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Margaret C. Levenstein April 18, 1999 It is a real pleasure and an honor to be here today. About ten years ago at Bill Parker’s retirement, when I was still a graduate student, I listened to a series of his students speak about his work in economic history and their own work following in his footsteps. I had, for the first but certainly not the last time, a sense of the significance and impact of the Yale, the Parker tradition in economic history. I remember telling David Weiman, who had organized the retirement celebration, that Joel Mokyr, whom I had never heard speak before, was clearly the standard bearer of the Parker tradition, demonstrating an ability to bring a flare with language to serious insights on economic history. But now that we have heard from Jan deVries about fishes and amphibians I see that Joel is not the only one to carry on Bill's tradition in style as well as content. Parker's retirement was an exciting and energizing event for me, as I felt part of something with deep roots. So it is with not a little bit of awe that I join this panel today and add my bit to the Parker tradition. We live in a world where change is extraordinarily rapid, in which we are all making a headlong dive into the twenty-first century. We all need to be forward thinking. We certainly see places today where people and countries are stuck in their history -- a history that traps and sometimes destroys them. So why do we need economic history, need to learn from economic history, need to put time and resources into thinking about the past when we also need quite desperately to be looking forward? The answer, I believe, is that we also live in a period in which people have learned their economics a bit too well, or, I would say, a bit too simplistically, and economic history can help to correct that. We live in a period in which people have embraced a market ideology in which market forces are all-powerful. We act as though whatever the market wants is inevitable and must be accepted. It would simply be foolish and counter-productive to try to do otherwise. It is absolutely true that competition is a powerful force that provides incentives that shape outcomes. But competition takes place in a context that is determined by individual and collective action. The work of Paul David -- not a Yalie -- and others has shown in a variety of historical examples that chance occurrences and sunk investments can have a long-term impact, so that the market outcome that emerges is not necessarily the best possible market outcome.[1] I would like to emphasize a slightly different point. It is not simply chance that leads us down a particular path. It is individual and collective actions that set the rules under which competition takes place. We can not control the flapping of butterfly wings or the sequence at the adoption of keyboards. But it is our responsibility as economists and human beings to try our damndest to choose the best path, not to abdicate or accommodate to anonymous market forces, which really means letting someone else pick the path that we all end up on. At one point yesterday, I thought that this point would perhaps be all too obvious to students of Jim Tobin and Carlos Diaz-Alejandro who are thinking about the impact of the architecture of international capital markets on growth and distribution in developing countries. But then last night's discussion of environment and labor standards and NAFTA made me think that this was, in fact, a point worth making. Obviously, we don’t want environmental and labor standards to be a pretext for closing trade. But just as obviously Y* -- the income level where countries in the past have shifted from environmental degradation to environmental protection -- is not fixed by God, but rather by past choices. There is no reason, a priori, not to try to move it left. And there is no reason not to use international pre-commitments to help move it to the left. As Jaime Serra described in his discussion of tax policy after NAFTA, and as the micro-economists, including David Pearce and Paul Milgrom, at Yale taught me, commitments can get us out of a bad equilibrium. Why should we be stuck in a prisoners delimma competing over who can offer the lowest environmental standards if we can commit to a higher standard and move to an equilibrium that is better for us all? Faith in the market has become our collective escape from responsibility. We need to re-assume responsibility for making the rules under which competitive markets operate so that we are the masters not the slaves of markets. Economic history re-birthed itself studying masters and slaves. That body of research has now largely been completed, at least for the present. What should we take from the volumes of research on slavery? What do I tell my students is the lesson of that debate? I surely tell them that Gavin Wright showed us that there were no economies of scale in cotton and therefore the profits of slavery were the profits of exploitation not of the efficient organization of cotton production.[2] But when I left the hallowed walls of Yale, I found that many non-Yalies emphasize another lesson that is also true. The establishment of slavery in North America was, as economic historians have now well established, the profit-maximizing outcome of competition in labor and tobacco markets.[3] The shift from indentured servitude to race-based slavery was the result of the choices made by individual, profit-seeking tobacco growers. Faced with increasing labor costs for European indentured servants, they turned to slave labor made cheap by depression in the sugar islands. Does that mean that slavery, and the 300 years of racial strife and suffering that continues to eat away at this country’s heart and gut are the inevitable results of market forces? Hardly. As Yale’s Edmund Morgan has shown, that was the market outcome because of rules, laws, and social norms that were adopted and that made slavery possible.[4] Cheap sugar may have reduced the price of slaves and made slavery in the Chesapeake profitable. But it was the Virginia legislature’s decisions to segregate blacks from white indentured servants and to establish distinct legal status for black slaves that made the price of slaves relevant to Chesapeake tobacco growers. There was a clear alternative political choice that would have led us down a very different path. If slavery had been precluded by the rules governing market competition, tobacco farmers probably would have done what they did do a century or so later. As indentured servants became increasingly expensive, we would have seen the emergence of an agricultural system based on free family labor. This might have required that tobacco growers reduce the scale of their plantations and possibly even diversify their crop mix. This in turn might well have created the conditions for true economic development, leading to increased productivity growth in agriculture and the urbanization that the south so desperately lacked. Instead Chesapeake planters made political choices that allowed them to take advantage of the possibilities made profitable by the fall in slave prices. They made political choices that meant that free and slave labor competed in international labor markets. This country has been paying for it ever since. This is perhaps an extreme example which I hope and presume is not directly relevant today. But when a panelist yesterday discussed the potential future impact of the integration of Chinese labor markets into the world market, I thought, we have to realize that we can make choices. Our choice is not simply whether to fully integrate the Chinese in the world trading system or to protect ourselves and leave the Chinese behind. We can also decide how to integrate markets. We can decide to do so in a way that is better for Chinese workers and American workers. We create markets. How we create those markets matter a lot to the kind of world we live in. My second example from economic history is somewhat less dramatic but actually much closer to my own line of research. Product competition in the U.S. has not ever been free competition. For most of the nineteenth century states set rules that effectively limited the size and scope of firms. In doing so, they limited the scope of competition, and in some cases directly facilitated price fixing. Technological changes over the course of the century increased the costs of those restrictions. Competition among the states to attract capital and generate tax revenue meant that the political solution was to accommodate the growth of firms and allow them a much freer rein in determining the scope of their activities and the internal organization of the firm itself. (For example, allowing boards of directors -- as opposed to owners -- to run firms requires legal and political decisions. Holland is apparently just now considering legislation that would allow firms to use proxies at annual stockholders meetings.) The Sherman Anti-Trust Act was passed to fill the void created as states became less able to regulate the competitive process. The Sherman Act put in place new rules about how competition would and would not take place in the United States. The act was clearly a compromise choice in which an alternative policy, the use of national corporate charters for manufacturing firms, was rejected.[5] We, of course, never know exactly what the path not taken would look like. Yale economic historians have a much better sense of the use and the limits of counterfactual history than some economic historians trained in other traditions, but even without engaging in cliometric fantasies, we can know that there are other paths. Germany, for example, was technologically innovative with smaller firms and less concentrated industries — though arguably not more competition, which would have been better yet. So it is not simply large scale firms in highly concentrated industries are not a technological imperative, but the competitive result of a series of political choices. The particular rules that we adopted in the U.S. focused on limiting horizontal collusion, and a little later, horizontal combination. But, I would argue, the most important barriers to entry, are vertical ones that our anti-trust laws have a much harder time doing anything about. (This may, in fact, reflect the success of our anti-trust laws in preventing horizontal barriers.) As we watch the Microsoft suit and the daily announcements of new international consolidations, we have to think sensibly about new rules. As Jorge DeMacedo said yesterday we may need to think more about international governance. In this case as well, the Europeans do provide an example, if not a perfect model, for the development of transnational competition policy. As the Microsoft case makes clear, we must also think about the network externality issues that we handled so badly in regulating the railroads. Rick Levin once said to me, in one of those moments in which things clicked in graduate school — as opposed to the hours and days and months and years of fog — we should have nationalized the rails, a la highways, and had free competition to provide railroad car services. Similarly, we must design new rules of competition that assure competition in access to the information highway as well as the concrete highways of the future. [1] David, Paul. 1986. "Understanding the Lessons of QWERTY: The Necessity of History." In William N. Parker, ed., Economic History and the Modern Economist (Oxford: Basil Blackwell). [2] Wright, Gavin, 1978. The Political Economy of the Cotton South. (New York: W. W. Norton). [3] Galenson, David 1981. White Servitude in Colonial America. (Cambridge: Cambridge University Press). [4] Morgan, Edmund 1975. American Slavery, American Freedom. (New York: W. W. Norton). [5] Lamoreaux, Naomi 1975. The Great Merger Movement in American Business. (Cambridge: Cambridge University Press). |