6. Review of Douglass C. North, The Economic Growth of the United States, 1790-1860

6. Review of Douglass C. North, The Economic Growth of the United States, 1790–1860

May 1, 1961

Dr. Ivan R. Bierly

William Volker Fund

Dear Ivan:

Douglass C. North’s The Economic Growth of the United States, 1790–1860 is an almost totally unfortunate work.²¹ It combines all the worst aspects of the currently fashionable “science” of economic history, as contrasted to the older and sounder disciplines of sound economic theory applied to the fabric of history.

In short, North takes as his “analytic framework” a series of absurd and erroneous hypotheses, all of which are incorrect or, at best, highly one-sided. Some of these hypotheses are “laws” of history, one or two similar historical observations elevated without justification to the status of a scientific law of history. Others are based on highly faulty economic theorizing. Filling in this analytic framework is a book that consists almost completely of a mass of absurdly overstressed and ill-digested statistics. The statistics are hurled at the reader with little or no attempt to explain their significance. The statistics are often irrelevant to the “analytic framework,” and almost always irrelevant to any coherent principles of selection.

Furthermore, there is almost no qualitative analysis in the book, no sense of any economic growth processes or legislative effects not incorporated in some chart or table. But actually, such non-strictly-quantifiable material is vitally important in such an economic history. This is especially true in this earlier period of American life, where the statistics, no matter what diligence went into them, were highly inadequate and fragmentary.

Many of the statistics are processed with “moving averages” and other refinements that remove them one more plane from the reality they are striving to describe. Furthermore, despite the vast array of statistics that reduces the actual text to negligible size, there is grave deficiency of even statistical—let alone “literary”—discussion of crucial economic concerns such as wage rates and unemployment. Undoubtedly, the reason is that wage rates and unemployment series are too fragmentary to be organized in large tables and detailed graphs. But they are, nevertheless, too important to be so overlooked.

And so, all the trappings of the scientistic economic historian are there: the faulty theoretical hypotheses; the enormous overweighting of statistics and underweighting of the qualitative, the searching for “laws of history,” etc. Obviously heavily concerned with keeping up with the last-minute scholarly fashion, North goes overboard in trying to confine his references largely to 1960 material. As a result, his references are incomplete and weighted far too much on the side of the most recent material. In his discussion of the 1819 Panic, for example, North relies heavily on Schur’s 1960 journal article, and also on Folz’s earlier, unpublished dissertation, both of which are very poor sources. Actually, North rises above this material, but the fact remains that this is the material that he is apt to confine his footnotes to.

In addition to ignoring wage rates and unemployment, North also virtually overlooks the important field of money and banking, and presents no statistics in this vital field either—probably, again, because they cannot be presented in an imposing table. Thus whatever cannot be quantified at length does not, for North, exist.

Having indicated the poor and completely unsatisfactory quality of North’s history, let us turn tohis equally poor, if not worse, theoretic framework, which he uses as a Procrustean bed for the history. North has seen the obvious fact that, generally, the most advanced industry, especially in an “undeveloped” country, is aleading export industry. But he concludes from this that there is something uniquely powerful and spurring to development of an export industry per se. In short, instead of realizing that an industry that is particularly efficient and advanced will then become a leading export industry, he tends to reverse the proper causation and attribute almost mystic powers of initiating development, etc., to export industries per se. From this he leaps to far more erroneous conclusions and non sequiturs. He claims, for example, that an export industry, the receipts of which are then used largely for imports, leaks away and hinders development of the country; whereas, export industries where the spending “stays at home” build up the country, because they retain within the country the “multiplier-accelerator” effect of such spending. This is Keynesian nonsense applied even beyond where Keynes would apply it—i.e., to all situations and not just depressions.

Critical ideas for North are such statements as, “Regions or nations which remain tied to a single export commodity almost inevitably fail to achieve sustained expansion.” Now this is nonsense on many levels. First, this is merely a historical generalization elevated into a “law.” Second, the causation is once again placed backwards by North: historically, obviously a country that develops only one leading export industry is usually a reflection of a limited development. But North implies that the export industries are the causal keys to the problem of development, and therefore all that would be needed to ignite development would be another couple of export industries. Third, even historically, North is incorrect. Australia, for example, was able to prosper and develop with essentially one leading export industry: wool. Fourth, if we pursue the statement fully we see what utter absurdity it is; for North (who realizes that regions are as important an economic unit as the political, artificial “nation”) talks of “regions” tied to one export. And yet how big or how small is a “region”? “Region” is an economically meaningless term, as we can make the “region” small enough so that it could never have more than one export commodity. And yet this does not make such a region poor or undeveloped.

The logic of North’s position, which apparently he does not carry through, is basically protectionist; industry is weighted more highly than other goods, exports more highly than other industries, etc. North does pursue his logic, however, to proclaim his bias for egalitarianism. Unequal distribution of income he associates with a “plantation” economy, where the planters have the ill grace to spend their money on imported luxuries; this is contrasted to the noble, more egalitarian economy where more people develop home industry and home activities.

Once again, North’s position is compounded of both historical and economic errors; the fact that, historically, some plantation systems had unequal incomes does not mean that either the plantation system or the inequality inhibited economic development. Certainly neither did. So protectionist minded is North that he actually says that an export commodity that requires more investment in capital facilities, etc. is better and more conducive to growth than one requiring less, because there will be more spending on home-port facilities, etc. This again is protectionistic nonsense (i.e., the thinking of protectionism—I do not know whether North actually advocates high tariffs) for it claims that a less efficient and less productive industry is better than a more efficient and more productive one because more money is spent by the former on costs, resources, etc. Isn’t the money that is saved ever used? Once again, the important desideratum is freedom of the market; a country or region will often best develop, depending on conditions of resources or the market, by concentrating on one or two items and then exchanging them for other items produced elsewhere. If this comes in a free market, it is far more productive and economic than forcing a hothouse steel or textile mill in the name of “economic growth.”

Furthermore, Professor North takes the occasion to propagandize, throughout the book, on behalf of the public school system. The noble North and West, since it benefited the people, “invested in human beings” via a free public school system; the plantation-ridden South declined to do so until much later.

North, like all scientistic-minded economic historians, has, at bottom, a highly mechanical and deterministic view of economic growth. There are resources, there are export industries (which he overstresses greatly—thus he virtually makes cotton, in this period, to be the only industry worth discussing, since it was the leading export); and there are various “multiplier-accelerator” models of impact of these various export industries. The role of individuals acting, of entrepreneurs and innovators, North deliberately and frankly deprecates; the role of capital investment—so crucial to development—receives similar slighting treatment (here, too, there are no detailed statistics of capital for this period, so presumably this topic is not worth discussing).

The role of money and banking is also slighted, except that North indicates adoption of the erroneous Leon Schur thesis that the Bank of the United States was an excellent institution not to be blamed for the inflation of 1817–18, which is the reverse of the fact.

In addition, North revives the hoary myth of “long cycles” of economic activity, which he thinks prevailed during this period and are comparable to the well-known, shorter, business cycle. Actually, there is no such “cycle”; if there are long swings in wholesale prices or in particular industries, this has nothing to do with the business cycle as we know it; the important point is that there is no such cycle in production or business activity, i.e., production does not fall for twenty or thirty years, etc. (The fact that rates of increase change is not the same thing, and is only a “cycle” produced by statistical refinement, not in the real world.) His explanation for these so-called long cycles is lengthy “periods of gestation” of investments; this is the erroneous Schumpeter explanation.

Finally, there is another vast omission: there is virtually nothing on government policies and their positive or negative impact on America’s economic development during this era.

To set off against this long and important roster of flaws and failures, I can think of no particular merit in the North book—except for the reflection of recent National Bureau findings that the United States began developing rapidly before the Civil War and that this development was interrupted by the Civil War, in contrast to previous views that the Civil War sparked American development. But this hardly begins to compensate for the defects and fallacies in the book. Needless to say, I would recommend strongly against any National Book Foundation distribution of this unfortunate book.²²