Endangered theses

Economics and the Historian
January 24, 1997

Why study economic history? In the past decade, the subject has been in retreat in Britain, and most students contemplating a degree in history or in economics have made a choice for one or the other. But in the 1950s and 1960s, economic history was exciting. There were battles between Marxist critics and capitalist apologists; there were stirrings of social history and a desire to rescue the underdog from condescension. History, by contrast, seemed dull, still in the grip of Namierites and of diplomatic history. How things have changed in the 1980s and 1990s! It is now economic history which is passe, and the intellectual excitement - or at least fashion - is for cultural history and the "linguistic turn". The appearance of this collection of essays by a team of American economic historians seeking to explain to historians the concepts used by various branches of economics raises the question of what went wrong - and what can be done about it.

One method favoured by historians is comparison, and it is clear that economic history has been very different in the United States where it has a much stronger presence within economics. Of the eight authors, six hold chairs of economics, and two are professors of economics and history. The importance of historical economics in America has long been obvious, from Earl J. Hamilton's analysis of the impact of Spanish silver in the 16th century, through the monetary histories of Milton Friedman and Anna Schwartz, to the recent award of the Nobel prize in economics to Douglass North and R. W. Fogel.

In Britain, economics has been much less sympathetic towards historical analysis. Ironically, one major reason for the increased isolation of economic history from history in Britain is the impact of this American approach. An article on British economic history which impresses the chair of an economics department in the US is off-putting to a British historian, and this collection of essays is no exception. Could it be that the attempt at conversion will merely make historians still more resistant to being "born again" in the certainties of neo-classical economics?

The missionaries of economics are at least willing to admit their own sins, and to accept that they have something to learn from those to whom they are preaching the gospel. Economists, as Peter Lindert admits, have been much less successful in explaining the causes of policies and institutions than in analysing their consequences. His own chapter provides a good illustration of the comparative advantage of the two disciplines. He offers a clear and careful explanation of the way to measure the impact of import duties on an economy, or the impact of an increase in foreign trade on the distribution of income in a country. His advice will surely prevent historians from error in assessing who gains and loses from tariffs or an increase in import penetration. Where his chapter is weaker, and where a historian could help, is in explaining why a society shifted from a policy of import duties to free trade or vice versa.

Lindert simply mentions two possible explanations in passing. One possibility is that taxation of foreign trade might be necessary where the state apparatus was weak, and there was no other way to generate revenues for public services. Such a possibility raises a host of historical questions, about the emergence of a "tax state" in the early modern period, about the forms of political representation which were needed in order to secure acceptance of taxation, about the tussle between the state for taxes and landowners for rent, the forms taken by the state and its relations with civil society - and the interesting question of what is meant by a "weak" or a "strong" state apparatus. The state is surprisingly absent from the collection, and taxation is only mentioned in a narrow assessment of the consequences of different taxes in terms of their incidence.

The second possible explanation proffered by Lindert is that free trade made most sense when a single country - Britain in the 19th century or the US since 1945 - had achieved economic hegemony. Presumably, these hegemonic powers adopted free trade out of economic self interest, in order to extend their markets in other countries, confident that they would not suffer from a flood of cheap imports into their domestic economies.

This argument has some force, but it should be taken further. The adoption of free trade might be theological as well as economic, arising from the belief that protection allowed men to escape from punishment for their commercial sins; free trade meant that rash speculation would be visited by retribution in this world through business failure, as well as in the next. Furthermore, it was a different matter to convince other governments to adopt free trade as an economic policy, simply because it was in the interests of Britain as the world's dominant economic power. What was involved was a matter of rhetoric, entailing much more than a simple assumption of economic self-interest and rationality. Once the rhetoric of free trade had developed, it had immense power within British society and limited the capacity to develop alternative policies, whatever their economic rationality.

Such an approach to economic policy moves well beyond the methods and concepts contained in this collection. It allows historians who have taken the "linguistic turn" to have their say, and it locates economic debates within a much wider discourse which involves evangelical theology and natural science.

The third explanation might be implied in Lindert's account. Might it have been that various interest groups in society were aware of the implications of tariffs and trade for income distribution, precisely in the way Lindert helps the modern historian to understand? Could it therefore be that these groups were acting out of rational self-interest? The theme running through the collection is that historians should start from the assumption that everyone was acting rationally in pursuit of self-interest in order to maximise their profits and satisfaction. Indeed, D. H. McCloskey claims that economic history has addressed one leading question: how well does the assumption of close calculation fit the economic past? The answer, it seems, is "pretty well". McCloskey even goes so far as to suggest that historians treat their ancestors without due respect if they suggest that they indulged in the foolish behaviour of choosing to have less bread rather than more.

Many historians might wonder whether it is McCloskey who is treating his ancestors with scant respect, by failing to penetrate into their worlds. Such a criticism would not be entirely fair, for it is often appropriate to ask whether a decision was economically rational or not, and whether resources were being used in the most effective manner.

For example, it is often assumed that British businessmen were imprisoned in a culture of rural nostalgia which led to a neglect of new technology developed in the US. But could it be that their choice of technology was appropriate to the availability and price of labour, capital, and raw materials within Britain? McCloskey's answer is that the choice was appropriate, and that criticism of industrialists is misplaced. Yet this is still only part of the story, for the prices of labour and capital were fixed by the institutions of collective bargaining, which were part of the political system of industrial cities and secured the support of the state. Historians will want to go much further than the authors of the chapter on labour economics, who ignore such considerations and simply remark that "competition in the context of scarcity selects efficient institutions".

The failure to consider institutional structures is a disappointing feature of the collection. It largely ignores recent work in economics which provides an escape from the present crisis in economic history. A much-discussed situation is the "tragedy of the commons": it is in the economic interest of each individual farmer with access to common land to add another sheep to his herd, with the ultimate result of over-grazing from which all suffer. The solution could be some form of collective action designed to limit the number of sheep each farmer could run on the common land. Alternatively, it could be the replacement of common ownership by private property, which gave each individual farmer an incentive to conserve his own plot of land. Such considerations are central to the extensive literature on game theory and trust, which marks an attempt by economists to grapple with institutions and the nature of collective action. Surprisingly, the approach is ignored here with the exception of a passing remark that the "tragedy" may be averted by collective action or by a shift to private property - without any discussion of what influenced the choice.

The underlying assumption seems to be that private property is the better solution, which is unfortunate. After all, the assumption that property should be owned outright by an individual was precisely the issue which was being contested in the late 18th and early 19th centuries, between English villagers and their landlords, as well as between Australian aborigines and white settlers. A historian will be concerned with the circumstances which led to one solution rather than the other, and which allowed for collective action, Were farmers forced into obedience through expensive systems of compliance, and who set and policed the regulations? Or did farmers consent to the rules, with a high degree of trust in the willingness of other farmers to exercise self-restraint? This theme of trust offers a connection between economics and history which is not explored. Trust was central to most activities, whether the acceptance of a paper bank note, or the likelihood that a merchant in a distant country would sell goods and return the proceeds.

Particularly disappointing is Jon Cohen's chapter on institutions and economic analysis. He adopts a narrow definition of self-interest and rationality, which treats institutions and the market as substitutes, performing the same functions in different ways, with the choice largely determined by their costs and benefits. His approach is simple, resting on the belief that "institutions exist because they perform the tasks of allocating and/or distribution more effectively than markets do", so that the task of the economist comes down to pinpointing the causes of market failure.

Historians might well feel that it is mistaken to start from the norm of a perfect market, and to take institutions as a response to its breakdown. They might dissent from the contention that sharecropping in the American South after the civil war arose from a rational decision by freed slaves and their former owners to use their available resources of labour and of marketing and managerial skills in their mutual benefit. It is arguments such as these which make historians suspicious of the adoption of neo-classical economics.

Although Thomas Rawski and his colleagues provide a lucid and intelligible guide to many terms and concepts, they do not provide a solution to the crisis of economic history. Will competition in the world of scarce resources - and British universities fit that description very well - allow economic history to survive and compete in the historical market-place with those peddling the fashionable wares of identity and sexuality? Perhaps the outlook is not without a glimmer of hope, by forging links with game theory and developing the historian's sensitivity to institutional structures and the circumstances which create or destroy trust. There are signs that the process has already started - and it will be interesting to see how a collection of essays with the same title will look in another decade.

Martin Daunton is professor of British history, University College London.

Economics and the Historian

Author - T. Rawski, S. Carter, J. Cohen, S. Cullenberg, P. Lindert, D. McCloskey, H. Rockoff and R. Sutch
ISBN - 0 520 07268 5 and 07269 3
Publisher - University of California Press
Price - £35.00 and £13.95
Pages - 297

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