the institutional structure that emerged in the wake of the Great Depression

postponed the transition.

This is a remarkable thought on which to end this volume. Calomiris and

Wheelock discuss the Fed’s recent emphasis on price stability as a short-run

policy concern as a “throwback.” Obstfeld and Taylor discuss the deregulation

and recent growth of the financial sector as creating

a barrier to the reimposition of capital controls. Both discussions concern

long-run adjustments the economy has made as a result of the abandonment of

gold, but both would have taken place had there been no Great Depression if

Bordo and Eichengreen are


The editors point to four common themes supporting the “defining moment”

hypothesis (6). “First, skepticism about the efficacy of government

intervention withered as the public adopted the attitude that the government

could ‘get the job done’

if the free market did not.” It is unquestionably the case that there was a

loss of faith in the tenets of the competitive model. While this faith was

wavering among social scientists well before the depression, the general

bewilderment of the 1930s created a search for someone who was willing to try

anything. To paraphrase the late John Hughes, before the Great Depression the

federal government only knew how to spend money on rivers, harbors, and post

offices. As Rockoff documents, there were a number of other projects waiting

in the wings.

“Second, many innovations introduced by the New Deal were forms of social

insurance.” While much of the First New Deal took the form of World War I

programs modified for peacetime use, many of the Second New Deal programs were

aimed at ameliorating specific types of suffering, particularly those where

successful experiments had been tried elsewhere. Some undoubtedly would have

been adopted eventually; the depression meant they started earlier than

otherwise would have been the case.

“Third, the character of federalism moved from ‘coordinate’ to

‘cooperative’ with extensive intergovernmental grants, giving greater influence

to centralized government.” This change in form, it is argued,

was necessary to get them through Congress and the Supreme Court, but that is

not necessarily a result of the Great Depression; the states rights’ bias was

present much earlier.

“Last, the conduct of economic policy … changed to give more weight to

employment targets and less

to a stable price level and exchange rate.”

These changes in turn imparted what several authors refer to as a bias in favor

of inflation, but, in a simple Phillips curve world, what developed was a bias

against a return to the conditions of the 1930s. To put it as simply as

possible, those who lived through the Great Depression defined for

policy-makers then and for their grandchildren today that all possible steps

should be taken to avoid repeating the trauma.

Louis P. Cain Departments of Economics Loyola University of Chicago and

Northwestern University

Louis Cain and the late Jonathan Hughes are the authors of American Economic

History published by Addison Wesley. Cain’s article with Dennis Meritt,

Jr., “The Growing Commercialization of Zoos and


appeared in the Journal of Policy Analysis and Management, Spring 1998.

His article with Elyce Rotella, “Urbanization, Sanitation, and Mortality in the

Progressive Era, 1899-1929,” will appear in Gerard Kearns, W.

Robert Lee, Marie C. Nels on, and John Rogers, editors, Improving the

Public Health: Essays in Medical History.

Subject(s):Economic Planning and Policy
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

A Living Wage

Author(s):Glickman, Lawrence B.
Reviewer(s):Schneirov, Richard

H-NET BOOK REVIEW Published by H-SHGAPE (April, 1998)

Lawrence B. Glickman. A Living Wage: American Workers and the Making of Consumer Society .Ithaca and London: Cornell University Press, 1997. xvi + 220 pp. Notes, bibliographical references, index $35.00 (cloth). ISBN 0-8014-3357-6.

Reviewed for H-Net by

Richard Schneirov, Indiana State University

This book has enormous implications for historians of the Gilded Age and Progressive Era. To understand precisely how first requires a capsule summary of nineteenth century labor historiography. From the 1960s through the early 1980s, U.S. labor historians sought to write a history of the making of the American working class much in the manner done so masterfully for the English working class by Edward P. Thompson. New labor historians located a nascent socialist critique of the wage labor system in a working class version of artisan republicanism grounded in the classical labor theory of value. Most of the new generation of labor historians found that the career of labor republicanism came to a halt in the late nineteenth century with the defeat of the Knights of Labor and rise of the pure and simple or business unionism, commonly associated with the American Federation of Labor. Other historians pushed back the “fall” of labor into the twentieth century, but in most cases a working class that was “made” throughout most of the nineteenth century was “unmade” at some point in the twentieth.[1]

For nonlabor historians of the Gilded Age and Progressive Era, the conclusions of the new labor historians tended to reinforce a much older view of American history as exceptionalist–that is, lacking sharp class divisions and a viable socialist or labor political presence as existed in Europe and Britain. In the newest version of the old story, exceptionalism was not inherent in American history but emerged historically out of working class failure.

A Living Wage is so important because it provides us with some of the conceptual tools required for resolving labor history’s impasse. Glickman grounds the fin de siecle crisis, whose resolution created the foundation for modern America, in the dissolution of a producers’ understanding of how value was constructed. With the sundering of the labor theory of value from the calculus determining prices and wages–the premise for neoclassical economic theory–the producers’ critique of the wage labor system lost its intellectual and ultimately its cultural force. One outcome which Glickman does not discuss is the marginalist revolution, which facilitated the acceptance of corporate administered prices and wages. Glickman’s book tells of a different outcome, one that emerged out of the late nineteenth century labor movement. Accepting the modern premise that wages no longer were determined by the cost of labor, trade union activists, inspired by the writings of eight-hour theorist Ira Steward, began to promote a needs theory of value, according to which human needs would have priority over market forces in determining wages. In the terms of the day, labor advocated a “living wage” whose value would be determined by the ever-expanding needs and wants of workers in their capacity as consumers. As Samuel Gompers’ associate Frank Foster put it, “It is not the value of what is produced which determines the wages rate, but the nature and degree of the wants of the workers” (p. 70). Whether labor leaders knew it or not, the new regulative principle was quite in accord with the thinking of Marx whose maxim of socialism was “from each according to his ability, to each according to his needs.”

The significance of this development has been largely ignored by labor historians because the doctrine of the living wage and its corollary, the need for a constantly rising (American) standard of living, necessarily entailed the acceptance of what was then called “wage slavery.” Many historians have viewed the abandonment of the goal of self-employment through producers’ cooperation and the acceptance of a consumerist consciousness as equivalent to a passive and narrowly apolitical acquiescence in the inevitability of capitalism. But, as Glickman shows, the living wage doctrine was actively constructed by workers themselves, partly out of the producers’ ideal of a moral economy as an alternative to the commodification of toil, but also out of an acceptance of those very relations. In Glickman’s view acceptance, rather than being equivalent to acquiescence, was the necessary condition for actively reshaping and regulating market relations according to an ethical standard external to those relations, viz. workers’ self-perceived needs.

Glickman traces the development of living wage thinking from its first flowering in the eight-hour movement of the late 1880s to the rise of the 1890s trade union label movement long associated with business unionism. Inherent in both movements, according to Glickman, was the vision of a “social economy” that abandoned the idea that wages should return to workers the full fruits of their labor. Though much of the old producerist vocabulary continued to frame labor leaders’ thinking, Glickman demonstrates that trade unionists tried to reshape and control market relations by making them subject to a socially determined standard of living emerging from the sphere of consumption and collective bargaining.

By the early twentieth century, reformers outside the ranks of labor picked up the living wage ideal and turned it into a Progressive reform, known as the minimum wage. Because the minimum wage was defined as a subsistence wage fit only for those, like immigrants and women, working below the American standard, AFLers pulled back from the movement. Yet, even the minimum wage challenged the prevailing legal doctrine of freedom of contract and the still powerful producerist ethical ideal that wages should be based on an equivalent of services rendered. The idea that wages should be based on consumers’ proliferating needs and wants eventually came into its own during the New Deal. In their understanding of the 1930s depression as due to underconsumption, New Dealers and progressive businessmen endorsed the idea that rising purchasing power, which in part depended on rising wages, was necessary for the successful functioning of a mass production economy. The 1938 Fair Labor Standards Act establishing a minimum wage is for Glickman a monument to the triumph of a nonproducerist and nonmarket criterion of value determination in regard to wages.

The implications of Glickman’s book are at least several. It strongly suggests that historians abandon a time-honored view of pure and simple trade unionism as “conservative” and circumscribed by “bread and butter” concerns. To the contrary, Glickman provides us with a way of understanding this consciousness as an integral part of an ongoing class formation that occurred simultaneously with an accommodation to wage labor. Moreover, by demonstrating that socialism could have both a consumerist and producerist foundation, this book furthers the understanding that socialist principles and relations were intermixed in twentieth century corporate capitalist society and in modern liberalism.[2] Finally, it provides a way in which a re-thought labor history can incorporate the history of women workers and feminists whose agency was often focused in the sphere of consumption rather than production.

The book does have several limitations that should be mentioned. First, by promiscuously mixing quotations from the 1880s with those from the early twentieth century, Glickman misses the opportunity to suggest in specific ways how and why this new consciousness developed historically. In this regard, some labor historians will be disappointed that the book does not directly confront the prevalent argument that the living wage was gained only by abandoning skilled workers’ control over the workplace. Second, there is a basic ambivalence in Glickman’s treatment of consumption. At some points, he argues that organized workers began to view the sphere of consumption as displacing the sphere of production. At other points, he suggests that workers merely understood that the two spheres were interrelated and of roughly equal importance in determining class identity, a more defensible position. Finally, there is an implication in the book that the labor movement was the sole or prime source in defining an American standard of living. This ignores the long nineteenth century history of Whig and Republican sponsored protective tariff proposals that party spokesmen argued were necessary to protect high American wages.

These qualms should not detract unduly from a provocative and important monograph. Glickman’s book is concise (162 pages of text), well written, and his argument is easy to follow, making it accessible to undergraduates as well as graduate students. It promises to become a major text for the next round of rethinking labor history in the Gilded Age and Progressive Era.


[1]. For example, see Kim Voss, The Making of American Exceptionalism: The Knights of Labor and Class Formation in the Nineteenth Century (Cornell University Press, 1993); for a survey see Larry G. Gerber, “Shifting Perspectives on American Exceptionalism: Recent Literature on American Labor Relations and Labor Politics,” Journal of American Studies, 31 (1997): 253-74.

[2]. Martin J. Sklar, The United States as a Developing Country: Studies in U.S. History in the Progressive Era and the 1920s (Cambridge, 1992); James Livingston, Pragmatism and the Political Economy of Cultural Revolution, 1850-1910 (University of North Carolina Press, 1994); and Richard Schneirov, Labor and Urban Politics: Class Conflict and the Origins of Modern Liberalism in Chicago, 1864-1897 (University of Illinois Press, 1998).


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

Mass Production, the Stock Market Crash, and the Great Depression: The Macroeconomics of Electrification

Author(s):Beaudreau, Bernard C.
Reviewer(s):Hausman, William J.


Published by EH.NET (February 1998)

Bernard C. Beaudreau, Mass Production, the Stock Market Crash, and the Great Depression: The Macroeconomics of Electrification. Westport: Greenwood Press, 1996. xx + 182 pp. $59.95 (cloth), ISBN: 031329920X.

Reviewed for EH.NET by William J. Hausman, Department of Economics, College of William and Mary.

Beaudreau asserts boldly on the first page of his book that his purpose is to “provide a definitive account of the Great Depression and the events leading up to this cataclysmic event” (p. xv). At least he didn’t claim to have written “the” definitive account. In fact, this is a highly idiosyncratic treatment that explores a number of events of the ‘teens, 20s, and 30s. There is much that is outrageous, along with occasional insights that warrant further study. The fundamental argument is that productivity-enhancing structural changes in industry in the 1920s set the stage for the events that were to follow. The treatment of the period thus fits within the basic approach economic historians such as Michael Bernstein (The Great Depression: Delayed Recovery and Economic Change, 1929-1939, Cambridge University Press, 1987) and, more recently, Rick Szostak (Technological Innovation and the Great Depression, Westview Press, 1995) have taken.

The chain of logic is clearly defined but long. The electrification of industry (“the most important process innovation in this century”), because it set the process in motion, is actually the villain of the piece. The electrification of the assembly line in the 1920s (a process led by the Ford Motor Company) substantially raised productivity and led to an era of mass production. This brought conditions of “oversupply,” initially hidden by labor hoarding. Eventually, aggregate income failed to keep pace with productivity, not because profits rose substantially, but because wages failed to rise. By 1928 Senator Reed Smoot, with the support of Hoover, proposed restricting access to the U.S. market by raising tariffs. The prospect of passage of the tariff bill in 1928 set off the speculative stock market boom. The failure of the bill in the Senate the following year precipitated the stock market crash. Planned investment then was cut drastically, setting off the decline in income and the Great Depression. The National Industrial Recovery Act was the only policy response that had a chance of reversing the process, but this experiment in cooperative behavior aided by government was cut short by the Supreme Court. This is all laid out in the introduction. Twelve chapters, each of them short, then attempt to either flesh out the bare bones of the logic, or offer asides on some aspect of the historical process.

Because the chain of logic is long, it can be attacked at numerous points. Take, for example, the monocausal view of the course of the stock market. In two chapters and an appendix, Beaudreau links the prospects of the tariff bill as reported in the press to stock market activity. A correlation can be established, but the causality is obscure, relying heavily on an indirect link to planned business investment. One important aspect of the event that is not mentioned is the fact that industrial stocks actually rose much less than public utility stocks, especially stocks of public utility holding companies, a sector not much affected by the prospective tariff. In the end the correlation is not sufficient to prove the point.

The book contains some interesting chapters. In one, a game-theoretic model is used to show how an economy may get stuck in a low-growth equilibrium in the presence of a productivity-enhancing technological shock. It carries some heavy assumptions, the critical one being that firms will not raise wages in response to the shock (without some third-party intervention). It is conceivable that such a process had a role to play in bringing on the depression.

This book is not a definitive account of the events surrounding the Great Depression. The basic approach of exploring structural changes as the root cause of the depression is, however, a worthy endeavor. Perhaps if the author had been more modest in his claims, my reaction would not have been as critical.

William J. Hausman Department of Economics College of William and Mary

Will Hausman is the author of “Long-term Trends in Energy Prices,” in Julian L. Simon, ed., The State of Humanity, Oxford: Blackwell Publishers, 1995, and other papers on the history of the U.S. electric utility industry.


Subject(s):Macroeconomics and Fluctuations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII

Funding American State, 1941-1995: The Rise and Fall of the Era of Easy Finance

Author(s):Brownlee, W. Elliot
Reviewer(s):Vedder, Richard K.


Published by EH.NET (December 1997)

W. Elliot Brownlee, Editor. Funding the Modern American State, 1941-1995: The Rise and Fall of the Era of Easy Finance. Cambridge: Woodrow Wilson International Center for Scholars and Cambridge University Press, 1996. ix + 467 pp. $59.95 (cloth), ISBN: 0521552400.

Reviewed for EH.NET by Richard Vedder, Department of Economics, Ohio University.

The good news is that seven scholars from a variety of disciplines (economics, history, political science, law) have given us an engaging narrative on various aspects of the contemporary history of American federal taxation in a volume that should be oft-cited. The bad news is, as is typically the case in edited volumes, the quality of the analysis is uneven and in a few places even historically inaccurate.

The book was probably largely written in 1994 or at the beginning of 1995. I was a little turned off by the very first sentence of text in the book, in a promotional blurb preceding the title page: “The fiscal crisis faced by the American federal government represents the end of a fiscal regime that began with the financing of World War II.” My reaction was: what fiscal crisis? At the time I read the book, President Clinton had just announced that the 1997 fiscal year budget deficit was about $22 billion, the smallest deficit in relation to total output in a generation. Moreover, the tax changes implemented in the 1997 budget deal merely extended the fiscal regime arising out of World War II.

Yet the claim is probably not so wrong after all. Americans are extremely unhappy with the administration of the tax system, and with its complexity. The public mood is ripe for reform, perhaps radical change that involves the replacement or profound modification of the progressive marginal rate income tax. The booming economy has given some temporary respite in dealing with the entitlement problem, but in the long run the existing fiscal equilibrium is clearly untenable given what C. Eugene Steuerle appropriately calls (p. 428) “the yoke of prior commitments.” It looks increasingly likely that major fiscal changes will occur at some time in the next decade.

Two of the essays (totaling more than one hundred pages) are by Elliot Brownlee. One summarizes the volume and the second provides a historical overview of the tax system since the beginning of the Republic. Brownlee correctly notes that new tax regimes implemented during four national emergencies (Civil War, World War I, the Great Depression, and World War II) facilitated the enormous growth of the federal government. High wartime taxes were only modestly lowered after those conflicts, which, combined with reduced defense spending, allowed for expanded social programs without incurring large political costs.

Brownlee emphasizes the tensions between the Republican emphasis on consumption and tariff taxation and the Democratic yearning for progressive income taxation in the late nineteenth century. Indeed, one can argue that the entire fiscal history of the country since 1860 is one of the changing political importance of two impulses: the progressive impulse to use the tax system to bring about income redistribution, and the conservative impulse to reduce the inefficiencies, resource distortions, and growth drag associated with high rates, particularly with regards to income.

A point that gets occasional mention but little emphasis in the book (possibly excepting Steuerle) is that progressive taxation gave political incentives to encourage price inflation, as bracket creep provided a politically clever way to raise taxes in a stealth fashion to finance social programs. I do not think it is entirely an accident that inflation in the United States was low or non-existent in the era before sharply progressive taxation, was high in the era of high progressive rates, and has moderated since tax indexation reduced (although not eliminated) the bracket creep dimensions of the progressive income tax. Did fiscal policy drive monetary policy?

Brownlee makes its abundantly clear that progressives in both the Wilson and Roosevelt administrations used war emergencies as an opportunity to impose their redistributionist ideas. As he hints, a case can be made that the notion of progressive income taxation was saved, by all people, Secretary of the Treasury Andrew Mellon, who in the 1920s defused Republican efforts to replace the progressive income tax with a national sales tax, an effort that has had a renaissance of sorts today.

Brownlee’s account of tax history emphasizes the progressive impulses at redistribution, and pays little attention to the efficiency difficulties that extremely high marginal rates pose. Few economists today would claim that sharply raising marginal tax rates in 1932 was an intelligent move from either a demand or supply side perspective, yet Brownlee does not discuss whether this viewpoint was articulated at the time. Had equity concerns completely silenced the traditional efficiency arguments that arise in tax debates? The emphasis throughout the Brownlee article is on tax changes that provided fiscal support for an increased state: he gives very little attention to the important Kennedy and Reagan tax cuts, and completely ignores several moderately important changes in the tax system, such as in 1954, 1990, and 1993.

Turning from the general to the specific, Carolyn C. Jones competently explores how the government used public relations techniques to convince Americans to comply with high income taxation in the 1940s, when most Americans first became payers of the tax. Edward D. Berkowitz nicely summarizes the history of social security taxation, showing how liberals associated with the administration of the program (such as Wilbur Cohen) played an influential role in crafting Social Security expansion. They convinced legislators that large increases in benefits were possible with only moderate tax increases. In time, of course, political leaders learned this lesson too well, increasing benefits in the 1970s in an actuarially untenable fashion. The modern troubles of Social Security are less extensively explored than the program expansion, although Berkowitz perceptively notes that “Americans have historically tolerated taxes reflecting shared social purpose but that even these taxes can reach a threshold that threatens to undermine the enterprise the tax supports” (p. 183).

In a long and important essay, Herbert Stein updates his Fiscal Revolution in America (Chicago: University of Chicago Press, 1969). The era before the 1960s was dominated by tensions between three alternative budget philosophies (old-fashioned Keynesian “functional finance”, a more conservative or “domesticated” Keynesianism advocated by Stein, and a traditional Republican balanced budget rule). By contrast, Stein correctly tells us that fiscal policy in the post-1964 era was not governed by any specific budget philosophy. The problem was “the unwillingness of policy-makers to subordinate their desires for specific tax and expenditure programs to any aggregate goal” ( p. 200).

Stein then goes into a long discussion of the specifics of fiscal policy, emphasizing the era when he was a player, namely the Nixon Administration. The fact is that, for all the policy angst and debate, federal taxation absorbed about 20 percent of the national output throughout the period. Whenever taxes started to rise above that amount from bracket creep, a tax revolt would ensue, culminating in what Stein (p. 266) terms the “Big Budget Bang” of 1981. Whenever taxes fell much lower than one-fifth of the nation’s output, tax increases ensued (1982, 1990 and 1993 come especially to mind). The increasing contempt for aggregate fiscal rules of any kind reflected growing tensions posed by the growth of entitlement programs and, on occasion, other spending needs. The marginal political benefits to politicians of spending money exceeded the marginal political costs. The “automatic” nature of entitlement spending increases was aggravated by new programs in the 1960s and 1970s. Deficits were a politically less painful way to finance government constrained by a tax threshold imposed by popular sentiment. Like inflation- induced tax increases, deficits are a stealth form of taxation. As Stein concludes, in the early 1960s it was true that “economic science had provided commands that politics would and should obey. That belief has now disappeared.” (p. 286)

Julian E. Zelizer’s account of Wilbur Mill’s role in the fiscal policy changes is well crafted. Mills shrewdly used experts to help him make important changes in the fiscal system, and to stand up to Administration and congressional pressures. At the same time, he was a creature of Congress and knew how to win votes and maintain power. In a less successful essay, Cathie Jo Martin looks at the role that business played in the tax changes of the postwar era. The paper is marred with significant factual errors. Speaking of the Reagan era, we learn (p. 382) that “neoclassical economists concentrated in the CEA under Murray Weidenbaum and then Alan Greenspan.” Alan Greenspan did serve as Chairman of the Council of Economic Advisers – but in the Ford administration several years earlier. I read (p. 394) that administration official Richard Darman was a “supply-side economist.” First of all, Darman was (and is) not an economist (his most recent Who’s Who in America bio refers to him as a “former investment banker” and “former educator” and earlier biographies as “business consultant.”). Secondly, most of the prominent supply siders I know from that era viewed Darman as their enemy, the very antithesis of a “supply side economist.” The essay makes several assertions based on interviews with anonymous committee staffers. As a congressional staffer myself in this era, I would suggest that staff interpretations of major congressional events varied widely, and too many assertions are made that at the very least should be qualified.

The book ends on a more solid scholarly note. Steuerle nicely uses fact and logic to suggest that the era of “easy finance” ended in 1981. Up to that date, economic growth, defense cuts, social security tax increases and the impact of inflation in raising taxes and lowering the real burden of the debt made it possible to expand social programs without dire budgetary consequences. After 1981, “the yoke of prior commitments”, the productivity growth slowdown, tax indexation and other factors brought about “the fiscal straitjacket era.” On the spending side, the growth in entitlements set the stage for a future fiscal crisis that will force some change in the nation’s fiscal (and probably tax) regime.

Taken as a whole, this volume advances our understanding of the historical trends in tax policy in important ways. While not pretending to be a balanced or comprehensive survey of history of modern taxation, it is a nonetheless a welcomed addition to the literature that scholars will utilize for years to come.

Richard Vedder Department of Economics Ohio University

Richard Vedder is Distinguished Professor of Economics at Ohio University, where he does research on labor and fiscal policy issues. His latest book, with Lowell Gallaway, is Out of Work: Unemployment and Government in Twentieth-Century America, updated edition (New York: New York University Press, 1997).


Subject(s):Government, Law and Regulation, Public Finance
Geographic Area(s):North America
Time Period(s):20th Century: WWII and post-WWII

Business Cycles and Depressions: An Encyclopedia

Author(s):Glasner, David
Reviewer(s):Whaples, Robert


Published by EH.NET (September 1997)

David Glasner, editor, Business Cycles and Depressions: An Encyclopedia. New York: Garland Publishing, 1997. xv + 779 pp. Index. $95.00 (cloth), ISBN: 0-8240-0944-4.

Reviewed for EH.NET by Robert Whaples, Department of Economics, Wake Forest University.

“The motion of the economy, unlike that of heavenly bodies, conforms to no immutable mathematical laws and follows no repetitive patterns (p. 66)”

David Glasner (economist at the Bureau of Economics, U.S. Federal Trade Commission) has assembled a stellar cast who have written an exceptionally useful reference book. Business Cycles and Depressions: An Encyclopedia includes 327 original articles on every major aspect of business cycles, fluctuations, financial crises, recessions, and depressions. The articles, which range from macroeconomic theory to econometrics to the historical record, are generally up-to-date, clear and to the point. Most entries will be accessible to students, but are informative enough to benefit almost any professional, as well. Each includes a bibliography. A seven-page appendix presents international data detailing business cycle turning points and durations. Perhaps the highlight of the volume is a ten-page entry, “Business Cycles” by Victor Zarnowitz, which surveys the entire field of business cycle research and is quoted above.

EH.NET subscribers will find this work especially helpful. The encyclopedia includes biographies of dozens of economists. (These entries focus almost entirely on the individual’s contributions to the understanding of business cycles. The biography of W.W. Rostow, for example, only briefly mentions his work in the Kennedy and Johnson administrations and says little about his writings on economic growth.)

The subjects of these biographies include Moses Abramovitz, Maurice Allais, Luigi Amoroso, James Angell, Walter Bagehot, Otto Bauer, Eduard Bernstein, Eugen Bohm-Bawerk, Arthur Burns, Richard Cantillon, Carl Cassel, John Commons, Charles Coquelin, James Duesenberry, Otto Eckstein, Friedrich Engels, Irving Fisher, Milton Friedman, Ragnar Frisch, John Fullarton, Richard Goodwin, Tygve Haavelmo, Gottfried Haberler, Alvin Hansen, Roy Harrod, Friedrich Hayek, John Hicks, Rudolf Hilferding, John Hobson, David Hume, William Stanley Jevons, Nicholas Kaldor, Michal Kalecki, Karl Kautsky, John Maynard Keynes, Charles Kindleberger, Lawrence Klein, Nikolai Kondratieff, Tjalling Koopmans, Simon Kuznets, Oskar Lange, Frederick Lavington, Abba Lerner, W. Arthur Lewis, Erik Lindahl, Eric Lundberg, Rosa Luxembourg, Thomas Malthus, Alfred Marshall, Karl Marx, Lloyd Metzler, John Stuart Mill, Frederick Mills, Hyman Minsky, Ilse Mintz, Ludwig von Mises, Wesley Mitchell, Franco Modigliani, Gunnar Myrdal, Bertil Ohlin, Arthur Okun, Vilfredo Pareto, Henry Parnell, Warren Persons, A. W. Phillips, Arthur Pigou, David Ricardo, Lionel Robbins, Dennis Robertson, Joan Robinson, W.W. Rostow, Paul Samuelson, Jean Baptiste Say, Joseph Schumpeter, Anna Schwartz, Eugen Slutsky, Adam Smith, Arthur Smithies, Piero Sraffa, Paul Sweezy, Henry Thornton, Jan Tinbergen, James Tobin, Thomas Tooke, Robert Torrens, Mikhail Tugan-Baranovsky, Thorstein Veblen, Clark Warburton, J.G.K. Wicksell, Wladimir Woytinki and Victor Zarnowitz

Among the entries that will be of most interest to economic historians are: Agriculture and Business Cycles by Randal Rucker and Daniel Sumner Bank Charter Act of 1844 by David Glasner Bank of England by David Glasner, C.A.E. Goodhart and Gary Santoni Bank of France by Pierre-Cyrille Hautcoeur Bank of the United States by Eugene White Banking Panics by Gary Gorton Baring Crisis (1890) by Richard Grossman Business Cycles in Russia, 1700-1914 by Thomas Owen Central Banking by Anna Schwartz Clearinghouses by Gary Gorton Crisis of 1763 and 1772-1773 by Eric Schubert Crisis of the 1780s by Fred Moseley Crisis of 1819 by Neil Skaggs Crisis of 1847 by David Glasner Crisis of 1857 by Hugh Rockoff Crisis of 1873 by David Glasner Crisis of 1907 by C.A.E. Goodhart Crisis of 1914 by Forest Capie and Geoffrey Wood Depression of 1873-1879 by Fred Moseley Depression of 1882-1885 by Alan Sorkin Depression of 1920-21 by Anthony Patrick O?Brien Depression of 1937-1938 by W. Gene Smiley Federal Deposit Insurance by James Barth and John Feid Federal Reserve System: 1914-1941 by David Wheelock Federal Reserve System, 1941-1993 by Thomas Havrilesky Free Banking by Philippe Nataf Glass-Steagall Act by Eugene White Gold Standard by Michael Bordo Gold Standard: Causes and Consequences by Earl Thompson Great Depression in Britain (1929-1932) by Forrest Capie and Geoffrey Wood Great Depression in France (1929-1938) by Pierre-Cyrille Hautcoeur Great Depression in the U.S. (1929-1938) by Elmus Wicker Great Depression of 1873-1896 by Forrest Capie and Geoffrey Wood Industrial Revolution (c. 1750-1850) by Clark Nardinelli Kondratieff Cycles by Robert Zevin Leading Indicators: Historical Record by Geoffrey Moore Long-Wave Theories by Massimo Di Matteo Mississippi Bubble by Larry Neal Napoleonic Wars by Larry Neal Panic of 1825 by Michael Haupert Panic of 1837 by Richard Timberlake Panic of 1893 by Richard Timberlake Phillips Curve by Richard Lipsey Political Business Cycles by K. Alec Chrystal Recessions after World War II by Alan Sorkin Recessions (Supply-Side) in the 1970s by John Tatom Reichsbank by Harold James Seasonal Fluctuations and Financial Crises by Jeffrey Miron Smoot-Hawley Tariff by David Glasner South Sea Bubble by Larry Neal Stock-Market Crash of 1929 by Eugene White Tulipmania by Peter Garber

The encyclopedia is a valuable teaching tool. It is a must for any college library.

Robert Whaples Department of Economics Wake Forest University

Robert Whaples is Associate Director of EH.NET and author (with Jac Heckelman) of “Political Business Cycles before the Great Depression,” Economics Letters, 51, May 1996.


Subject(s):Business History
Geographic Area(s):General, International, or Comparative
Time Period(s):General or Comparative

The End of Economics

Author(s):Perelman, Michael
Reviewer(s):O'Brien, Anthony P.


Published by EH.NET (August 1997)

Michael Perelman, The End of Economics. London and New York: Routledge, 1996. $59.95 (cloth), ISBN: 0415137373.

Reviewed for EH.NET by Anthony O’Brien, Department of Economics, Lehigh University.

Michael Perelman’s new book argues that there is a flaw in the working of the market system; a flaw that has caused problems in the past and that is likely to cause disaster in the future. The result will be the inevitable end of economics and the beginning of a new system in which competition and the market system as we know it will no longer prevail. There are some good things in the book: Perelman tells his story clearly and directly, he has some interesting things to say about the last hundred years of macroeconomic history in the United States, and it is certainly easy to be sympathetic with his argument that neoclassical economics is sometimes disconnected from the workings of the real world. But, overall the book is rather a disappointment. It could easily have been much better. Perelman’s thesis will strike most economists as implausible, but it is not indefensible. Unfortunately, Perelman (Department of Economics, California State University, Chico) has allowed some avoidable roughness in his presentation to make his arguments appear even weaker than they are. This is Perelman’s fifth book in fifteen years. This book lacks a preface or acknowledgments, which makes me wonder how much feedback he received before it was published. My guess is this would have been a better book if he had taken more time with it.

Perelman’s basic idea is that economists have by and large failed to understand the enormous negative consequences for the workings of the market system of the increasing importance of fixed costs. He believes that since the Civil War fixed costs have been a large fraction of all costs in many U.S. industries and that the importance of fixed costs continues to increase (although neither point is well documented). In an industry with high fixed costs, what Perelman refers to as “unbridled competition” will result in disaster, because firms will find their prices will be driven to the level of marginal cost. The substantial losses resulting from these low prices will eventually lead to widespread bankruptcy. He believes that at least since the experiences of the railroads in the 1890s some non-mainstream economists and many businessmen have realized that competition has to be constrained in order for the market system to function. Such constraints are all that has stood between the economy and disaster. So, while essentially all mainstream economists act as if our economy is highly competitive -and build ever more elaborate models that assume the existence of competition- in fact, the economy is not very competitive and moves to make it more so run the risk of unleashing the consequences of increasing fixed costs.

There are several problems with Perelman’s discussion of this thesis. He presents it in a rather off-putting polemical style, he commits a number of avoidable blunders with respect to theory and history, and, perhaps most disappointingly, he never deals with — and gives the impression of perhaps not even being aware of — the conventional responses to his main argument.

Perelman’s style is a mixture of debatable obiter dicta and remarks that leave the unfortunate impression that he believes those who disagree with him are either stupid or sellouts. The tenor of Perelman’s style is indicated by a few excerpts:

[The government] creates a legal structure that gives business the upper hand relative to labor. When the economy falters, it increases spending, often discovering imaginary threats that require more military spending (p. 5).

Economics provides an ideological justification for atavistic methods of providing for our economic and social needs. It leads to economic practices that create great harm to both people and the environment (p. 8).

Graduates [of Ph.D. programs in economics] soon develop a professional persona with a vested interest in not rocking the boat, recognizing that, to launch a significant challenge to orthodox beliefs can lead to professional ostracism…. Finding an academic job does not free the young economist from the clutches of the corporate sector, since winning grants is often an important consideration in the promotion process…. [E]conomics is not a science, but an ideology designed to defend existing practices (pp. 23, 26, 29).

We live in an economy in which many corporations are large enough to make decisions that threaten our welfare in obvious ways- spreading toxic substances, selling dangerous products, or putting the health of their workers at risk. Those public agencies, which are supposed to protect us from corporate misconduct, seem thoroughly beholden to those whom they are supposed to regulate (p. 111).

This kind of thing is pretty tiresome. I don’t believe the people at the EPA and OSHA are “thoroughly beholden” to those they regulate, there may be academic economists defend the market system only so as to be able to make their next mortgage payment, but I’ve never met one, and so on. Writing in this way is counterproductive. By about page 10 anyone who doesn’t already believe the market system is bad is likely to stop reading, leaving Perelman to preach to the choir.

Perelman makes a number of statements that indicate there are significant gaps in his knowledge of the economic history and history of economic thought literatures. For instance, how many economic historians still believe the old chestnut that the Civil War was an important watershed in the development of U.S. manufacturing?

During the war, the military created levels of demand that were previously unknown, setting off an unprecedented economic boom. Because the war drained off so much labor and grain prices were so high, farmers invested heavily in labor saving devices, such as reapers. No doubt, other businesses followed a similar course. Certainly, the railroad boom was part and parcel of this process (p. 54).

How many economic historians believe the price deflation of the late nineteenth century was due to excessive competition, as Perelman apparently does (p. 59)? How many historians of economic thought would buy the notion that marginal productivity theory was developed in an attempt “to cool the radical ardor of farmers and workers by crafting an abstract theory based on mathematical theorems that supposedly demonstrate that labor could do no better than to trust its fate to the market” (p. 77)?

How many observers of the controversies in macroeconomics of the last forty years would call Milton Friedman a disciple of Leon Walras (p. 78)? A key reason why Friedman has not been taken entirely seriously either by his Keynesian critics of the 1960s and 1970s or by his latter-day putative followers like Robert Lucas and Thomas Sargent is that he has declined to reduce his story to a neo-Walrasian model- the sine qua non of modern theoretical work. These sorts of slips significantly undercut the authority of Perelman’s presentation.

The biggest problem with the book is Perelman’s failure to deal with or, in many cases, even to mention the arguments of the critics of the notion that high fixed costs lead to destructive competition. Perelman discusses approvingly and at length the ideas of a group of late nineteenth century economists who became convinced that large fixed costs and excess capacity in the railroad industry meant that unbridled competition would be ruinous both there and in other industries with similar cost structures. The writings of these economists brought forth a number of critiques — almost entirely unmentioned by Perelman — that, for mainstream economists at any rate, were quite telling. Perhaps the best known was Eliot Jones’s 1920 Quarterly Journal of Economics article, “Is Competition in Industry Ruinous?” Many latter articles- and, for that matter, most industrial organization textbooks- have discussed the supposed evils of cutthroat competition and, by and large, have come to the conclusion that they are greatly exaggerated. Now, these conventional arguments may be correct or incorrect, but surely Perelman needs to deal with them.

Finally, if the market system does not work well and can’t be made to work well, what would Perelman replace it with? He doesn’t really say:

I do not pretend to offer some simple crackpot reform that will magically solve all economic problems. Instead, I intend to expose economics as a pseudo-science that stands in the way of human betterment in the hopes that we can develop new practices and better institutions that will allow us to manage our lives in a more satisfactory manner (p. 7).

Unfortunately, the history of the twentieth century doesn’t inspire much confidence that replacing market practices and institutions with non-market ones will lead to human betterment.

Anthony O’Brien Department of Economics Lehigh University

Anthony O’Brien is author of a number of articles– all of which are entirely above criticism ;-). These include “The Importance of Adjusting Production to Sales in the Early Automobile Industry,” recently published in Explorations in Economic History and (with Judy McDonald and Colleen Callahan) “Trade Wars: The Canadian Reaction to the Smoot-Hawley Tariff” forthcoming in the Journal of Economic History.


Subject(s):History of Economic Thought; Methodology
Geographic Area(s):General, International, or Comparative
Time Period(s):20th Century: WWII and post-WWII

American Trade Policy, 1923-1995

Author(s):Kaplan, Edward S.
Ryley, Thomas W.
Reviewer(s):Aaronson, Susan Ariel

Edward S. Kaplan, American Trade Policy, 1923-1995. Westport, CT: Greenwood Press, 1996. x + 176 pp. Bibliography and index. $55.00 (cloth), ISBN: 0-313-29480-1


Edward S. Kaplan and Thomas W. Ryley, Prelude to Trade Wars: American Tariff Policy, 1890-1922. Westport, CT: Greenwood Press, 1994. 160 pp. Bibliography and index. $49.95 (cloth), ISBN 0-313-29061-x.

Reviewed for EH.Net by Susan Aaronson, Department of History, University of North Texas and The Brookings Institution

Trade is where foreign and domestic policies meet. Consequently, the development of trade policy is fraught with controversy–between nations; between the affected interests and policymakers; between Congress and the Executive Branch; and between government agencies that negotiate and administer trade protection and agreements. Edward S. Kaplan’s new book, American Trade Policy, 1923-1995 promises to address some of that complexity. Kaplan is to be commended for attempting to tackle the morass of U.S. trade policy. Regrettably, his book falls short.

Kaplan relies on a few secondary sources, not primary sources, and thus, he provides an incomplete understanding of the politics and economics of trade policymaking. For example, rather than examine the Congressional Record or Congressional hearings, he relies on The New York Times (and no other papers) to describe the development of trade policy legislation. He consistently cites the same four secondary sources for his analysis of trade policy and ignores prominent analysts of trade such as E. E. Schattsneider (Politics, Pressures and the Tariff,New York, 1935) and John Jackson (The World Trading System: Law and Policy of International Economic Relations, Cambridge, MA, 1989). He does not review government reports for statistics or history (such as the Annual Report of the U.S. Tariff Commission on the Trade Agreements Program), speeches of the Presidents, or speeches or reports from the U.S. Trade Representative.

U.S. trade policy has always reflected freer trade and protectionist sentiment. Even during the supposed “glory days” of U.S. leadership of free trade, the U.S. protected some sectors. Kaplan seems to miss this crucial point because he oversimplifies the process by which trade policy is made. The nature of such protection as well as its endurance depends on the state of the economy, politics, and culture.

In contrast with many other nations, authority for U.S. trade policy is divided. The President has power to control foreign policy, but under the constitution, Congress has the power to regulate international commerce and to tax. Some special interests benefit from open markets and others benefit from protection. As a result, America has always had a bifurcated trade policy, with efforts to liberalize trade coexisting with protection. Finally, given the many interests concerned about trade, some protection is necessary to “buy” political support for freer trade measures. This has been true since 1789. Why is such protection necessary? Because trade can create both winners and losers. Those who are hurt may deserve temporary protection, despite the costs to consumers and taxpayers. Such protection is accepted by GATT law and considered appropriate.

Kaplan believes that the Clinton Administration is protectionist and negating U.S. leadership of global efforts to free trade. In his view, “U.S. trade policy in 1995 has come full circle since the protectionist 1920s.” This thesis is flawed because Kaplan does not understand modern modes of protection. Is the Clinton Administration really more protectionist or is it harder to reduce the types of protection nations rely on today?

In the first five decades of the twentieth century, nations relied on border measures (tariffs, exchange controls, quotas etc..) to protect. These border measures are overt and were easily reduced in the first eight GATT rounds. As a result, today tariffs in most GATT members are relatively low. Ironically, GATT’s very success may have encouraged nations to rely on “covert” trade barriers (domestic measures) such as subsidies, government procurement policies or regulation in recent years. Because these administrative measures are domestic policies, it is hard to determine whether nations use such regulations with the intent to discriminate against foreign producers. Under 301 trade legislation, when the President confronts such trade barriers, he is required to investigate and sometimes to punish protectionist nations with retaliatory protection in the United States. Kaplan fears that America (because of Super 301) appears less disposed towards multilateralism and is “moving from a multilateral trade approach within the WTO to a unilateral one under which it threatens countries like Japan with tariff increases for failing to open their markets” (p. x). Had Kaplan read primary sources or Susan Schwab’s Trade-offs (Cambridge, MA, 1994) he would understand that the Clinton Administration is reluctant to use these powers, nor did it call for them.

A more careful review of the history of Uruguay Round negotiations and enabling legislation shows that both the Bush and Clinton Administrations have tried hard to broaden the rules that govern trade to include corruption and labor standards, and to complete negotiations to bring new sectors into the GATT/WTO system such as services and agriculture. This is not a protectionist record. Ironically, Jesse Helms, Pat Buchanan, and other noted protectionists frequently complain that the United States under Clinton is too supportive of multilateralism. The author ignores the Clinton Administration’s push to expand the North American free trade agreement (NAFTA); its continued leadership of global efforts to free trade; its unwillingness to cite many nations (from Argentina to India) under super 301; and its attempts to bring non-WTO members into membership (such as Saudi Arabia, China, Ukraine, and Russia). Finally, instead of relying on domestic tools to protect, the Clinton Administration seems to be relying on international tools. The U.S. is using the dispute settlement mechanism of the WTO. From January, 1995 to July, 1996, the U.S. has invoked dispute settlement in 16 cases, more than any other country in the world.

Writing a history of tariffs is a daunting task. It is hard to make it interesting. Dr. Kaplan has also teamed up with Thomas W. Ryley in an earlier book on the history of tariff policy, Prelude to Trade Wars, which does a good job at describing the politics of trade policy without being dry. The book is especially good at explaining the background of the participants and how they came to their positions. Unfortunately, the authors rely principally on secondary sources to make their case. Consequently, they are making their arguments based on the strong (or weak shoulders) of others rather than their own extensive research.

For example, describing the Emergency Tariff Act of 1921, the authors write “to all appearances in 1914, the country desired a moderate tariff bill.” To prove their point they cite one article in the American Economic Review, written in 1923. That would not convince most historians that is what the country desired.

The analysis is hampered by sloppy writing and inadequate argumentation. For example, “The McKinley Tariff … was the first of a number of tariff bills that raised duties to their highest levels in U.S. history.” Which one was the highest? All of them? Moreover, the title is a shocker. Which trade wars are the authors talking about? In the 20th century, when did the U.S. go to war over trade? The very term “trade wars” gives one the sense that trade is a zero sum game, a competition. A more plausible assumption is that entities trade because they think they can both gain.

The authors’ contribution is strongest in political history. (Ironically, the authors write for a series called Contributions in Economics and Economic History.) For those interested in the politics of American tariff making in this period, they provide a decent read. But to understand U.S. trade policy, one must understand the social, technological and economic environment, as well as the political environment..

Those readers who want to gain a better understanding of the complexities of the history of U.S. trade policy should look beyond these two books. Good books with very different perspectives include Thomas Zeiler’s American Trade and Power in the 1960s (New York, 1992); Alfred Eckes’s Opening America’s Market: U.S. Foreign Trade Policy since 1776 (Chapel Hill, NC, 1995); I.M. Destler’s American Trade Policies: System Under Stress (Washington, DC, 1995); G. John Ikenberry et al, The State and American Foreign Economic Policy (Ithaca, NY, 1984); William Becker and Samuel F. Wells, eds., Economics and World Power: An Assessment of American Diplomacy since 1789 (New York, 1984); Susan Aaronson, Trade and the American Dream (Lexington, KY, 1996); and John Dobson, Two Centuries of Tariffs (Washington, 1976).

Susan Ariel Aaronson Department of History University of North Texas and Guest Scholar in Economics The Brookings Institution

Susan Aaronson is also a regular commentator on Public Radio International’s Marketplace.


Subject(s):International and Domestic Trade and Relations
Geographic Area(s):North America
Time Period(s):20th Century: Pre WWII