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Marx, Rostow, Kuznets, Gershenkron: September 9, 2007

September 8, 2007: 5:00-6:30 PM: What remains after 50 years: The role of economic history as a guide to economic development.

Moderator: James K. Galbraith, UNIVERSITY OF TEXAS AT AUSTIN


Marx, Rostow, Kuznets, Gerschenkron

Large Audio File

We might as well start with Karl Marx. "De te fabula narratur! Marx wrote in the preface to the first edition of the first volume of Capital: it is about you. Why should Marx's German audience read the details of the industrial and social history of England mixed up with pieces of classical economic theory and a coquette's flirtation with Hegelian philosophy? Because, Marx wrote: "The country that is more developed industrially only shows, to the less developed, the image of its own future." --Karl Marx, Capital, preface. In short, it is about you.

Thus in Marx's view, economic historians and development economists were or ought to be the same. In fact, all economists and economic historians ought to be the same. In fact, everybody ought to be an economic historian: studying the social and industrial history of England, and then applying its lessons everywhere around the globe, was the most important task. Economic historians ought to rule the world, for they held the key to the lock that opened the door behind which was concealed the answer to the riddle of human destiny. There was one qualification. As a secondary task one needed to be a political historian--and not a political historian of England, but of France. As Friedrich Engels said in a revealing moment, "Generally speaking, for the economical development of the bourgeoisie England is here taken as the typical country; for the political development, France." But the politics was added-on superstructure: the economy was fundamental base.

Now the cup that Marx offered turned out to be a poisoned chalice, and I think there were three reasons for this.

First, as a matter of historical understanding--well, (the mind does boggle at the grafting of France's political history onto England's industrial one. No country, anywhere, anytime has had the political history of France and the industrial history of England. A focus on politics tends to make one anticipate revolutions and seizures of state power and expect state-led economic transformation. But thumb-fingered states are capable of only certain types of economic transformations, and the free society of wealthy and productive associated producers that Marx tried to order was simply not on the menu. Taking France's political and England's economic history leading to mass revolution that produces a left anarchy as the model, and trying to explain every deviation from that as second-order factors imposing transitory disturbances on a dominant tendency--well, that is not an easy task.

Second, as a matter of practical politics--Marx and Engels's insights into economic history were intended to provide a set of guideposts: make people aware of the power of market-economic capitalist development, warn people of the dangers of market-economic capitalist development, and also make people aware of the opportunities for socialism in a rich, advanced, high-tech economy thereby opened up. But those who ruled nations and tried to apply Marx's lessons ruled not advanced industrial economies but poor agricultural ones. So the Preobrezhenskys and the Liu Shaoquis tended to view the brutal historical chapters of Capital not as warnings but as models: So that's how you do it! That's how you become a powerful country with a developed economy! Do everything you can to keep peasant standards of living as close to subsistence as possible. Extract as much surplus as possible from the countryside, and invest it in urban industry. And since you don't have a labor market and a flood of immigration from Ireland to enforce the iron law of wages, reenserf the peasantry.

Third, the economic mechanisms did not seem to work very well. Absolute immiserization doesn't seem to happen, so you retreat to relative immiserization and then to the cultural critique of advertising. The falling rate of profit did not fall. A theory of business cycles based on economies of scale and overaccumulation committed you to a neo-Hayekian anti-Keynesian view of the macroeconomy. Nobody who ventured into the labor theory of value has ever emerged. So the economic-historical research program that tried to draw on Marx found itself throwing the "economic" part overboard. The river jumped its banks and found itself in a new channel: Gramsci and Foucault and modes of thought rather than Hobsbawm and his children.

If the Marxists turned out not to be very Marxist, others did take up the torch. The most Marxist of economic historians--in the sense of believing that economic history was the key to the lock on the door behind which was the secret of history--was the University of Texas's own Walt Whitman Rostow. He must have been the most hawkish person ever named after Walt Whitman--just as his brother was the most hawkish person ever named after Eugene V. Debs. And he was the only development economist/economic historian ever named to the post of American National Security Advisor.

Adam Smith had said, in lecture: "Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable administration of justice." For Rostow much more was required: The traditional economy. The creations of the preconditions for takeoff--an honest government, good market institutions, and commercial and financial sophistication. The "takeoff" itself--a substantial rise in the savings and investment rate made possible by the opportunities in leading sectors opened up by modern technology and financial mobilization, and that would transform the economy from an earth-bound to a sky-free creature. Followed by the drive to maturity, and the age of high mass consumption.

But in the decolonization age of the High Cold War the first priority of the Dulleses and the Rusks was to line up newly-independent countries and the older states of Latin America on the U.S. team for the great tug-of-war. And this required gaining the favor of the new princes who ruled. And as Machiavelli taught us long ago, there is nothing more difficult than being a new prince: all of one's energy must be devoted to state-building so that one does not rapidly become an ex-prince.

State-building requires that you make friends who will be your supporters, which requires that you make people who want to be your friends happy, which often means rich, which requires that you give them some other people's money, which requires that you find some other people with money whose money you can give, which tends not to be great for economic development. Rostow went with Kennedy to Indonesia. Rostow had primed Kennedy to negotiate on how the U.S. could aid Indonesian economic development. But Indonesian dictator Sukarno, stuck between a large rural land redistribution-seeking Communist movement and an army officered by the relatives of local notable landlords, did not think he could take the long view. Kennedy talked about the Peace Corps and aid and technical assistance and economic development and a South Asian Development Bank. Sukarno's response? "Mr. President, development takes too long. Give me West Irian instead"--West Irian being the western half of the island we westerners call New Guinea. Sukarno got West Irian, and the Year of Living Dangerously.

This should not have come as a great surprise. State-building, the pursuit of empire, and political organization always had an uneasy relationship with economic prosperity and growth. Back in 1992 Andrei Shleifer and I were tremendously excited when we discovered an inverse correlation between political reach and city growth in Paul Hohenberg and Jan de Vries's numbers on comparative early modern city growth. It wasn't until 1996 that I realized that Charles Wilson in 1967 had put this better than we could, and done so in a parenthetical aside:

The two areas... in 1500... richest and most advanced... the quadrilateral... Milan, Venice, Florence, and Genoa; and the strip... from Ypres... to Antwerp. It was not merely coincidence that these were the areas where the tradesmen of the cities had been most successful in emancipating themselves from feudal interference, and in keeping at bay the newer threat of more centralized political control offered by the new monarchies. In the fleeting intervals between the storms of politics and war, men here glimpsed the material advance that was possible when tradesmen were left in peace unflattered by the attentions of strategists who regarded their activities as the sinews of war.... The precocious economic development of the cities of Italy and the Low Countries was cradled in the civic independence of those cities where merchants had achieved political power...

Indeed, back in 1776 Adam Smith had warned that Britain's politico-military state's success might well crush its economy, writing about even successful debt-funded wars:

The practice... has gradually enfeebled every state which has adopted it. The Italian republicks... Spain seems to have learned the practice from the Italian republicks, and (its taxes being probably has, in proportion to its natural strength, been still more enfeebled.... France... languishes under an oppressive load.... The republic of the United Provinces is as much enfeebled by its debts as either Genoa or Venice.... Is it likely that in Great Britain alone a practice, which has brought either weakness or desolation into every other country, should prove altogether innocent?

Rostow's The Stages of Economic Growth: A Non-Communist Manifesto served much more as a hard rake of the spurs than as the laying of a foundation for a collaborative research program. Reread the International Economic Association's critique volume--Rostow, ed., The Economics of Take-off into Sustained Growth, and it is brutal. As Dacy, Galbraith, and Inman (2004) wrote:

Rostow's identification of and focus on the "take-off"... stage of relatively short duration... became a lightning rod.... The criticisms.... Rostow's "theory" was not theory... [but] taxonomy... [with] no predictive usefulness.... [P]reconditions for take-off could not be distinguished from take-off proper... sustained growth did not always follow...

Rostow was not much good for those who thought that economic historians should be supported because their work had direct and immediate application. Dacy, Galbraith, and Inman quote Mancur Olson:

There is a paradox here.... How can we explain this absence of any consensus in favor of Rostow's main conclusions and formulations, and at the same time explain the extraordinary amount of attention and tribute his work has received?...

And Henry Rosovsky:

I invariably learn more by disagreeing with Professor Rostow than I do by agreeing with most other writers...

Rostow did not help himself, as far as the East Asian Plains Ape sociodynamics were concerned, with his scorn for Simon Kuznets's national accounts project, and its implicit claim that national product could serve as an effective summary statistic for the economy. Rostow did not believe in aggregation. Kuznets had labored in the vineyards of Arthur Burns and Wesley Mitchell, identifying business cycle turning points and laboriously calculating the coherence of myriads of individual economic time series. Kuznets thought that there had to be a better way.

In the end Kuznets won. It was not clear how one developed Rostow's line of research. It was very clear how one developed Kuznets's: one calculated national product, or decomposed national product, or accounted for changes in national product sector-by-sector, or accounted for changes in national product factor-by-factor. In his Ely lecture critique of Milton Friedman--a critique that Milton never forgave--Harry Johnson argued that the Monetarist Counterrevolution had succeeded for the same reason that the Keynesian Revolution had succeeded: not because it was true, but because it provided young scholars with (a) an excuse for ignoring the work of their elders as wrongheaded and irrelevant, and (b) relatively straightforward yet high-value things that they could do--estimate consumption functions, estimate money demand functions, account for changes in national product. Yet as I look back I am somewhat uneasy. Yes, real national product as an excellent first-order summary statistic. Yes, the insights into the striking importance of innovation from Abramovitz, Solow, and Denison were as blinding as any light on the Damascus Road. Yes, I do teach my students every year that global total factor productivity growth was roughly:

0.03%/year for 1-1650
0.21%/year for 1650-1800
0.53%/year for 1800-1900
1.82%/year for today

But when I look at the orerry of Solow and post-Solow growth models and at the twelve million regressions with nation-state real national product growth rates on the right-hand side, I cannot help but think that all this energy might have been better deployed elsewhere.

Even Simon Kuznets identified a single process: modern economic growth. It started--takeoff-like--at different moments in different countries. But it was the same process.

It was Gerschenkron who pointed out most strongly that economic development was not economic history--that it was not the same process repeating itself over and over again, because successive episodes took place in very different technological and international environments. In 1600 Antonio, the Merchant of Venice, can draw upon the skills of the craftsmen who work at the Venetian Arsenal to build his ships, write incentive-compatible contracts with his captains and quartermasters, diversify his portfolio, and largely keep his accounts in his head. In 1800 Francis Cabot Lowell employs a staff of ten managers and technicians--including a high-priced engineer, Paul Moody, poached from Britain and given an equity kicker--at his first spinning mill far up the Charles River in Waltham, Massachusetts. But by 1850 to build railroads in France you need the cooperation of Baron James de Rothschild to mobilize capital--not the enthusiastic cooperation, mind you: he said that spending money on the fair sex and fine wines were much more pleasant but not as sure ways of losing it than railroad engineers. By 1900 you needed to draw on an oligarchic universal bank--a Dresdner, a Deutsche, or a Morgan--to do your infrastructure or your heavy industry on a scale where you had a hope of being efficient.

Gerschenkron extrapolated this line in "Economic Backwardness in Historical Perspective": he saw the Stalinist industrialization of the 1930s as, at one albeit not the most important level, a response to twentieth-century technological necessity: only a state could mobilize savings and thus resources on the scale needed for the hydroelectric dam at Dnepropetrovsk and for the tractor factories of Magnitogorsk. And he expected that trend to continue: successful economic development in the post-WWII era, Gerschenkron thought, would be state-led and state-financed even if market-oriented.

Alongside Gerschenkron came Prebisch and Singer, and the development of underdevelopment. In poor countries labor was cheap because they were poor, and technological capability was small. Poor countries had to export resource-intensive products of unskilled labor for they had no chance of attaining a comparative advantage in manufacturing. But many low-wage countries exporting the same ores and foodstuffs found themselves with bad and worsening terms of trade, hence with no ability to buy the technology-embodying products of the core needed to industrialize. Successful economic development in the late twentieth century required something very different than walking in the footsteps of the North Atlantic, for an iron-handed state pursuing trade policies to squeeze down elite consumption of imported luxuries and to abandon comparative advantage in order to acquire domestic manufacturing competence. Or maybe it wasn't something very different: recall the Tariff of Abominations, after all, and Andrew Jackson's threat to hang his own vice president on the White House south lawn if South Carolina moved one step closer to treason.

But, once again, they were wrong. The comparative advantage that poor countries have been revealed to have in the past generation appears to have been a comparative advantage in assembly line-based light industrialization based on relatively low wage levels as anything. State-led development has not been necessary--especially not when pursued by anti-developmental states. Adam Smith's dictum:

Little else is required to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes and a tolerable administration of justice...

may have been more close to being true in the past generation than in any of the eight previous ones--if one adds also a functioning electric power grid, working ports, and roads without potholes and rails with switches.

"De te fabula non narrator! The story is not about you. The country that is more developed industrially does not show, to the less developed, the image of its own future. The experience of the North Atlantic does provide a useful set of benchmarks, comparisons, and yardsticks for countries going through urbanization, globalization, marketization, democratization, and industrialization. But that is all it provides, and all it has ever provided.

What, then, is the value of economic history? Why should history departments train and hire people like us? Jan de Vries says that the students he will teach in graduate early modern history in Berkeley's history department next year--well, that not that many of them are focusing on proto-industrialization or the Nederland Vereenigde Oostindische Compagnie. Instead, they are focusing on what happens to the world of women as a result of the Reformation: on the one hand, you have to learn to read because you must read the Bible to your children; on the other hand, the honorable estate of being a nun if you don't like the potential husbands your father offers is no longer open. I find this disappointing--for there is an awful lot of economic history still to be done in history departments, and I think it fascinating--but it is not as though studying the Reformation through a gender-culture-sociology lens is not honorable.

In economics departments I hear that it's unfair to spend so much time studying history when there are the crying needs for more theory. And when I hear this I want to respond: what do you think theory is? Theory is, after all, nothing but distilled history, processed history, freebase or crack history--you know, it reaches the brain and alters your neurotransmitter balance in five seconds. But freebase and crack or very dangerous: better to simply chew the leaves. As Alan Greenspan said on Friday night, to gain insight into the state of financial markets today you would have been much better advised to do a narrative and institutional study of the panic of 1907, or of that seventeenth century episode that Voth and Temin's spellchecker calls the "Turnip Bubble," than building a statistical model or applying Ito's lemma to the no-arbitrage condition.

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