EHA Abstracts Fall 2000


Daron Acemoglu, Simon Johnson, and James Robinson


Stephen Broadberry and Sayantan Ghosal

Contrary to popular perceptions, trends in comparative productivity levels for the whole economy have been driven primarilyby trends in services rather than in industray. We provide a model of interactions between technology and organization that explains trends in relative services productivity between Britain, Germany, and the United States since 1870.

Sally Clarke


Karen Clay and Werner Troesken

Between and 1880 and 1900, thousands of businesses in the United
States combined to form what were loosely referred to as trusts. The
trust movement ultimately gave rise to some of the largest and most famous
enterprises in American history. Yet for all of the successful combinations
that emerged from the trust movement, most trusts failed. Nearly all
existing studies of the trusts, however, focus on the successful enterprises, and little is known about the combinations that failed. To understand why some trusts succeeded, it is necessary to better understand why so many others failed.

Accordingly, this paper analyzes the rise and fall of the Whiskey Trust, which dominated the production of alcoholic spirits, from 1887 through 1895. Four possible explanations for the demise of the trust are considered: antitrust regulation; managerial misconduct and mismanagement; market entry; and unanticipated shocks to supply and/or demand.

William Collins and Robert Margo


Paul David and Gavin Wright

A marked acceleration of total factor productivity (TFP) growth in U.S. manufacturing followed World War I. The paper analyzes this development, attributing it to the confluence of diffusion of a general-purpose-technology (electrification) with a regime change in the industrial labor market. The proximate source was the switch from declining or stable capital productivity to a rising capital-output ratio, which occurred at this time in many branches of manufacturing, and which was not accompanied by slowed growth in labor productivity. The era also witnessed profound transformations in the labor market, following the stoppage of mass immigration from Europe. Rising real wages provided strong impetus to changes in workforce recruitment and management practices that had been underway in some branches of industry before the War. Complementarity
between these two forces is indicated by a marked positive correlation between changes in capital productivity and labor productivity during the 1920s.

Lance Davis and Stanley Engerman, "International Law and Naval Blockades: The United States, Great Britain, and Germany in World War I, World War II, and the Cold War"

This paper examines the role of international law and of technological and organizational innovations in influencing the economic and political success (or lack of same) of the use of blockades during twentieth-century wars and peacetimes. Of particular interest will be the interplay of legal, military, and economic factors.

David Dollar and Art Kraay, "Property Rights, Political Rights, and the Development of Poor Countries in the Post-Colonial Period"

Two of the most distinctive institutional features of the United States in
the twentieth century were well-defined property rights and broad-based
political rights. Cross-sectionally and longitudinally, the two institutions tend to
go together, but not all that closely. Historically, property rights developed
before political rights in the U.K. and U.S. And while the strength of property
rights and the extent of political freedom are correlated across countries, there are lots of important exceptions in "both directions": economies with reasonably good property rights and little democracy (Korea, Taiwan, Chile, China, Uganda), and ones with democracy but weak rule of law (Russia, Ukraine, Yemen, Honduras, Jamaica, to name a few).

In this paper we investigate the effect of these institutions on the development (or more commonly, non-development) of poor countries in the post-colonial period. Strength of property rights has a clear relationship to accumation and ultimately growth of per capita income. After controlling for this and for other policies and
characteristics, there is actually a negative relationship between extent of democracy and per capita growth. We repeat the work focusing only on the income of the bottom twenty percent of the population (asking whether democracy is particularly important for the economic well-being of the poor) and find the same relationships. These findings shed some light on the role of foreign savings in promoting the development of backward regions. Private capital tends to flow to where the rule of law is good -- without reference to democracy -- and those flows accelerate the development of such areas. On the other hand, foreign aid (official flows) has tended to favor democracies -- without regard to the rule of law or economic policies. Because most foreign aid has been disbursed into environments with weak rule of law and poor policies, it has had relatively little impact of the development of poor countries.

Alan Dye and Richard Sicotte

Our paper adopts the method of the event study to examine the effect of legislative revisions to the U.S. Sugar Program between 1945 and 1959 on its principal suppliers. The institutional design of the sugar import quota system made its governance vulnerable to rent-seeking by domestic producers. We examine the response of stock prices of sugar companies representing major supplier groups, each of which faced different consequences from modifications to the regulatory environment. Mainland producers, domestic refiners, U.S. insular possessions and Cuba represent the major supplier groups. Estimation of abnormal rates of return to shareholders captures the responses of investors to changes in the relative earnings potential of companies, and comparison across supplier groups tests our hypothesis that the relative effects of sugar policy revisions were destabilizing to the Cuban economy and polity. The findings may suggest profound influence of the institutional design of regulatory policy on determining the long-run winners and losers of a policy.

Richard Easterlin

The 20th century has seen the rise of the United States to world economic
and political supremacy. This rise, together with advances in communications and transportation technology and the great expansion of international economic and political relations with the U.S. at its center, has placed America in a position of unparalleled influence in the evolution of world culture. Country after country throughout the world is falling in line, replicating the American model of material life style, so far as it is able. In contrast, political democracy, one of America's proudest and most proclaimed achievements, has only a limited reception worldwide. Indeed, since 1950 in the less developed world there has been little or no advance in political democracy.

This paper will sketch quantitatively the 20th century rise of the U.S. to world supremacy and the differential economic and political impact of the U.S. on world culture. It will also speculate on the reasons for the uneven cultural effects, and consider implications of the analysis for the future of world culture.

William Easterly, "The Middle Class Consensus and Economic Development"

Modern political economy stresses "society's polarization" as a determinant of development outcomes. Among the most common forms of social conflict are class polarization and ethnic polarization. A middle class consensus is defined as a high share of income for the middle class and a low degree of ethnic polarization. A middle class consensus distinguishes development successes from failures. A theoretical model shows how groups -- distinguished by class or ethnicity -- will under-invest in human capital and infrastructure when there is a "leakage" to another group.

The paper links the existence of a middle class consensus to exogenous country characteristics like resource endowments, along the lines of the provocative thesis of Engerman and Sokoloff (1997) that tropical commodity exporters are more unequal than other societies. This hypothesis is confirmed with cross-country data. This makes it possible to use resource endowments as instruments for inequality. A
higher share of income for the middle class and lower ethnic polarization are
empirically associated with higher income, higher growth, more education,
better health, better infrastructure, better economic policies, less political instability, less civil war and ethnic minorities at risk, more social "modernization," and more democracy.

Michael Edelstein


Jari Eloranta, "Filling the Void?: Implications of the Lack of American Military Leadership on the Military Spending of European Democracies, 1920-1938"

This article attempts to explore the complicated phenomenon of military spending in eight Western democracies (Great Powers: the United Kingdom, France, and the United States; small states: Belgium, Denmark, Finland, Norway, and Sweden) during the interwar period. This question is approached by analyzing especially the impact of the lack of American military leadership in the interwar period, emerging through military spending patterns both as real military expenditures and shares of their respective GDPs. The hegemonic perspective, advocated by i.e., Robert Gilpin and Paul Kennedy, suggests that the economic leader also embarks on growing military spending, eventually becoming harmful to economic growth. The military spending patterns respective of economic growth (=military burden) at first seem to suggest that not only the totalitarian states (as is the traditional view) but also the United Kingdom and France challenged the limited American leadership in the 1930s. This also coincided with the absence of American commitment in the European foreign policy sphere. However, the military spending of these nations were too low to warrant the conclusion, such as Kennedy suggests, that military spending had any impact on their respective economic performance. This result is also verified here by employing Granger causality tests between military spending and economic growth variables for the United States, the United Kingdom, and France. Moreover, regression analysis on the military spending variables for UK and France does not support the claim of high dependence on lagged US military burden; rather, the evidence points towards competition on the level. The smaller states, respectively, spent quite cautiously on their military establishments, which is displayed in their military spending patterns. Further research challenges outlined here include the collection of more variables affecting the demand for military expenditures, broadening the sample of countries, and analysis of the relative importance of domestic political and economic actors more closely in this period.

Price Fishback and Shawn Kantor


Jennifer Frankl, "Reducing Transaction Risk in Trade between Japan and the United States: The Role of General Trading Companies, 1915-1941"

In 1853 when Commodore Perry used military force to end Japan's 250 year isolation from interaction with the rest of the world, Japan's economy was abruptly exposed to foreign trade. The isolation meant that neither Japan nor the United States had much information or experience about the customs, language, legal traditions or markets of the other. Long distances, big differences in culture and language, and prejudices about the potential of Asian countries for future development exacerbated the risks associated with this lack of experience and information.

Most literature on general trading companies claims that firms needed to incur high fixed costs in order to surmount this isolation. These high fixed costs meant that economies of scale existed in the number of international transactions and, therefore provide a raison d'etre for Japanese trading companies. My previous work shows evidence that trading companies did not experience standard economies of scale. So I turn to an alternate view proposed in the literature, that these trading minimize the transaction costs associated with international trade. Specifically, I propose that lack of information and large cultural gaps increased the risks of making and enforcing international contracts. General trading companies arose in both the West and Japan to reduce such risks, but were particularly large and important in Japan where these risks existed for every foreign transaction.

My results show that general trading companies acted as intermediaries to foreign transactions enabling them to reduce the risks faced by both parties in both the United States and Japan. Japanese trading companies absorbed all exchange rate and payment risk in these transactions. They also reduced quality uncertainty by having a valuable reputation at stake in these transactions. Trading companies were able to take on risks of making and enforcing international contracts because their large size enabled them to spread such risks across a large number of transactions. Trading companies were also able to mitigate some risks of international trade using information gained through repeated contact with both individual companies and whole countries. In addition, the presence of trading company personnel in both countries made monitoring and enforcement of international contracts relatively simple. As trade increased and the information and cultural gaps between the US and Japan gradually narrowed, the large scale and expertise of the trading companies allowed them to maintain a profitable business.

This paper uses records located in the US National Archives of the US branches of two general trading companies to demonstrate that these companies absorbed much of the risk associated with international trade for both US and Japanese companies. Trading company documents also support the claim that trading companies were able to mitigate transaction risks on their own behalf enough to maintain a profitable business as an intermediary. Thus, general trading companies expanded the amount of trade possible between Japan and the US, and by extension, between Japan and the rest of the world.

Stephen Haber, Armando Razo, and Noel Maurer, "Credible Commitments and Economic Growth Under Political Instability: Evidence from Revolutionary Mexico."

The paper examines the following puzzle: the theoretical literature written by political scientists predicts that political instability should have a strongly negative impact on growth, while the empirical literature written by economists cannot detect the predicted causal relationship. We address this puzzle by first presenting a theory of how credible commitments are possible under conditions of political instability and then by operationalizing this theory using quantitative evidence from Mexico during the period 1900-1934. This evidence is drawn from both archival and published sources.

James Heckman and Petra Todd, "Understanding the Sources of Black Economic Progress in the Twentieth Century: Social Action vs. Private Choice"

This paper investigates the sources of black economic progress in the twentieth century. It examines the role of education, migration, self selection, markets, and social action in accounting for measured economic gains by Black Americans.

Philip Hoffman and Jean-Laurent Rosenthal, "Divided We Fall; Wars and the Evolution of Fiscal Regimes in Europe 1700-2000"

Fiscal regimes have become progressively more centralized and though the trend extends over nearly a millenium, the process accelerated in the early nineteenth century. The growth of central government budgets as a fraction of the economy and relative to local and regional budgets is well known. Many believe that the process has been driven by changes in citizens' demand for social services and therefore have associated it with democratization and with crises like WWI and the great depression. In this paper we take a different tack and consider the evolution of fiscal institutions and changes in the preferences of the central executive.

Our reconsideration is prompted by the observation that from an institutional stand point fiscal centralization long preceded the massive expansion of the welfare state in the twentieth century. Indeed eighteenth century monarchs ruled over territories where their authority to raise revenue was limited. Further the organizations that the executive had to bargain with were multiple. For instance in the Low Countries each province had to approve new taxation going to the central government, in Spain the Castilian Cortez had no authority in Aragon or Valencia. Even in Great Britain, Ireland had its own parliament and who had the right to increase taxation in the colonies was under some debate.

By 1848 countries all possessed a single tax authority that funded and to a large extent controlled the central government.

Our analysis relies on a theoretical model to understand why monarchs might want to create a central fiscal authority. In our model fiscal authority is divided between the crown and a set of organizations controlled by the elite. The elite and the crown have different preferences about expenditures--in particular on warfare. There are two ways of unifying taxation. There can be an autocratic regime where the monarch has discretion over revenue and expenditures, in this case the elite organizations are eliminated. There can also be a parliamentary regime where the elite organizations are merged and the crown surrenders its fiscal autonomy.

However in a parliamentary regime, the crown looses long run control of expenditures because parliament can use the power of the purse to discipline the executive.

Our model puts an important emphasis on changes in warfare between 1756 and 1815 in hastening the centralization of fiscal authority. To be sure the cost of warfare was rising, but wars also brought on political change as well. In the seventeenth and eighteenth centuries monarchs who lost wars were rarely if ever deposed. But the tide began to change during the Napoleonic wars. For after French victories, many European monarchs lost their throne, and Napoleon himself was deposed after Waterloo. From then on, governments faced a stark reality, wining on the battled field did not guarantee staying in power but for most losing was a sure way to exile.

Monarchs were thus faced with both rising costs of war and greater personal risks. Winning was ever more important and a result the inefficiencies of divided fiscal authority became more glaring. Those inefficiencies were revealed in the French defeat in the Seven Years War. The French could simply not raise enough money to fight the British.

Why then did fiscal structure not converge more quickly? There were two ways to do. First was by the crown appropriating fiscal authority. The Low Countries in the 1560s, Portugal in 1640, the American Colonies in the 1770s all demonstrated that such attempts lead to rebellion and that these could be successful. Local elites could resist such encroachment from the crown. Why then did the crown not surrender its fiscal authority to a unified organization? Our model suggest that until monarchs were faced with the dire consequence of loss of power, they preferred to fight many wars with low levels of funding to fighting few wars that were well funded. In
this context the Napoleonic period proved crucial.

Applying the logic of our model to the construction of the European Union, we predict that fiscal unification will be glacially slow in Europe unless an outside threat forces the member states to concede the ultimate sovereignty on the European Parliament: the right to raise taxes. Indeed for the past several decades member states seem to have preferred an under funded and inefficient European Commission to one that might be better funded and more efficient but that might enact policies that they do not like.

Zorina Kahn


Sukkoo Kim, "The Rise and Decline of Density in Economic Activities"

In the United States, the density of economic activities in cities differed significantly over time. Between the eighteenth and the early nineteenth centuries, cities became increasing dense; however, since the second half of the twentieth century, the trend has reversed as cities have become dispersed. The density of economic activities differed significantly across cities as well. At any given point in time, there is a great variation in the density of economic activities across cities. The dynamic changes in the spatial organization of economic activities also differed across cities. In some cities, such as New York, population density grew and plateaued while in others, like St. Louis, it grew and fell dramatically. Yet, despite the fact that the defining element of a city is its density, few scholars have systematically examined the long-run changes in the spatial organization of economic activities. This paper documents the historical changes in the density of economic activities and explores the causes of their rise and decline.

Naomi Lamoreaux, Daniel Raff, and Peter Temin

This paper is an effort to build on the essays collected in our three NBER
conference volumes by offering a new synthesis of American business history.
We move beyond the traditional markets versus hierarchies (or markets versus
central planning) dichotomy and argue that one can observe in the
cross-section of the economy at any moment in time a variety of coordination
mechanisms in use, many of which do not fit neatly into these ideal types.
We argue further that one can speak of the incidence of these different
mechanisms in cross-section, and hence one can speak of modal mechanisms and
hence of the history (that is, evolution) of these cross-sections. Finally,
we argue that changes over time in the incidence of these coordination
mechanisms were propelled by forces that can be taken as
exogenous-including, most importantly, improvements in transportation and
communications, urbanization, and the general rise in per capita income.

Our synthesis allows us to historicize the dominant Chandlerian interpretation of business history by showing that the M-form managerial corporation
emerged as the dominant coordination mechanism in only the middle of the
three periods we study. It also allows us to focus scholarly attention on
what we think should be the paramount question: what it is about the U.S.
economy that has allowed businesses so flexibly to exploit different
coordination mechanisms, both cross-sectionally and over time. The real
history of the American Century lies here.

Joseph Mason, Ali Anari, and James Kolan


Emily Mechner, "The Closing of the Frontier in Barbados: Economies of Scale and the Distributional Impact of the Sugar Revolution"

This paper investigates the dynamics of rapid frontier development in the forty years of Barbados' history before 1680, the decades of its transition to sugar island and slave-based "plantocracy" from a settler economy peopled by white servants and numerous small landowners. It uses a linked data set of several thousand individuals who appeared over time in three key data sources: the 1665 export registration, the 1679 census holdings of property, and the record of deeds. Combining these sources into career histories of thousands of the people who lived in Barbados during its sugar revolution will make it possible to answer some of the most intriguing questions about that economic transition. In particular, these new data shed light on the land-consolidating activities of individual landowners over time, the role of small planters and artisans in the process of land-clearing and agricultural capital formation, and the participation of merchants and foreign investors in creating sugar enterprises.

Hideaki Miyajima, "The Transformation of the Japanese Economic System: A Reappraisal of the Occupation"

Why and how did the institutional characteristics often described as the Japanese system or the Japanese enterprise system emerge? Although there is a broad consensus among researchers that Japan's enterprise system emerged during 1930-1955, researchers differ with regard to the importance of the prewar system, changes and their magnitude during the wartime planned economy, and the impact of post-war reforms. Okazaki (1993, 1994) suggested that the origin of the current Japanese economic system can be found in the wartime planned economy. In contrast, this paper suggests that the impact of postwar reform was crucial for establishing the current system. Specifically, that GHQ's 'Americanization' of the economic system created a discontinuous transformation of that system. This paper highlights the effects of occupation reform on changes in corporate finance, governance and industrial organization. In order to clarify the transformation process of the economic system, I use micro-data for capital composition, ownership structure and firm behavior such as depreciation and investment, which I collected from the 126 largest industrial and mining firms.

The initial purpose of US postwar economic reform was the complete elimination of Japanese war potentials and the democratization of Japanese economic institutions. This purpose was adhered to until mid1948, when the priorities of the US occupation clearly changed to rapid economic rehabilitation under the emerging cold war. Postwar reforms initiated by GHQ planners included redistribution of concentrated property rights, reform of war related systems, and the elimination of concentrated industrial organization. The intention was to create a system of individual-centered corporate ownership, securities based corporate finance, and competitive markets. However, what the data show in 1955 is a system of strengthened corporate management resulting from a shareholder stabilization scheme, bank based corporate finance, and monopolistic competition.

Some of the reforms did take hold and have a substantial impact on the current Japanese enterprise system. Large asset holders represented by zaibatsu families were completely dissolved through redistribution of property rights, creating a system of small shareholders. Former board members of firms, including large shareholder, were entirely purged and replaced by salaried managers promoted from within. Additionally, the capital composition of large firms was distorted and concentrated industrial organization and cartel networks were dissolved. Some regulatory features, such as the Glass Steagal separation between banking and securities businesses, and the ban on establishment of holding companies, continued as part of Japan's regulatory framework until recently.

Given the above, why was the original American system not realized in Japan? The following answers appear to be plausible. First, that the new system planned by GHQ was not consistent with postwar economic conditions. Second, GHQ policies sometimes contradicted themselves. Third, in contrast to the thorough purge of business leaders, government bureaucrats were not purged, and took the initiative with regard to the postwar reconstruction process. Fourth, networks of inter-firm and bank-firm relationships survived the American occupation and were subsequently reestablished.

Paul Rhode

A significant, although relatively unexplored aspect of US economic history
over the 20th century is the rise of the American West, especially of
California, as a center on economic activity. This paper uses a new panel
data set on manufacturing industries in California and the United States to
investigate the underlying forces driving the economic rise of the region.
This analysis views the long-run growth of California as a process of
endogenous, scale-dependent development, much like the dynamics highlighted
in the New Economic Geography. It also identify several important
economy-wide shifts over the 20th century, including changes in power
sources, rising demand for human capital, the weakening of pressures for
larger scale, and the increased contribution of R&D investments in
production, that facilitated the regions development.

Hugh Rockoff and Leonardo Caruana

Christina Romer and Chang-Tai Hsieh


Pierre Siklos


Cynthia Taft Morris

An increasing number of cross-national studiesof macroeconomic growth that pool data on developed and underdeveloped countries seek to explain world growth patterns with a single model and propose universal policy prescriptions for market reforme. This paper questions the applicability to most underdeveloped countries of this literature's generalizations about growth, convergence, living standards, and economic policy. I use little known Adelman and Morris historical cross-country estimates for the late nineteenth and mid-twentieth centuries to demonstrate that the consequences of capitalist market expansion typically vary so greatly across different development levels, different development paths, and different institutional
settings that no single set of theory-based policy prescriptions is applicable.

Alan Taylor and Gerardo della Paolera


Steven Usselman