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Economics and the Historian

University of California Press

We aim to broaden and deepen the exchange of ideas between economists and historians. Our specific purpose is to show how to apply the core ideas and methods of economics to a wide range of historical issues.

Historians who neglect economics can lose sight of factors that affect every historical situation. Saints and sinners, elites and masses, rich and poor-all require food, clothing, and shelter. Even if man does not live by bread alone, economics lurks beneath the surface of any historical inquiry. The economist who hesitates to peek outside the confines of his models can overlook cultural influences on markets. Likewise the historian of labor, of agriculture, of trade policy, of elite politics, of the church, of international conflict, of the arts, of migration, ideas, industrialization, universities, technology, demography, or crime ignores the economic approach at the risk of losing important lines of explanation.

Historians often shy away from economics because of its reliance on models apparently devoid of institutions. But the model of homo economicus, the hyperrational actor, deserves a place in the scholar's analytic repertoire. This model implies, and statisticians confirm, for instance, that female children receive better nutrition (relative to their male siblings) in regions of India where the wages of female adults (relative to male adults) are high, and that wealthy parents receive more attention from their offspring than poor parents, but only if they have more than one child.1

On Indian child-rearing, see Rosenzweig and Schultz 1982. The results reflecting competition among children of wealthy parents are from Kotlikoff 1988.

Although these and other examples demonstrate the power of models, economics is not a discipline wholly preoccupied with their construction. The development of economics is itself a historical process tied to the evolution of the economy. Take the example of economic thinking about corporations. In 1776 Adam Smith, thinking of conflicts of interest among owners and managers, opined that "negligence and confusion. . . must always prevail, more or less, in the management of" joint stock companies. He predicted that corporations could not succeed without special monopoly rights: "They have. . . very seldom succeeded without an exclusive privilege; and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it" (Smith 1937 [1776], 700). Events of the two centuries following showed the breadth of Smith's misjudgment. Alfred Chandler (1962, 1977) has chronicled the triumph of corporate organization over individual and family enterprise.

In this case as in others, changes in the economy have influenced economic theory. The traditional idea of a market economy based on exchange among autonomous and independent agents begins to crumble if the "individual agents" include complex organizations like General Motors, Hitachi, or the Department of Defense. Thinking about organizations raises issues that cut to the core of economics. To ask Smith's question: how can the corporation function effectively if the interests of its members (workers, middle managers, executives, shareholders) pull in different directions?

Efforts to answer the question (Simon 1991; Williamson and Winter 1993) focus on internal mechanisms of bargaining, contracting, monitoring, enforcement, and governance-matters that play no part in standard economic thinking. Theorists cannot penetrate these mechanisms without drawing on law, psychology, and sociology. They must adopt a comparative approach, and study the consequences of different structures (the multidivisional firm; the Japanese firm), the effects of specific market mechanisms (e.g., for the hiring of medical interns), and the implications of information flows and blockages for the rate of technical change (Aoki 1990; Roth 1990; Milgrom and Roberts 1992).

This sort of theorizing, known as the "new institutional economics," involves modeling, but it builds on the information treasured by historians: detailed appreciation of actual business practice. It moves away from the abstraction of homo economicus to "study man as he is, acting within restraints imposed by real institutions" (Coase 1984, 231).

New institutional economics is not an isolated instance of linkage between changes in the economy and changes in economic theory. The observation that poor farmers often reject "improved" seed varieties sparked a revolution in the economic analysis of risk (Schultz 1964; Calabresi and Bobbitt 1978; Lipton 1989). Systematic exploration of the idea that information is scarce and costly rather than freely available has spawned a rich and varied literature (Stigler 1968, 171-190; Akerlof 1984, chap. 2; Stiglitz 1986). Growing discomfort with the incongruity between traditional analysis of international trade, which assumes small producers and pure competition, and the reality of huge volumes of exchange involving related products and powerful multinational firms has sparked the development of new trade theories based on economies of scale and departures from atomistic competition (Krugman 1987, 1990b, 1991). Observation of large expenditures on research and development led to a new vision of technical change as a commodity capable of being produced rather than an external phenomenon like "manna from heaven" (Nelson 1987; "Symposium" 1994). The rapid growth of Japan and other East Asian nations whose governments reject laissez-faire principles has forced proponents of free-market orthodoxy to rethink their analysis of long-term growth (Wade 1990; World Bank 1993). The recent and often painful experience of economic transition in the former communist states of Europe and Asia, a market birthing that fascinates even the purest of laissez-faire theorists, demonstrates how economic analysis can fall short if it overlooks the cultural forces in history.

Our book is rooted in the conviction that historians will find it useful to acquaint themselves with economics. The chapters that follow provide repeated examples of how standard items in the economist's intellectual arsenal extend the reach of historical source materials by revealing unexpected connections between different elements of market systems.

Historians who do incorporate economic analysis into their working vocabulary can expect to find an enthusiastic response from economists. Rising interest in history is visible at every level of the economics profession. Robert Fogel and Douglass North, two economic historians, shared the 1993 Nobel prize. The work of other Nobel recipients, such as James Buchanan, Ronald Coase, Simon Kuznets, W. Arthur Lewis, T. W. Schultz, and Herbert Simon, reflects a commitment to historical and institutional studies. Robert Solow, another Nobel laureate, advises colleagues to seek inspiration for theories of technological change and long-term growth from "case studies, business histories, interviews, expert testimony" (1994, 53).

Richard Sutch, a coauthor of this volume, notes in his presidential address to the Economic History Association that economists now recognize "the central importance of institutional...