THETRANSFORMATIONOFTHEAMERICANECONOMY,

1865-1914

ANESSAYININTERPRETATION

THETRANSFORMATION

OFTHEAMERICANECONOMY,1865-1914

ANESSAYININTERPRETATION

ROBERTHIGGSUNIVERSITYOFWASHINGTON

LvMIMISESINSTITUTE

TODAYLANDMATTHEWWithLove

Copyright©1971byJohnWiley&Sons,Inc.Prefaceto2011EditionCopyright©2011bytheLudwigvonMisesInstitute

ThisreprintispublishedundertheCreativeCommonsAttributionLicense3.0.

LudwigvonMisesInstitute518WestMagnoliaAvenueAuburn,Alabama36832U.S.A.mises.org

ISBN978-1-61016-240-1

PREFACETOTHE2011EDITION

This book, my first, was composed for the most part in 1969 and 1970 andpublished in 1971, exactly forty years ago. At that time, I was in my mid-twentiesandhadjustcompletedmyworkforthePh.D.degreeineconomicsattheJohnsHopkinsUniversity.AtHopkins,Ihadbeentrainedentirelyalongthelinesoftheneoclassicalsynthesisthat,atthattime,reignedsupremeinthebestU.S. universities. This approach to economic analysis rests on a positivisticepistemological foundation: theory serves as a source of empirically testablehypotheses and, in the event that the data do not refute the hypotheses, as aframework for understanding the empirical observations. This methodologicalunderstandingwasnotsomuchtaughtaspresumed,andstudentsabsorbeditbyosmosis from their teachers and from the articles and books their professorsassigned.

The arguments presented in this book rest explicitly on such an approach.Indeed,itsyoungauthorcarrieswaterforneoclassicaleconomicsproudly,withnosignsofanymisgivingabouttheapproachassuch,butonlycautionsaboutitsmisapplication or about unwarranted conclusions derived from it. Even at atenderage,Ihadlearnedtobecarefulaboutthedatausedinempiricaltestsandtotakecarenottoclaimtoomuchfortheconclusionsreachedinsuchanalysis.Yet,atthattime,Ientertainednodoubts—indeed,myteachershadnevergivenmeanyreasonfordoubt—aboutthecorrectnessofthiswayofdoingeconomicanalysis.

Hence, the book brimswith statements about theories fromwhich testablehypothesesmaybederivedandaboutthetestsconductedtodeterminewhetherthe data refute the hypotheses and therefore call into question the underlyingtheory,or“model.”Althoughthebookpresentshardlyanyformaleconometrics,much of its content represents my translation of formal econometric findingsinto language understandable by readers untrained in economic theory andstatisticalinference.

When the book was composed, the so-called New Economic History, or

cliometrics, was riding high among academic economic historians, and I wasproud to go forth as one of the young knights doing battle in the crusade toremake the study of economic history along more scientific lines—to makeeconomichistorynotthepoorstepchildofeconomics,asithadlongbeen,butafield of applied economics fully entitled to stand alongside other well-established fields, such as labor economics, public finance, and internationaltrade.Wecliometricians sought tocorrect themanyerrorscommittedover theyears by historians untrained in economics. Although, to be sure, many sucherrors cried out for correction, I later came to see in retrospect that we weremuch too full of ourselves and that we—certainly I—still had much to learnaboutmanythings.

Assoonas Ibeganmyacademiccareer, Istarted to learn these lessons. Inpart,thisself-educationtooktheformoflearninghowtoworkasamoreskillfulcraftsman in the cliometricworkshop.But in another partmy learning carriedmeona long journeyawayfrommy initial training inandcommitment to thepositivistic epistemological foundation of neoclassical economics. Indeed, Iwould eventually conclude that my initial acceptance of this approach was amistake, and Iwould come to see themethodological practice ofmainstream,neoclassical analysis not as a form of science, but as a form of scientism—amisapplication ofmethods suitable for studyingmaterial nature but unsuitablefor studying human action.My journey away from neoclassical epistemologybeganwithmyreadingofworksbyF.A.Hayek,whichinduecourseledmetoworks by Ludwig von Mises and other economists writing in the Austriantradition.Here I discovered an approach to economic analysis that I found farmoreconvincingthantheoneIhadfollowedintheearlyyearsofmycareer.

So,readingthroughmyTransformationoftheAmericanEconomyafterfortyyears, I have the eerie feeling that despite its familiarity, it was written bysomeoneelse.Inolongerstandbythebook’smethodologicalpronouncementsor bymuch ofwhat it represents as “modern economic theory.”Yet, I do notwant toapologize toomuch.Agreatdealof theeconomicanalysis still seemssound to me; after all, in the area known as applied microeconomics, theneoclassicals and the Austrians hold similar views in regard to their basicunderstanding of how many actions and events are interrelated. And even inregardtotheeconometricsonwhichIreliedforthefirstfifteenortwentyyearsofmycareer,Ihavecometobelievethatnotallofmywork(andothers’workalong similar lines) was for naught. I now believe, however, that inferentialstatistics—econometric “tests of hypotheses”—have no defensible place in

economicsortheotherhumansciences.However,ifoneviewstheeconometricfindingsnotasameansofmakinginferencesintestinghypotheses,butsimplyasdescriptivestatistics,onemaymakevaluableuseofsuchfindingsinwritingeconomichistory.Iurgethereadertounderstandthebook’spresentationinthislight.

ROBERTHIGGSAugust2011

PREFACE

This book offers an interpretation of American economic development in thehalfcenturyaftertheCivilWar.Itshypothesesaredrawnfrommoderneconomictheory,andtheevidencepresentedislargelystatistical;butthebookiswritteninplain English, and the reader needs no previous training in economics orstatistics to comprehend it.Chapter I furnishesabrief surveyof the analyticalframework;moredetailedtheoreticaldiscussionsappearatappropriateplacesinthe subsequent chapters. Included are many subjects that have just begun toreceive rigorous historical study—for example, health improvements, racialdiscrimination, invention, and urban growth—as well as some that arecustomarilytreatedinthetextbooks.Althoughpartsofthebookdonothingmorethan “translate” the recent historical research of economists into languagecomprehensible to the general reader, I have in several instances attempted topushoutthefrontiersofknowledgeandtoraisequestionsforfutureresearch.Ihopethereforethatthebookwillinterestmyfelloweconomichistoriansaswellasprovideausefulanalysisforstudentsandgeneralreaders.

Thecentralfeatureofthe1865–1914erainAmericaneconomichistorywaseconomicgrowth—arapidandsustainedriseinoutputpercapitathatconstitutedthereturnoninvestmentsinhealth,skills,andknowledgeaswellasinvestmentsinbuildings,machines,andinventories.Inextricablyrelatedtoeconomicgrowthwas the transformation of the economy’s structure—most importantly, therelativedeclineofagriculturaloutputandemploymentandtheconcomitantriseof urban manufacturing, trade, and service industries, often described as an“industrialrevolution.”Institutionsingeneral,andpropertyrights inparticular,were of critical importance in determining the rate of economic growth;conversely,growthgaverisetochangesininstitutions.ChaptersII–IVfocusongrowth,transformation,andinstitutionalchange.ChapterVdealswithquestionsofinequalityinthedistributionofincomeandwealth.

This small volume makes no pretense of comprehensiveness. Manytraditionalsubjectsdonotappearatall,andothersreceiveonlycursoryattention—treatment that tells the reader something about what I consider relativelyunimportant. Becausemymain interest is interpretation, I have included onlyenough detail to make the book self-contained. A rather lengthy bibliographygives the sources of more detailed description and analysis. I hope that thebook’sbrevitywillbeconsideredavirtuebut,likeanyshorttreatmentofabroadsubject, my comments tread a thin line between clarifying the issues andoversimplifying them. As a warning against overstepping this line, I haveoccasionallyemployedfootnotestoindicatethatmattersarenotassimpleasthetext might suggest and to refer the reader to a fuller treatment. To keep thenumberoffootnoteswithintolerablebounds.Ihaverefrainedfromdocumentingevidence available in theCensusBureau’swell-knowncompilation,HistoricalStatisticsoftheUnitedStates.

Any merits of the book are attributable to many friends who generouslyassisted me. I wish to pay tribute to my teachers at The Johns HopkinsUniversity—EdwinS.Mills,PeterNewman,JürgNiehans,andH.LoutsStealer—whobeganthearduoustaskofmakingmeaneconomist,andtomycolleaguesat theUniversityofWashington,whoarecontinuingthejob.AlsoIamdeeplyindebted to those who read the manuscript and commented on it: Ralph L,Andreano, Mary L. Eysenbach, Day1 Higgs, Edward F. Meeker, Morris D.Morris,NancyNeubert,DouglassC.North,NathanRosenberg,andDavidSisk.Withoutbelittlingtheothers,IespeciallythankProfessorNorth,forhisunfailingencouragement, and Professor Rosenberg, whose incisive and wide-rangingcomments contributed greatly toward improving themanuscript. Since I havestubbornlyignoredmuchoftheiradvice,noneofthepersonsnamedshouldbeheldresponsibleinanywayfortheformorcontentsofthebook.

ROBERTHIGGS

UniversityofWashington,1971

ACKNOWLEDGMENTS

Acknowledgment is due the publishers for their kind permission to printquotationsorreproduceillustrationsfromthefollowingworks:

AllanG.Bogue,MoneyatInterest:TheFarmMortgageontheMiddleBorder,copyright©1955.Ithaca,N.Y.:CornellUniversityPress.

AllanG,Bogue,FromPrairie toCornBell:FarmingontheIllinoisandIowaPrairies in theNineteenthCentury,copyright©1963.Chicago:UniversityofChicagoPress.

Alfred D. Chandler, Jr., Strategy and Structure: Chapters in the History of the Industrial Enterprise,copyright©1962.Cambridge,Mass.:MassachusettsInstituteofTechnologyPress.

StevenN.S.Cheung,“PrivatePropertyRightsandSharecropping,”JournalofPolilticalEconomy,LXXVI(November/December1968,copyright©1968.Chicago:UniversityofChicagoPress.

StevenN.S.Cheung, “TransactionCosts,RiskAversion, and theChoiceofContractualArrangements,”JournalofLawandEconomics,XII (April 1969), copyright©1969byTheUniversity ofChicagoLawSchool.Chicago:UniversityofChicagoPress.

Gilbert C. Fite; “Daydreams and Nightmares: The Late Nineteenth-Century Agricultural Frontier,”Agricultural History, XL (October 1966), copyright © 1966 by The Agricultural History Society.Berkeley:UniversityofCaliforniaPress.

RobertWilliam Fogel and Jack Rutner, “The Efficiency Effects of Federal Land Policy, 1850–1900: AReport of Some Provisional Findings,” University of Chicago Center for Mathematical Studies inBusinessandEconomics,Report7027(June1970).

James Willard Hurst, Law and the Conditions of Freedom in the Nineteenth-Century United States,copyright©1956byNorthwesternUniversity,Madison:UniversityofWisconsinPress.

EugeneM.Lerner,“SouthernOutputandAgriculturalIncome,1860–1880,”AgriculturalHistory,XXXIII(July1959).copyright©1959byTheAgriculturalHistorySociety.Berkeley:UniversityofCaliforniaPress.

W.ArthurLewis,TheTheoryofEconomicGrowth,copyright©1955.London:GeorgeAllenandUnwin,Ltd.

RichardG.LipsyandPeterO.Steiner,Economics,copyright©1966.NewYork;HarperandRow,Inc.

C.O.Paullin,inJohnK.Wright,Ed.,AtlasoftheHistoricalGeographyoftheUnitedStates,copyright©1932.Washington,D.C.:CarnegieInstitutionofWashington.

NathanRosenberg,“NeglectedDimensions in theAnalysisofEconomicChange,”Bulletinof theOxfordUniversity InstituteofEconomicsandStatistics,XXVI (February1964), copyright©1964.Oxford;BasilBlackwellandMott,Ltd.

CONTENTS

ListofTables

ListofFigures

Introduction:ProgressandPoverty

I.MakingSenseoftheFacts

HistoryandTheoryMarketOrganization

TheEconomicsofInformationInvestmentandEconomicGrowth

Transformation

II.EconomicGrowthandTransformation

OutputandPriceTrendsPopulationGrowth

TheSourcesofGreaterProductivityMainPatternsofTransformation

ADigression:HowGrowthBegan

III.TheRiseofCities

TheUrbanTransformation

TheEconomicsofImprovingUrbanHealthUrbanizationandInvention

CityVersusCountry:TheNatureoftheChoice

IV.TheUpsandDownsoftheFarmer

AgriculturalDevelopmentTheFarmer’sComplaints

TheLearningProcessinAgriculture

V.GrowthandInequality

RegionalDisparitiesinDevelopmentImmigrantsand“Exploitation”

InequalitiesBetweenWhitesandBlacksWasProgressWorthItsPrice?

Appendix:TheSourcesofEconomicGrowth

Bibliography

Index

LISTOFTABLES

2.1RealGrossNationalProductperCapitaandImplicitPriceIndex

2.2PopulationandLaborForce

2.3MaterialCapitalStock

2.4MilesofMainRailroadTrack

2.5CostsofEducation

2.6PercentageDistributionofCommodityOutput

2.7PercentageDistributionofLaborForce

2.8PercentageRegionalDistributionofPopulation

3.1PercentageofTotalPopulationUrbanandNumberofCities

3.2PopulationsofElevenLargeCities,1860and1910

3.3Deathsper100,000PopulationinNewYork,Boston,Philadelphia,andNewOrleans

3.4EffectofFiltrationonDeathRatesatAlbany,N.Y.,andaComparisonwithTroy,N.Y.,WheretheWaterWasNotFiltered

3.5EstimatedLevelsofPatentedInventionsper10,000Population,ConnecticutLocations,1870–1910

4.1GrossandNetFarmOutput(Millionsof1929Dollars)

4.2MaterialCapitalStocksinAgriculture(Millionsof1929Dollars)

4.3PercentageDistributionofFarmsbyClassofTenure,1890

4.4AverageAnnualPercentageCapitalGainonFarms

5.1RegionalPersonalIncomeperCapitaRelativetotheNationalAverage(NationalAverage=100)

5.2CharacteristicsofAdult,Male,Foreign-BornWorkersinMiningandManufacturingOccupations,1909

5.3Earnings,Literacy,andAgeofBlacksRelativetoWhites,AdultMaleEmployees,1909

5.4EstimatedPercentageofLaborForceUnemployedinSelectedDepressionYears

LISTOFFIGURES

2.1ArrivalsMinusDepartures,AllAlienPassengers

2.2SpatialDistributionofPopulation,1870

2.3SpatialDistributionofPopulation,1880

2.4SpatialDistributionofPopulation,1890

2.5SpatialDistributionofPopulation,1900

2.6SpatialDistributionofPopulation,1910

2.7SteelProduction

3.1PercentageUrbanin1870,ByStates

3.2PercentageUrbanin1910,ByStates

4.1SpatialDistributionofCottonProduction,1899

4.2SpatialDistributionofWheatProduction,1899

4.3SpatialDistributionofCornProduction,1899

4.4SpatialDistributionofHogs,1900

4.5SpatialDistributionofCattle,1900

4.6GrossFarmIncomeandPhysicalCapitalperPersonEngagedinAgriculture,TenFarmingRegions,1910

4.7IndexesofFarmPrice/RailroadRateRatios

4.8RelationBetweenPhysicalCapitalAccumulationandGrowthofIncomeinAgriculture,TenFarmingRegions,1870–1910

5.1RelationBetweenIncomeandInvestmentinFormalEducation,ByStates,

1880

5.2RelationBetweenAbilitytoSpeakEnglishandLengthofResidenceinU.S.,31Non-English-SpeakingEthnicGroups,1909

[O]bservations...arealwaysinterpretationsofthefactsobserved...[and]theyareinterpretationsinthelightoftheories.

KARLR.POPPER

INTRODUCTION:PROGRESSANDPOVERTY

Somegetaninfinitelybetterandeasierliving,butothersfindithardtogetalivingatall.

HENRYGEORGE

Building, wrecking, and rebuilding, with immense energy and boundlessoptimism,Americansinthehalfcenturyafter1865outstrippedallrivalsintheracetocreatewealth.Butprogresshaditsprice.Thecreationofamodern,ever-expandingeconomydisruptedandthendestroyedtheoldorderineconomiclife,and casualties lay strewn along the road of progress. No one remainedunaffected, nor did any industry or region escape the vast transformation thatswept the nation.Men’s reactions varied as widely as the events themselves.Some,theirownfortunessweptalongwiththegeneralupsurge,rejoicedintheeconomy’s development, while others, caught in the backwaters of progress,lamentedthelossesanddisappointmentsthatunanticipatedchangeshadimposedonthem.Byexaminingtheeffectsofthisgreattransformationonparticularmen,industries, and regions,we can begin to grasp their extent, to appreciate theirbewilderingvariety.Theseintroductorypagespresentafewillustrations.

Tomillions of downtroddenEuropeans,Americawas the land of promise.Seekingthatpromise,WilliamCarnegie,ahandweaverdisplacedbymachinery,left Scotland with his family in 1848 for the United States. Like many otherimmigrants,however,hefoundthepromise illusory,andhissonAndrew,aged13,went towork in a textilemill at $1.20 aweek to help support the family.ManyyearslaterAndrewrecalled:“Itwasahardlife.InthewinterfatherandIhadtoriseandbreakfastinthedarkness,reachthefactorybeforeitwasdaylight,and,withashortintervalforlunch,worktillafterdark.Thehourshungheavilyupon me and in the work itself I took no pleasure.” During the years thatfollowed, as amessenger boy, a telegraph operator, a railroad superintendent,and finally an independent businessman of diversified interests, he advanceduntilintheearly1870’s,alreadymoderatelywealthy,hemadeafatefuldecision:“Iwouldconcentrateonthemanufactureofironandsteelandbemasterinthat.”

Thedecisionprovedwise.Forthenext30yearstheriseofCarnegieparalleledthespectacularriseoftheAmericanironandsteelindustry.Hisfortunemountedsteadily, and in 1901 he finally sold the business for over $225 million and“resolvedtostopaccumulatingandbegintheinfinitelymoreseriousanddifficulttaskofwisedistribution.”Oneof theworld’s richestmen,hespent the last18years of his life giving away his wealth to promote various humanitarianorganizations,manyofhisowncreation.ItseemedthatAmericawas,afterall,reallythelandofpromise.1

WhileCarnegieconcentratedhisenergiesonironandsteel,otherssupposedthatafarmintheWestofferedanopportunityformaterialsuccess.Inignoranceof the true risks, many committed themselves to failure. Writing to the stategovernor in 1874, a Minnesota girl, Jennie Flint, described her family’scondition:

Wehavenomoneynownothingtoselltogetanymoreclotheswithasthegrasshoppersdestroyedallofourcropswhatfewwehadforwehavenotmuchlandbrokeyet;aswehavenoteamofourownwehavetohireoneinordertogetitworkedwhatlittlewehavetosow,soyouseeitisratherhardonustohiresomuchandgetalong.Wemanagedtoraiseafewpotatoesandsomecornandalittlebuckwheatandthatisallwehavetodependupon.Weareverybadoffforbeddingnothavingbuttwoquiltsandtwosheetsinthehouseandhavetomakethemservetwobeds.Wehavetouseourclothing,thatwewear,onthebedstokeepusfromsufferingwiththecoldandthenit[is]mostimpossibletokeepwarmforourhouseissoopen....Wehavenotgotourhouseplasteredasyetonlyontheoutsidewithmudcouldnotget any lime todo itwith forwehadnomoneynor couldnotget any, almostperishheresometimeswiththecold... .Nowifyouwillbesokindastosendussomebeddingandclothesandyarntoknitussomestockingswithwehavenowoolnoryarn.Orsendussomemoneysowecangetthemourselves,wewouldbethankful....

Twentyyearslater,aKansashousewife,Mrs.SusanOrcutt,wrotetoherstate’sgovernor:

Itakemypeninhandtoletyouknowthatwearestarvingtodeath.ItisprettyhardtodowithoutanythingtoeathereinthisGodforsakencountry....Myhusbandwentawaytofindworkandcamehome last night and toldme thatwewould have to starve. . . . It is pretty hard for awoman to dowithoutanything toeatwhenshedoesn’tknowwhatminute shewillbeconfined tobed. If Iwas inIowaIwouldbealllight....Ihaven’thadnothingtoeattodayanditis3o’clock.2

Noteveryone,itseems,sharedequallyinthefruitsofprogress.While the fortunesof individualsdiffereddramatically, thedevelopmentof

different industries varied no less. Some expanded by leaps and bounds, steelbeingperhapsthebestexample.In1886aleadingfinancialnewspaperreported:

New steel plants are being put up in all sections of the country. In the Bulletin of the SteelAssociationforFebruary10,1886,wefindnolessthan13worksforthemanufactureofBessemersteel

thathaveeitherrecentlybeencompletedorareinprocessofconstructionandexpecttobeinoperationsome time in the present year. These new works are going up in a great many different States—Pennsylvania,NewYork,NewJersey,Ohio,Illinois,WestVirginia—anditistrue,astheBulletinsays,thattheBessemersteelindustryisnolongerconfinedtoafewestablishmentslocatedinthreeorfourStates.3

Anddespitesuchenormousadditionstosupply,thedemandforsteelexpandedso rapidly that entrepreneurial returns remained high, making millionaires ofCarnegieandmanyothersteelproducers.

Not every industry yielded such returns, however, and agriculture inparticularseemedunabletokeeppace.Writingin1891,RodneyWelchgaveanaccountwithwhichmanyfarmerssurelyagreed:

Idoubtiffarmersareanybettercontentedwiththeirlot,oriftheyobtainmoreenjoymentfromlife,thantheydidinoldtimes.Ialsoquestioniftheyaremoreprosperous.Theyaregenerallyinaconditionofunrest, ifnotofdiscontent.Their socialconditionhasnot improved,ashas thatofmechanicsandtraders.Mostofthemareanxioustoleavethefarmforthestore,theshop,themine,orthelocomotive....FarmershavelongbeenlosingtheirplaceandinfluenceinthecouncilsoftheStateandnation.Ourlater Congresses have not contained enough farmers from the northern States to constitute thecommitteesonagriculture.Ournationallaw-makershaveknownsolittleaboutwhatwouldpromotetheprosperityoffarmersthat theyhavefavoredmeasuresthathavegreatlyinjuredagriculture. . . .[T]heprice of nearly every farm product has declined sometimes below the cost of the labor required toproduceit.4

Sharply contrasting changes not only occurred among individuals andindustries but had a geographic dimension as well; whole regions developedquitedifferently.In1869,thehamletofWichita,Kansas,boastedfourshops,ablacksmithy, a saddlery, a saloon, and 20 families betting on the future of thelittleplace.Itprovedagoodbet.By1880Wichita’spopulationhadexpandedto5000,by1890to24,000.Andsuchgrowthoccurredcommonlyinthatboomingpart of the country. During the same period, for example, Omaha grew from16,000 to149,000,KansasCity from35,000 to176,000,andhundredsofnewtownssprangupwestoftheMississippi.5

Elsewherethescenedifferedmarkedly.OnatripthroughsouthernVermontinthe1880’sCharlesNottobserved:

Midway betweenWilliamstown and Brattleboro . . . I saw on the summit of a hill against theeveningskywhatseemedalargecathedral.Drivingthither,Ifoundahuge,old-time,two-storychurch,a large academy (which had blended in the distancewith the church), a villagewith a broad street,perhaps 150 feet in width, I drove on and found that the church was abandoned, the academydismantled, thevillagedeserted.Thefarmerwhoownedthefarmonthenorthof thevillagelivedononesideofthebroadstreet,andhewhoownedthefarmonthesouthlivedontheother,andtheyweretheonlyinhabitants.Alloftheothershadgone—tothemanufacturingvillages,tothegreatcities,tothe

West.Herehadbeenindustry,education,religion,comfort,andcontentment,butthereremainedonlyadrearsolitudeofforsakenhomes.6

And the story could have been repeated, with minor variations, for scores ofothervillagesacrossnorthernNewEngland.7

We could continue to pile fact upon fact, but such efforts alone wouldcertainlygenerateasmuchconfusionasunderstanding.Howcanweseeallthesefactsaspartsofanoverallpatternandrelatethemtooneanotherinsequencesofcauseandeffect?Inshort,howcanweunderstandthem?

1AndrewCarnegie,Autobiography of Andrew Carnegie (Boston: Houghton-Mifflin, 1920). pp. 34,

177,255.2Both, lettersascited inGilbertC.Fite,“DaydreamsandNightmares:TheLateNineteenth-Century

AgriculturalFrontier,”AgriculturalHistory,XL(Oct.1966),289,292.3CommercialandFinancialChronicle,XLII(Feb.13,1886),199.4RodneyWelch,“TheFarmer’sChangedCondition,”TheForum,X(1891),695,699.5 Constance McLaughlin Green, American Cities in the Growth of the Nation (New York: Harper

ColophonBooks,1965),pp.148-66;RobertHiggs,“TheGrowthofCitiesinaMidwesternRegion,1870–1900,”JournalofRegionalScience,IX(Dec.1969),369–70.

6CharlesC.Nott,“AGoodFarmforNothing,”TheNation,XLIX(Nov.21,1889),406.7HaroldFisherWilson,TheHillCountryofNorthernNewEngland:ItsSocialandEconomicHistory,

1790–1930(NewYork:ColumbiaUniversity,1936),pp.97–115.

I

MAKINGSENSEOFTHEFACTS

[T]he simplifications of an analyticalmethod furnish a powerful tool for understanding some of thefundamental controlling interrelationships in historical change. That such a techniquemakes explicitthosedaydreamsonwhichourjudgmentofwhatisimportantinhistoryare,alwayshavebeen,andmustbebased isnodoubtanembarrassment;but, to thosewhohavestomachfor thissortofgame, itcanbecometheroadtoawiderandtruerunderstanding.

WILLIAMN.PARKER

HISTORYANDTHEORY

Thateconomicdevelopmentshouldbringenormouswealthandsuccesstosomemenbutgrindingpovertyandfailuretoothers,thattheunprecedentedexpansionofsomeindustriesshouldproceedsimultaneouslywiththerapiddeteriorationofothers, that towns should spring up overnight in one region while the peopleabandon their homes in another—surely all these events seem contradictorywithin the same nation. Yet these apparent contradictions are prominent factsabout thepost-CivilWar era inAmerica.1Clearly the factswill not speak forthemselves;tounderstandthem,wemustcombinefactswiththeory.

A theory is a logically consistent set of assumptions and implications. Itprovidesameansofrelatingfactstooneanother,oforganizingandinterpretingthemsothattheymakesense.Toavoidbecomingentangledinafutileattempttodescriberealityinallitsdetailandcomplexity,theassumptionsstateonlywhatseemsespeciallyrelevanttothequestion,ignoringeverythingelse.Fromthesetofassumptions,wecanlogicallydeduceasetofimplicationsthatconstitutethetheory’spredictionsorhypotheses.Inatest,thefactsmayormaynotconformtoa hypothesis. If they do, then the theory provides a means of understanding

them;iftheydonot,thenthetheory’sassumptionsmustberejectedormodified.To be of any use, a theory must have hypotheses that could conceivably berefutedby the facts, for otherwisewe cannot test it.Of course, quite differenttheories may be consistent with certain facts. To determine which of thecompeting theories is the most useful, we must consider questions for whichtheypredictdifferently.2

Tousetheoriesininterpretinghistoryisnonovelty.Indeed,anyaccountthatgoesbeyondmeredescriptiontoasearchforcausesmustusesometheory.Buttypically it is implicit, and the readermust identify it by reading between thelines. Naturally this game of theoretical hide-and-seek gives rise tomisunderstandings,sincethetheoriesoftheauthorandthoseofhisreadersoftenfail to correspond.Moreover,when the theory is not specified, it is frequentlyunclearwhetherthequestionatissueisreallyatestablehypothesisandwhetherthe evidence considered is appropriate. To avoid such problems, this chaptermakes explicit the theoretical foundation on which the analysis of this bookrests. It is hardly surprising that economists have devised the most usefultheoriesforinterpretingeconomichistory.

MARKETORGANIZATION

In relation to the desire for them, economic goods—both commodities andservices—arealwaysscarce.Resourcesbeinglimited,itisimpossibletosatisfyallwantssimultaneously,andpeoplemustchooseamongthealternativesopentothem. Should more houses be built? If so, how many, and where?Who willoccupy them?Bywhatmethods should they be constructed?Millions of suchunavoidable choices face every society every day, and the way we make thechoicesdeterminestheallocationofscarceresourcesamongalternativeuses.If,forexample,wecommitresourcestohousingconstruction,thenwenecessarilyforego their use elsewhere, and the most highly valued alternatives foregoneconstitute the true cost—what economists call the “opportunity cost”—of thehousing.

Throughoutthepost-CivilWarerainAmericafreeindividualsactingwithinmarkets made most of these choices.3 No one planned or directed theorganizationofeconomiclifeinanyformal,overallway.Individualsthemselvesdecidedwhat, howmuch,where,when, andhow toproduce.Yet even thougheachpersonpursuedhisowndesigns,theoverallresultwasnotchaotic;instead,

itwasorderlyandinmanywayspredictable.Privateproperty rightsare the foundationof themarket systemof resource

allocation.These rightspermit an individual toexcludeothers from theuseofhis property and to transfer this exclusive ability to others on terms that aremutuallyagreeable.Inamarketeconomy,peopleoftenexchangeonlytherightsovertheuseofproperty,notthepropertyitself.Secureandwell-definedprivatepropertyrightspermitindividualstotransactexchangeswiththeexpectationthatagreementsreachedbymutualconsentofthecontractingpartieswillbebinding.Without this security a market economy cannot function.Within a system ofprivatepropertyrights, individualswhoownthemeansofproductionmaysellthemor use themas they see fit; similarly, people are free to dispose of theirincomes as theyplease. Fortunately, in such a system itwill usually be in theinterestof individuals toact inaway that isalsosociallydesirable,because ifmanypeoplewantmoreofaparticulargood,theiradditionalexpendituresforitwillmakeitsproductionmoreremunerative,enticingself-interestedproducerstoprovidemoreofit.Theseproducers,inturn,willbidupthepricesofresourcestoattractthemawayfromtheirpresentemploymentandintomorevaluableuses.

Relativepricesplayacrucialroleinthemarketsystem,theirfunctionbeingto summarize in a form that is immediately meaningful to consumers andproducers amass of information concerning the relative scarcity of resources,the relative efficiency of competing methods of production, and the relativeurgency of different desires. Consumers tend to buymore of goods that havebecomerelativelycheaper:workerstendtomovetojobswherewagerateshavebecomerelativelyhigher;andproducerstendtomovetoindustriesorlocationswhere rates of return have become relatively higher. Even in the absence ofconscious direction, the actions of individuals pursuing their own self-interestresultinanallocationofproducers,workers,andotherresourcesthatinsuresthatthe goods society wants most urgently—as expressed by freely madeexpenditures—will appear on the market. Similarly, because producers canincrease their returns by reducing their costs, theywill seek to combine theirresourcesinthemostefficientway,whichbenefitssocietybymakingavailablethemostgoodsobtainablefromthelimitedresourcesatitsdisposal.

Themarketsystemoperatessuccessfullyonlywhenconsumers,workers,andproducers perceive and respond to the signals of changing relative prices. Ifmovementsintoparticularindustriesorlocationsareobstructed—inotherwords,ifcompetitionislessthanperfect—resourceswillbemisallocated.Societythenloses,becauseitobtainsfewergoodsthanitcouldunderaperfectlycompetitive

allocationof its resources.Themonopolizationofmarkets is thereforesociallyundesirable.Toperformwell, themarket systemdepends cruciallyon the freecompetitionofconsumers,workers,andproducers.

The American economy in the post-Civil War era was not perfectlycompetitive, which is hardly surprising, since perfect competition is only a“model” that isneverobserved in the realworld.Butdespitemuch talk about“monopolies”and“the riseof trusts,” thedegree towhich theactualeconomydepartedfromthetheoreticalconstructswasnotgreat,andthereforewecanstillinterpret the economic history of this period by applying the theory ofcompetitive markets. Indeed, no alternative interpretation yields such anextensivearrayofhypothesesconsistentwiththefacts.

THEECONOMICSOFINFORMATION

The preceding discussion of the market system implicitly assumed that allpersons possess complete information about the economy. In fact, informationitselfisascarcegood.Itisthereforenotfree,andindividualsmusteconomizeintheir search for it; everyonemust necessarily remain ignorant to some extent.Recognizingtheeconomicbasisofignorance,however,permitsustoexplainawide range of historical events for which the simple theory of competitivemarkets cannot account and at the same time to explain the emergence andgrowth of a variety of businesses whose main purpose is the creation ordisseminationofinformation.

An example will help to present the basic ideas of the economics ofinformation. Consider a man seeking a job. Other things being the same, heprefers the jobwith thehighestwagerate;buthisproblemis tofindit.Wagesdiffer somewhat from place to place, and changes occur from time to time.(Wagedispersionexistsbecauseittypicallydoesnotpayanemployertofindoutexactlywhatwage rate each of his competitors pays for each grade of labor.)Suppose the job seeker inquires at the nearest factory and finds that he couldobtain a job there at $2.00 per hour. Would it pay to look any further? Bysearching for alternative jobs he incurs costs in two ways: first, he loses thewages he could be earning had he accepted the first job; second, he mustsacrificeleisureandincurdirectcostsintransportinghimselfaboutinsearchofalternatives.Butpotentialgainsexist,too.Hemaydiscoverthatthenextfactorypays$2.25perhour.Ifhebelievesthatwagesintheneighborhoodtypicallyvarywidely,hewillprobablycontinuehissearch.Also,ifmanyfactoriesarelocated

nearby,hewillbemorelikelytocontinuethesearchthanifhehadtogotothenexttowntofindanotheropportunity.Hewillarriveatadecisionbybalancingthe expected gains from seeking additional information against the expectedcosts of acquiring it. If expected costs exceed expected gains he will stopsearchingandseizeonthebestopportunityfoundsofar;iftheconverseistruehewillcontinuesearching.

If many workers are seeking jobs, a new business is likely to appear.Someonewill probably establish an employment agency, keeping informed ofjob openings, wage rates, working conditions, and skill requirements, andproviding this information to job seekers for a price. Since this agency canprobablycollect informationmoreeffectively than theaverageworkerbecauseof its established contacts and accumulated experience, and because oncecollected the information can be provided to additional persons at very smallcost, the employment agency represents a means of greatly enhancing theefficiency of the labor market. Workers need not continue searching forinformation from place to place. By eliminating repetitious inquiries, theemployment agency greatly reduces the quantity of resources used in searchactivities.Theaveragelengthoftimeeachworkerisunemployedwhileseekinganewjobwillprobablyfall.Employersalsogain,becausetheycannowobtainqualifiednewemployeesmorereadilybyadvertisingwiththeagency.Workersgain, employers gain, and the owner of the employment agency obtains anincomethatcompensateshimforhisefforts.

Wecaneasilygeneralizethisexample.Whetherthequestionistheworker’ssearch for thehighest-paying job, theconsumer’s search for the lowest-priced,highest-qualityproducts,orthebusinessman’ssearchforthemostremunerativeinvestmentopportunities, the sameprinciples apply. Ingeneral, thegreater thevalues involved, thegreaterare thepotentialgains,andtherefore thegreater istheamountofsearch.Ontheotherhand,thelargerthemarketgeographicallyorthe higher the costs of transportation and communication, the greater are thecosts of search, and therefore the amount of search will be correspondinglyreduced. However, the larger the market, not only geographically but also intermsofdollarvolumeandthenumberoftraders,themorelikelyinformation-supplying businesses such as trade journals or brokers are to appear. (We sayonly “more likely” because discovering the opportunities for obtaining anincomebysupplyinginformationisalsoacostlyendeavor,anditwouldnotpayanyone to find them all.) In this way business organization adapts to thechanging size anddemandpatternsof themarket.Bypursuinggains from the

provisionof information,businessmen—withoutnecessarilyknowingorcaringabouttheimplicationsoftheirefforts—helpthewholemarketsystemtooperatemoreefficiently.

INVESTMENTANDECONOMICGROWTH

In the long runmen can consume nomore than they produce. Themaximumpossible output of goods depends on the number of availableworkers and thesize of the capital stock, the producedmeans of production.Of course, if thelabor force grows, more can be produced: and if the capital stock growsproportionatelywiththelaborforce,stillmorecanbeproduced.Buteventhen,wecannotexpecttheamountofoutputperworkertoincreasemuch.Inalargereconomymencanspecializetoagreaterdegree,andthisspecializationcanraisethe average output per worker. It is difficult, however, to imagine suchimprovementscontinuingforlongsolelyasaresultoftheincreasingscaleoftheeconomy.

Economicgrowthmeansacontinuingincreaseinoutputperpersonsustainedover the long run, at least over several decades. Such a productivity increasepermits,on theaverage, rising levelsofmaterialwell-being.Economicgrowthdoes not just happen, however. Its gains are the product of deliberate humanefforts.

Economic growth results from the accumulation of capital through acontinuing series of investments. An increase in the amount of capital theaverage worker has to assist him in production enables him to producemoreoutput. The relevant stock of capital embraces not only buildings,machinery,equipment, inventories, and improved land, but also the acquired health andskills of the labor force;most important of all, it includes the technology, thebodyofknowledgerelatinginputsofresourcestooutputsofgoods.4Itisuseful,then, to distinguish at least three kinds of capital—material, human, andintellectual. In the long run it is impossible tobuilduponepartof the capitalstockwithoutalsobuildinguptheothers.TheCommissionerofPatentsin1900clearly recognized this interdependence: “To employ these devices [Americaninventions] to the best advantage requires the intelligence of the Americanworkmen, and the result is due to the combination of witty inventions andthinking men. Witless men behind witty machines would be of no use.”5Understanding these interdependencies is at the heart of understanding the

process of economic growth, but unfortunately scholars have devoted littleattentiontothem.Tobuildfactoriesiscommonlyrecognizedasaninvestment,but to obtain education, to purchase improved health, to seek new usefulknowledge—thesetooareinvestments.Andtherateofreturnoninvestmentinaparticularkindofcapitaldependsnotonlyonthesizeoftheexistingstockbutalsoontheavailablestocksofcomplementarykindsofcapital.

Information flows are intimately involved in these interdependentinvestments. The accumulation of intellectual capital, sometimes calledtechnological progress, is simply the augmentation of the stock of usefulinformation about production processes. Investments in the improvement ofhealth often rely on new knowledge of public hygiene and disease or on thewiderapplicationofoldknowledge.Andeducation,ofcourse, isnothingmorethan the dissemination of information. Moreover, even material capitalaccumulationdoesnotstandcompletelyoutsidethisconceptualframework,fornew ideas are often useful only when embodied in new capital goods.Investmentinmaterialcapitalthenbecomesthevehiclefortheimplementationof technological advance. In an important sense, the economics of risingproductivityandtheeconomicsofinformationareinseparable.

Investors generally undertake a project only when the expected returnsexceed those obtainable from employing the available resources in their bestalternative use. No one would quarrel with this proposition as applied toinvestmentsinmaterialcapital,butbecausewehavenottraditionallyconsideredinventionandeducationasinvestments,itmaybeusefultoseesomeexamples.

Consider a hypothetical individual who is contemplating the developmentand production of a new tool, such as a machine for making nails. Beforecommitting himself to such a project, the inventor will have to form severalexpectations. First, he needs to know the probable costs of developing andproducing suchamachine.Thesecosts includenotonly themoneyoutlayshemustmakebutalsothevalueofthebestalternativeuseofhistimeandtalentheforegoes by working on the project, both items together comprising his full“opportunity cost.” Second, he must estimate, for each year in which hismachinewillbepurchased, thenumberhecansellat thepricehewillcharge,which tells him the stream of revenues he can expect from future sales. Bysubtractingtheprobablecostsofproductionfromtheseyearlyrevenues,hefindstheexpectednetrevenuestream.Hecanthencalculatethepresentvalueofthefuture net revenues.6 If the present value of the expected net revenue streamexceeds the development costs, the inventor considers the projectworthwhile

andundertakesit.Ifatonetimetheprojectisnotworthwhilebutlaterbecomesso,itisbecausethedevelopmentcostortherateofreturnonthebestalternativeopportunityhasfallen,orbecausetheexpectednetrevenuestreamhasincreased.If, for example, the construction industry grows and the demand for nailsincreases,thenthemarketfornail-makingmachinerywillbeenlarged,andthisaugmentationof the expectednet revenue streammaymake the projectworthwhile.

Suppose the inventor undertakes todevelop and sell hismachinebut findsthatothersthenimitateitand“rob”himofsales.Suchcopyingmaywellturnhisexpectedgains intoactual losses. If,however, some legal institution—apatentsystem—insures that he can capture sufficient gains fromhis idea, the risk ofsuch “robbery” is reduced; he will therefore be more likely to undertake theproject.Thepatentgrantgivestheinventoratemporarymonopolyovertheuseof his idea in exchange for its public disclosure. In general, we suppose thatmonopolies obstruct economic growth, but here the gains that accrue fromtechnologicalprogresscanmorethancompensateforthetemporarywithholdingof information. While the inventor himself receives the encouragement ofcapturable gains, the overall result can be a gain for society. As theCommissioner of Patents saw very clearly in 1891, “The patent law does notexistforthebenefitofinventors.Itexistsforthebenefitofthepublic.”7

Our hypothetical case suggests some general propositions. Whether aninventionwillbeproduceddependson the relationbetween twovariables: theexpected revenues it will generate, and the expected costs of developing it.Expectedrevenuesareoftencloselyrelatedtothegrowthofthemarket—thatis,to the expansion of population or income per capita and to the reduction oftransportationcosts.Expecteddevelopmentcostsmaydeclinewiththediscoveryofnewscientificknowledgeorwiththeappearanceofrelatedinventions.Butnomatterhowpromisinganinventionmayappearinasocialsense,fewinventorswill undertake a project unless they expect to reap sufficient gains from theirideas. Private property rights must be defined and enforced for intellectualproperty aswell as formaterial property ifmuch technological progress is tooccurinamarketeconomy.

Considernowayoungmancontemplatingthechoiceofanoccupationinthe1840’s.His interests incline him towardwork in designingmachinery, towardwhatwenowcallmechanicalengineering.Hesoonrecognizes,however,thatitwill not be in his best interests to undertake the several years of specializededucationnecessarytoprepareforsuchwork,becauseveryfewjobsofthissort

areavailable.Most firmsare small anduse littlemachinery;what theydousethey generally design, install, and service themselves as the need arises. Thedemand for machinery is too small to support a machinery industry wheremechanicalengineerswouldbedemanded ingreaternumbers.Theyoungmanmay well decide to become a carpenter, which requires a shorter and lessexpensiveperiodoftrainingandoffersabundantopportunitiesforemployment.

Ifweshiftourattention forward to the1870’sandconsider theoccupationselectedbythecarpenter’sson,whohasinterestslikehisfather’s,thechoiceofoccupationmaywellbedifferent.Bythistimetherearemanymorefirms,eachone on the average using more machinery. Consequently the demand formachineryissubstantiallylarger,andaseparateindustrysupplyingmachineryisbeginningtoemerge.Asaresultthedemandformechanicalengineersisgreater,and it may now pay to undertake the education necessary to prepare for thisoccupation.Thesonbecomesamechanicalengineer.Heismoreskilledthanhisfather,andhisskillsarereflectedinhishigherrealearnings.

This example can be generalized to explain why the entire labor forcebecomesmoreskilledinagrowingeconomy.Thelargerthemarket,thegreateristhenumberofhighlyskilled,specializedjobsthatthemarketwillsupport.Themore potential jobs, the greater is the incentive for workers to invest inbecomingskilledspecialists.Inprinciple,thepersonconsideringaninvestmentinacquiringskillswouldcalculatethepresentvalueoftheexpectednetrevenuestreamassociatedwithhavingsuchskillsandcomparethatwiththeopportunitycostof the training.As in thecaseofothereconomicdecisions, itneednotbetruethatindividualsactuallymakesuchelaboratecalculations;eventhoughtheyreachtheirdecisionsbyconsideringtheiralternativesonlyinarough-and-readyfashion,stilltheygenerallyactasiftheyhadperformedsuchcalculations.Andevenifinitialdecisionswererandomlymade,onlythe“correct”oneswouldberewarded in themarket. Observation of such accidental successes would thenencourage subsequent decision makers to move in the most rewardingdirection.8

TRANSFORMATION

Asincomesrise,thedemandforsomegoodsgrowsevenmorerapidly,whilethedemandforothergoodshardly increasesatall.Theamountspenton food, forexample,growsrelativelyslowerthanincomes,andthereforeconsumersspenda

progressivelysmallerproportionoftheirincomesonfood.Forothergoods,likepersonaltransportationorrecreation,expendituresgrowfasterthanincome,andsuchgoodscometooccupyalargerpartofconsumers’budgets.Becauseofsuchchangingdemandpatterns, relativepricesarealteredas incomesgrow,and therateofreturnon theproductionofsomegoods isenhancedwhile thatofothergoodsdeteriorates.Thesechangesinducewealth-seekingbusinessmentoexpandtheproductionofgoodsforwhich thedemand isgrowingmost rapidly,and intheprocesstheybidupthepricesofresourcestoattractthemintotheexpandingindustries. The upshot of these actions is a reallocation of resources amongindustriesandachangeinthecompositionoftheeconomy’stotaloutput.Inthisway resources have shifted out of agriculture and into manufacturing,transportation,andservicesduringthepastcenturyandahalf.

Similar reallocations of resources occur because productivity—output perunitof input—typicallygrowsatdifferent ratesamong industries,because, forexample,thepaceoftechnologicalprogressisgreaterinsomeindustriesthaninothers.Gainsinproductivityreducethecostsofproduction,whichincreasestherateof return to entrepreneurs.Greater returns induceother producers to enterthe industry, and this entry—alongwith theexpansionof existingproducers—expands supply, driving prices down and attracting more buyers. Eventually,excessiveentrepreneurialreturnsareeliminatedaspricesfall,andnewentryintothe industry ceases; but in theprocess a redistributionofoutput and resourcesamong industries occurs. For example, in steel making, where productivityadvancedveryrapidlyduringthepost-CivilWarera,outputalsoexpandedmorerapidly than in most other industries, and the steel industry grew from an“infant”intooneofthenation’slargest.

Finally,becauseofdiscovery,depletion,accumulation,ormigration,changesoccur over time in the resources—both human and nonhuman—available inparticularplaces.Thesechangesinresourceendowmentaffecttheratesofreturnon different economic activities, inducing a reallocation of enterprises amongregions.WhenOhiowasfirstsettled,forexample, itseconomicactivitieswereprimarily agricultural, but by 1914 the state was, by comparison with otherstates,heavilyengagedinmanufacturing.ThischangeoccurredbecauseskilledworkersmigratedtoOhioandbecauseentrepreneursaccumulatedmuchmaterialcapitalthereduringthenineteenthcentury.Withitsresourceendowmentin1914thestatewasbest suited fornonagriculturalactivities, and farminghad largelyshifted to states farther west, where the resource endowment was relativelyfavorabletoagriculture.

In sum,we can identify at least three important concomitants of economicgrowth:changingpatternsofdemand;differingratesofproductivitygainamongindustries; and changing resource endowments among regions. Among theimportant transformations that these forces produce in amarket economy are:changes in the composition of the economy’s total output; changes in thedistribution of productive resources, includingworkers, among industries; andregional shifts in production and employment. (Another important aspect oftransformation,urbanization,isdiscussedinsomedetailinChapterIII.)

Noteveryonewelcomesthesechanges,andsomepeopleactivelyresistthem.New ideas, new skills, and new machinery add to the economy’s averageproductivity,buttheyalsogiverisetoadifferentdistributionofthetotalproduct.Those committed to old skills or obsolete machinery, employed in decliningindustries,or located inareaswhere importantnaturalresourcesareexhausted,often suffer. Although changes in the relative income and wealth of differentgroups are inherent in the process of economic growth, those who suffer therelative(andsometimesabsolute)losseshaverarelyperceivedthetruesourceoftheirmisfortune.Oftentheyhaveascribedresponsibilityfortheirhardshiptothesuccessfulgroups;typicallytheyhavesoughtgovernmentinterventiontoprotectthem from the vagaries of the market. Of course, people need not bemisinformedtoreactintheseways.Muchofwhatisnowadaysdescribedasthe“farm problem,” for example, is nothing more than an attempt to resist thetransformation of agriculture, to maintain a larger amount of resources infarming than can be supported there without assistance from the government.Manymodern farmers surely understand their dilemma; their political actionsfurnish a good example of a well-informed effort to obstruct the economy’stransformation. To the extent that people fail to adjust to the economy’stransformedstructure,economicgrowthisretarded.Transformationisnotonlyaconsequenceofgrowth;itisaconditionforfurthergrowth.However,forthosewhomustmaketheadjustments,thistransformationisoftenapainfulandcostlyprocess,and theeconomichistorian’s inability tomeasuremanyof thesecostsmakesthemnolessreal.DavidA.Wellssummarizedtheissueclearlyin1889whenhesaidthat“pendingtheintervalornecessaryperiodforadjustment,theproblemofwhattodotopreventamassofadults,whosepreviouseducationhasnotqualifiedthemfortakingadvantageofthenewopportunitieswhichmaterialprogressofferstothem,fromsinkingintowretchednessandperhapspermanentpoverty,isaseriousone,andonenoteasytoanswer.”9Ultimately,ofcourse,nooneofferedan“answer”;peoplesimplystruggledasbesttheycould,sometimes

failingutterly.Themarketsystemcouldbeefficienttothepointofruthlessness.Inevitably, transformation affected not only economic welfare but politicalpower and social status as well; new attitudes and values appeared in theprocess.Measuringthegrowthofpercapitaincomeisonlyaverycrudewayofindicatingapopulation’schangingwell-being,butclearlywelfareinamoreall-embracingsenseisinextricablytiedtoeconomicgrowthandtransformation.

1Inthisbooktheexpression“post-CivilWarera”referstotheyears1865–1914.2For a luciddiscussionof scientific theories in economics, seeMiltonFriedman,Essays inPositive

Economics(Chicago:UniversityofChicago,1953),pp.3–43.Friedman’sessayisparticularlyvaluableforitsemphasisthatscientifictheoriescannotbejudgedbythe“realism”oftheirassumptions.Themostusefultheoryistheonethatyieldsthemostaccuratepredictions.Foranexcellentdiscussionofscientifictheoriesingeneral,seeKarlR.Popper,TheLogicofScientificDiscovery(NewYork:HarperTorchbooks,1965).

3Theconceptofamarket is rathercomplicated.“From thepointofviewofaconsumer, themarketconsists of those firms fromwhich the consumer could buy the product; from the point of view of theproducer,themarketconsistsofthosebuyerstowhomhecouldselltheproduct.Thefactorsthatdelineateagivenmarket depend partly on the prices that prevail, partly on the point of view being examined, andpartly on such factors as distance. Other complications include the fact that the area of a market for aproductispartiallydependentonthenatureofthatproduct,andthatwemayhavedifficultyindefiningtheproductexactly;infact,thesameproductmayhavedifferentmarketdefinitionsfordifferentbuyers.”SecRichardG.LipseyandPeterO.Steiner,Economics(NewYork:HarperandRow,1966),p.249.Resourcemarkets,especiallythoseforlaborandloanablefunds,displayadditionalcomplexities.

4Tosomeextentthetechnologycanbeaugmentedwithoutacommitmentofresourcestothatpurpose,throughlearningfromexperience.Thiskindoftechnologicalprogressisconsideredbelow,pp.103–105.

5 U. S. Patent Office [C. H. Duell], Annual Report of the Commissioner of Patents for 1900(Washington:GovernmentPrintingOffice,1901),p.ix.

6Thecalculationof thepresentvalueisnecessarybecausereceiptsatdifferentpoints intimearenotdirectly comparable. A dollar receivable next year is worth less than a dollar receivable today becausetoday’sdollarcanbeusedtoproduceearnings—forexample,bylendingitatinterest—orbecauseitcanbeusedforimmediateconsumption,butonehasnocommandoverthedollarreceivablenextyear.Immediateavailabilitycommandsapositiveprice,therateofinterest.IfreceiptsR(1),R(2),...,R(n)areexpectedtobereceivableafter1,2,...,nyears,thepresentvalueoftherevenuestreamisgivenbytheformula:

wherei is the rateof returnonone’sbestalternative investment.SeeArmenA.AlchianandWilliamR.Allen,UniversityEconomics,2ded.(Belmont,Calif.:Wadsworth,1967),pp.199–209.

7U. S. Patent Office [W. E. Simonds], Annual Report of the Commissioner of Patents for 1891(Washington:GovernmentPrintingOffice,1892),p.v.WhetherthebenefitsoftheAmericanpatentsystemactuallyhaveoutweigheditscostsisahotlydebatedquestion.Itisreallyaquestionoffact,butthefactsinthiscaseareparticularlydifficulttodetermine,forbothconceptualandempiricalreasons.Foranexcellentdiscussion of this complex problem, see FritzMachlup, “Patents,” in International Encyclopedia of the

SocialSciences(NewYork:Macmillan,1968).8ArmenA.Alchian,“Uncertainly,Evolution,andEconomicTheory,”JournalofPoliticalEconomy.

LX(June1950);andMiltonFriedman,EssaysinPositiveEconomics,pp.16–23.9DavidA.Wells,RecentEconomicChanges(NewYork:Appleton,1889),p.437.

II

ECONOMICGROWTHANDTRANSFORMATION

TheAmericanathome, spinningalongwithhis country, canobtain little ideaof theamazing rateatwhich she ismoving in comparisonwith other parts of theworld. It is onlywhen he sits down andstudiesstatisticsthathebecomesalmostdizzyatdiscoveringthevelocitywithwhichsheisrushingon....ItisprobablethatinmanyfuturedecadesthecitizenistolookbackuponthisasthegoldenageoftheRepublicandlongforareturnofitsconditions.

ANDREWCARNEGIE

OUTPUTANDPRICETRENDS

In the1840’sand1850’s,andperhapsevenearlier,outputpercapita increasedquite rapidly, but the CivilWar brought economic progress to a halt. In fact,standards of living fell during the war for most people on both sides. Thisdeclineishardlysurprising,forwaralwaysdivertsresourcesfromproductivetodestructiveuses,andtheCivilWarwasAmerica’smostdevastatingexperience.More than 600,000 men—over 5 percent of the labor force—most of themyoung adults, died in the conflict. In the South physical destruction waswidespread. To make matters worse, the landless emancipation of the slaves,decreed by President Lincoln and later ratified by constitutional amendment,caused organizational chaos in the economic life of the South that hadpermanently harmful consequences.But not until the political issues had beensettled on the battlefield were Americans ready to return to the business ofeconomicprogress.

TABLE2.1REALGROSSNATIONALPRODUCTPERCAPITA

ANDIMPLICITPRICEINDEX

PeriodAnnualAverageGNPperCapita

(1860dollars)(1)

ImplicitPriceIndex(2)

1869–1878 147 1231874–1883 172 1151879–1888 193 1061884–1893 208 971889–1898 213 921894–1903 234 941899–1908 268 103

SOURCE.Col.1:calculatedfromGNPdatainRobertE.Gallman,“GrossNationalProductintheUnitedStates, 1834–1909,” inNationalBureau of EconomicResearch,Conference onResearch in Income andWealth,Output, Employment, and Productivity in the United States after 1800 (New York: ColumbiaUniversity,1966),p.30andpopulationdatainU.S.BureauoftheCensus,LongTermEconomicGrowth,1860–1965(Washington:GovernmentPrintingOffice,1966),p.182.Col.2:Gallman,loc.cit.

Theeconomygrewspectacularlyinthehalfcenturyfollowingthewar.RealGNPpercapitaadvancedatanaveragerateof2percentperyear,andontheeveofWorldWar I it stoodatabout three times the1865 level (Table2.1).1Totaloutputexpandedevenmoreastoundingly: realGNPgrewatanaveragerateofmorethan4percentperyear,increasingabouteightfoldovertheperiod.Neverbeforehadsuchrapidgrowthcontinuedforso long.Ofcourse,growthdidnotoccur in a perfectly smooth, regular fashion. Business fluctuations punctuatedthewhole era, particularly severedepressionsoccurring in themid-1870’s andthemid-1890’s.Asalwaysinanunregulatedmarketeconomy,growthproceededinfitsandstarts.

After the war, despite brief inflations during the expansion phases ofbusiness fluctuations, the trend of the overall price level was downward until1897.Areversal thenoccurred,andagenerallyrisingprice levelcharacterizedthetwodecadesbeforeAmerica’sentryintoWorldWarI(Table2.1).Changesinthe stock of money and in total real output underlay these long phases ofdeflationandinflation.2

Wecanclarifytheserelationsbyconsideringtheequation whereP

is the overall price level,M is the money stock in dollars, V is the averagenumberof times that a dollar is spent for currentlyproduced final goods eachyear, andY is the quantity of real output. The equationmerely states that thepricelevelis,bydefinition,aratioofmoneyexpenditure(MV)torealquantitypurchased(Y).Wecantransformthisdefinitionintoatheoryofthepricelevelby

assumingthatoverthelongrun—say,overseveraldecades—Visapproximatelyconstant,whichisequivalent toassumingthat theamountofmoneythepublicwishestoholdisaconstantfractionofitsmoneyincome.Changesinthepricelevel, then, depend on changes in the money stock and in real output. If Yincreases faster thanM, priceswill tend to fall because the quantity of goodsgrowsfasterthanaggregateexpenditures,andthetotaloutputcanbesoldonlyifitsaveragepriceisreduced.Conversely,whenMincreasesfasterthanY,priceswilltendtorise.

During the three decades of deflation before 1897, the money stock—includinggoldandsilvercoins,banknotesanddeposits,andvariousobligationsof the federal government—increased, but not as fast as real output increased.Immediately after the war, the federal government helped to slow monetarygrowthbyreducingthequantityofitsfiatmoney,thefamous“greenbacks,”asastep toward reestablishing the currency/gold exchange rate at its prewar level.ThegovernmentsteadfastlyresistedthedemandsoftheGreenbackLaborPartyand others for a large issue of new fiat currency. After 1874, when its freemarketpricefellbelowitsmintprice,silvercouldhavepushedthemoneystockup,butthelawprovidedforonlyalimitedcoinageofthismetal,anditsactualcontribution tomonetary growthwas slight.Under thede facto gold standardafter1878, thestockofmoneycouldnotvaryindependentlyofthegoldstock,for besides serving directly as a medium of exchange, gold provided theconvertibility reserves on which the quantity of bank notes and depositsdepended. Therefore, the growth of the entire money stock was tied toproductionoftheyellowmetal,andfor30yearsgoldproductionsimplydidnotkeeppacewiththeoutpouringofcommoditiesandservices.Fallingpricesweretheconsequence.After1897,discoveriesofgoldintheYukon,SouthAfrica,andelsewhere, combinedwith newly devised,more efficient techniques ofminingandrefining, rapidlyexpandedthesupplyofgoldandpushedthemoneystockupfasterthanrealoutput.Thepricelevelrose.Notably,rapideconomicgrowthoccurredbothbeforeandafter1897;neitherafallingnorarisinggeneralpricelevelwasuniquelyassociatedwitheconomicgrowth.

POPULATIONGROWTH

Growing at an average rate of over 2 percent per year, the population of theUnitedStatesalmosttrebledbetween1865and1915(Table2.2),Butatendencytoward slower growthmarked the period; the annual rate of growth fell from

about2.3percent during the earlyyears (1865–80) to about 1.9percent at theend of the period (1900–15). The country’s population grew because birthsexceededdeathsandbecausethenumberofimmigrantsexceededthenumberofemigrants.Despiteunprecedented immigration,natural increasecontributed farmoretothegrowthofthepopulation.Inthe1870’sthebirthratewasprobablymore than 40 per thousand of population, while the death rate was in theneighborhoodof 23; therefore, the rate of natural increasewas at least 17 perthousand.Bothbirthanddeathratesdeclinedsubsequently,andthegapbetweenthem became somewhat narrower. Just beforeWorldWar I the birth rate hadfallenbelow30,thedeathratetoabout15,andhencetherateofnaturalincreasetolessthan15.

TABLE2.2POPULATIONANDLABORFORCE

Year Population(Millions)(1) LaborForce(Millions)(2)1865 36 121870 40 131880 50 171890 60 231900 76 291910 92 371915 101 40

SOURCE.Col.1:U.S.BureauoftheCensus,HistoricalStatisticsoftheUnitedStates,ColonialTimesto(Washington: Government Printing Office, 1960), p. 7. Col. 2: figures for 1870–1910 from StanleyLebergott, “Labor Force and Employment, 1800–1960,” in National Bureau of Economic Research,ConferenceonResearchinIncomeandWealth,Output,Employment,andProductivityintheUnitedStatesafter 1800 (New York: Columbia University, 1966), p. 118; figures for 1865 and 1915 obtained byextrapolationfromLebergott’sdata.

Adeclineinthebirthratehascharacterizedeverynationthathasexperiencedeconomicgrowth,anditiscloselyrelatedtothetransformationthataccompaniesgrowth. In particular, themigration from the countryside to the cities led to adecline in the desired family size, and hence to a reduction in the number ofbirths per family. On the farm large families furnished hands that, given thenature andorganizationofwork there, couldbe set to useful tasks at an earlyage. But in the city the costs of rearing and educating children were greater,while their economic usefulness was smaller. There women found greateropportunities forworking outside the home, and hence child rearing involvedhigherforegoneincomes.Anincentivethereforearoseforlimitingthenumberof

children.Otherinfluencesalsohelpedtoreducethebirthrate.Forexample,withlower child mortality, a family required fewer births to achieve the desirednumber of surviving children. But declining fertility probably owed more tourbanization than to any other single cause. Since urbanization was aconsequenceofeconomicgrowth,anultimatesourceofretardationintherateofpopulationgrowthwaseconomicgrowthitself.3

Afallingdeathrateresultedfrombetterpublichealthpracticesandfromtheimprovedstandardsoflivingthataccompaniedrisinglevelsofoutputpercapita.Improvements in sanitation,water supply, sewerage, nutrition, and housing allhelped to reduce the incidence of infectious diseases like tuberculosis andtyphoid.Advancesinmedicalpracticehadlittleornoimpactonthedeathrate.Again, as in thecaseof thedecliningbirth rate, economicgrowth itselfwasaprincipal source of the change. (Later in this chapter and in Chapter III wediscusshealthimprovementsinmoredetail.)

The greatest volume of immigration in recorded history augmented thenatural increaseofthepopulation.After theCivilWartherateofalienarrivalsreachedanunprecedentedhigh, and the trendcontinuedupwarduntil theFirstWorldWarreducedtheinflowtoatrickle.Inthe1920’stheimpositionoflegalquotasfinallyclosedthedoorsontheageofmassive,unrestrictedimmigration.Before the 1890’s the so-called “old” immigration predominated, having itssources primarily in the United Kingdom, Germany, and the Scandinaviancountries. Beginning in the 1890’s and extending until the war, the so-called“new” immigration accounted for the greater part of the influx. These peoplecamemainlyfromsouthernandeasternEurope,withItalysupplying themost,followedcloselybyAustria-HungaryandRussia.Throughoutthepost-CivilWareraimmigrationfollowedaroughcorrespondencewithfluctuationsofprosperityanddepressionintheUnitedStates,allthegreatsurgesofimmigrationoccurringduring periods ofAmerican prosperity (Figure 2.1). The reduced employmentopportunities that accompanied the business depressions of 1873–1878, 1882–1885,1893–1897,and1908aremirroredin thetroughsof thenet immigrationcyclethatcorrespondtothosedates.Thepushofhardtimesinthecountriesoforigin undoubtedly played a part also, especially in determiningwhat parts ofEuropewouldcontributemostheavily,butthetimingofthemigrationsseemstohavebeeninfluencedmoredecisivelybythepullofprosperousconditionsintheUnitedStates.In total,morethan28millionimmigrantsenteredbetween1865and1915.PerhapsasmanyasathirdeventuallyreturnedtoEurope,puttingnetimmigrationintheneighborhoodof20millionpersons.Immigrantsprovideda

largepartoftheadditionstothepopulationinsomedecades.Atthepeaks,inthe1880’sand1900’s.theyaccountedforaboutafifthoftheincreaseinpopulation.Being heavily concentrated in the young adult ages, they constituted an evenlargerproportionofthetotaladditionstothelaborforce,attimesasmuchas30percent.

Figure 2.1 Arrivals minus departures, all alien passengers. Source: Simon Kuznets and Ernest Rubin,ImmigrationandtheForeignBorn(NewYork:NationalBureauofEconomicResearch,1954),p.95.

A rapidly growing population had major economic consequences. Mostimportantly,itprovidedagrowinglaborforce(Table2.2).Infact,thelaborforcegrewevenmorerapidlythanthepopulation,becausetheimmigrantsaugmentedthe working-aged population proportionately more than the dependent-agedpopulation and because as the birth rate fell the ratio of adults (workers) tochildrenincreased.Populationgrowthalsoexpandedthenumberofconsumers,broadeningmarketsandpermittingagreaterdegreeofspecialization.Arapidlygrowingpopulationbuoyedupinvestors’confidenceinfuturemarketconditions,encouraging them to bear risks in expanding the capital stock. In comparisonwith Europe, the United States was an economy of labor scarcity and lowpopulationdensity.Insuchasetting,populationgrowthneveroperatedasadragon economic growth but rather encouraged the capital accumulation that gaverisetoeconomicprogress.

THESOURCESOFGREATERPRODUCTIVITY

Ourunderstandingofeconomicgrowthwouldbegreatlyadvancedifwecouldsay just how much each source of growth—material capital formation,education, technological progress, and so forth—contributed toward increasingoutput. In recent years economists have developed several techniques forattributingeconomicgrowthtoitsvarioussources.Unfortunately,however,itisimpossibletoprovideaverydetailedbreakdown,andthecalculationsaresubjectto errors of unknownmagnitude because the available data do not correspondvery well with the theoretical concepts and because the data are not veryaccurateanyhow.Still,suchcalculationsmayrevealrelativeordersofmagnitudeinabroadway.Thefigurespresentedbelowarebasedoncalculationsshowninthe Appendix, which some readers may wish to examine before reading anyfurther.4

WecanpartitiontheriseintotalGNPduringthe1869–1914periodroughlyasfollows:theincreaseinthenumberofman-hoursworkedaccountsforaboutfourtenths;theexpansionofthematerialcapitalstock,includingland,explainsaboutthreetenths;andallothersourcesaccountfortheremainingthreetenths.Partitioningthegrowthofoutputperman-hour,wefindthattheincreaseintheratioofmaterialcapitaltolaborexplainsoveronefourth,andallothersourcesaccount for almost three fourths.Crude as these conclusionsmaybe, they arenevertheless of great significance, for they indicate that economic growth—asustained increase in output per capita—cannot, as economists believed for alongtime,beattributedmainlytomaterialcapitalaccumulation.Wemustnot,ofcourse, dismiss material capital accumulation as unimportant; after all, it didaccountforoveronefourthoftheincreaseinoutputperman-hour.Furthermore,weknowthat technologicaladvanceswereoftenrealizableonlyinconjunctionwithinvestmentinmaterialcapital.Still, toexplaineconomicgrowth,wemustdevote the lion’s share of our attention to the accumulation of human andintellectualcapital.

MaterialCapitalAccumulation

The nineteenth century sawgreat expansions in the territory of theUnitedStates,which not only added to the country’s arable acreage but also broughtland of superior quality into use. Besides farming land, the acquisitionscontainedvastamountsofotherresources,includingminerals,timber,andgrass.The 1840’s saw a flurry of territorial expansion: Texaswas annexed in 1845;

claims to theOregoncountrywere settledwithGreatBritain in1846; and theMexicanCessionwasacquiredasthespoilsofwarin1848.Theselandsaddedalmost70percent tothenationaldomain,andaslateas1865allof themweresparselypopulated,someofthemvirtuallyuninhabited.

The thrustof thepopulationmovementwas inexorablywestward.By1865the frontier—defined as an area of at least two but less than six persons persquare mile, cities of 8000 or more not being considered—extended intoMinnesota,Kansas,Nebraska,andTexas,andthestatesinthefirst tierwestoftheMississippiwerefastfillingup.After theCivilWarthepopulationfloodedover the trans-Mississippi prairies and theGreat Plains, and the PacificCoaststates attracted hordes ofmigrants.TheSuperintendent of theCensus of 1890declared:“Uptoandincluding1880thecountryhadafrontierofsettlement,butat present the unsettled area has been so broken into by isolated bodies ofsettlement that there can hardly be said to be a frontier line,” In 1893 thehistorian Frederick Jackson Turner further dramatized the “closing of thefrontier,” and many subsequent accounts of westward expansion have placedgreat emphasis on this event and the date of its occurrence. Actually, theannouncementwaspremature.Thehardtimesofthe1890’sdrovebothfarmersandtownspeopleeastward,andin1900thefrontierlinemiraculouslyreappeared(withoutcomment)inthecensusmaps.Butitsdayswerenumbered.In1910themapsof settlement showed thatnoclearcuttingedge remainedof the frontier,andpocketsofpopulationdotted the areabetween the100thmeridian and thePacificCoast.Thousandsofwordscannotcompeteeffectivelywithafewmapsonthissubject,sothereaderisreferredtoFigures2.2–2.6.

It is difficult nowadays to comprehend the importance of land in thenineteenth century. Perhaps a fruitful approach is to consider how nineteenth-century economists viewed its place in the economy. The great Englisheconomist David Ricardo and his followers, among whom the influentialAmericanwriterHenryGeorgemaybecounted,explainedthatlandoperatesasa drag on economic growth, for there is only a fixed amount of it.As poorerquality land is put into production to provide for a growing population, thehigherqualitylandcommandslargerrents.Andasthelimitofavailablelandisreached,theonlymeansofexpandingfoodproductionisbycultivatingthelandmoreintensively.Buthereweencounterthespecterofdiminishingreturns:theaddition to output obtained by successive applications of labor and materialcapitaltoafixedamountoflandtendstobecomeprogressivelysmaller.Therealreturns to laborandcapitaldecline;bothworkersandcapitalistsareeventually

impoverished, while useless landlords grow rich, and the economy ultimatelyarrives at a “stationary state,” with a stable but mostly destitute population.Smallwonderthatsomecontemporariescalledeconomicsthe“dismalscience”!

In the United States the seemingly limitless availability of cheap landbanished the specter of diminishing returns. In the overly optimisticwords ofThomas Jefferson, there was “room enough for our descendants to thethousandth and thousandth generation.” Typically the lack of transportationmakingiteconomicallyaccessible,notascarcityof landitself,constrained thegrowth of farm production. After the Civil War, with the expansion of therailroad network, farming moved westward on a broad front, and fertile newlandsintheDakotas,Nebraska,Kansas,Oklahoma,Texas,andtheFarWestallcontributed to an unprecedented outpouring of agricultural products. In thetwentieth century technological progress alone would conquer diminishingreturns in agriculture; but in the nineteenth century, when the pace oftechnological progress was slower and population growth more rapid, theavailability of a vast expanse of unoccupied land played a crucial role inpermittingeconomicgrowthtocontinueunhamperedbythedragofdiminishingreturns.

Figure 2.2 Spatial distribution of population, 1870. Source: C. O. Paullin, Atlas of the Historical

GeographyoftheUnitedStates(Washington:CarnegieInstitution,1932),plate77c.

Figure 2.3 Spatial distribution of population, 1880. Source: C. O. Paullin, Atlas of the HistoricalGeographyoftheUnitedStates(Washington:CarnegieInstitution,1932),plate78a.

Figure 2.4 Spatial distribution of population, 1890. Source: C. O. Paullin, Atlas of the HistoricalGeographyoftheUnitedStates(Washington:CarnegieInstitution,1932),plate78b.

Figure 2.5 Spatial distribution of population, 1900. Source: C. O. Paullin, Atlas of the HistoricalGeographyoftheUnitedStates(Washington:CarnegieInstitution,1932),plate79a.

Figure 2.6 Spatial distribution of population, 1910. Source: C. O. Paullin, Atlas of the HistoricalGeographyoftheUnitedStates(Washington:CarnegieInstitution,1932),plate79b.

It might be asked: why do we discuss land under the heading “MaterialCapitalAccumulation”?Afterall,isn’tlanda“natural”resource?Theansweristhat landliesvirtuallyuseless tomenin itsnaturalstate,andityields itsfruitsonly after human effort has turned it into a productive resource.Virgin soil islushwithweeds,brush,andwildflowers,butthemarketfortheseisexceedinglylimited.Before it can yieldwheat, corn, or cotton itmust be cleared, plowed,cultivated, andoftendrained, fenced,or irrigated.Tomake the landusefulwemustinvestinit,andtheproductofourefforts,improvedland,isnolesscapitalthanisadrillpressoralathe.Likeotherformsofmaterialcapital,thestockofimprovedlandcanbeaugmented.Eventreesandmineralsaretypicallyuselessas they exist in nature; before they can assume a value trees must be cut,minerals dug, both transported to markets.5 It is easy to exaggerate thesignificance of “natural” resources. America’s immense territory yielded itsrichesonlyinresponsetohumaneffort,andverylittlewasobtainedasagiftofnature.

Of course, if a territory lacks coal, no amount of effort or ingenuity willsuffice to dig it up. But given the effort and ingenuity, lack of a particular“natural”resourcewouldnotmattermuch,foragoodsubstitutewouldprobablybesoonprovided.Inanycase,resourcesareusefulonlybecausethetechnologydescribeshowtousethem,andwhenaparticularresourceisrelativelyscarce—andhencerelativelyexpensive—inventorsarepresentedwithastrongincentiveto conceive of a good substitute material or a way of economizing on thematerialevenintheabsenceofagoodsubstitute.Ultimatelytheinfluenceofthenaturalresourceendowmentoneconomicgrowthmustyieldtothemuchgreaterinfluence of technological ingenuity. And as we have already seen, thetechnologicalvirtuosityofapopulationinamarketeconomydependscruciallyonthewaypropertyrightsaredefinedandenforced.

Asthelaborforceandthequantityofimprovedlandincreased,thestockofstructuresandequipmentmorethankeptpace.Duringtheperiodfrom1869toWorldWar I, this capital stock increased at an annual rateof about4percent.Sincethelaborforcegrewmoreslowly,thestockofmaterialcapitalperworkerincreasedsteadily(Table2.3).

TABLE2.3MATERIALCAPITALSTOCK

YearTotalMaterialCapitalStockNetofCapitalConsumption(Billionsof

1929Dollars)

TotalMaterialCapitalStockNetofCapitalConsumptionperMemberofLaborForce(Thousandsof1929

Dollars)1869 27 2.111879 42 2.491889 68 3.061899 108 3.791909 165 4.41

SOURCE.SimonKuznets,CapitalintheAmericanEconomy,ItsFormationandFinancing(Princeton,N.J.:PrincetonUniversity,1961),p.64.

In the late 1870’s the proportion of the national output being channeled intomaterial investmentwasalreadyquitehigh, inexcessof20percentonagrossbasis—including investment for maintaining the material capital stock as itwears out or becomes obsolete—and about 13 percent on a net basis. Theseratios remained high throughout the period; during the decade 1890–1908 thegrossmaterial investment ratiowasabout28percent.Before1860 thebulkofmaterial investmenthadbeeninstructures,buttherelativeimportanceofthese

declined steadily, while equipment became a larger element—evidence of theincreasing extent towhich productionwas beingmechanized in the post-CivilWar era. A substantial share of the material investment of this period wenttowardbuilding the railroadnetwork, especiallyduring the1870’sand1980’s.Figuresshowingmilesofmaintrack(Table2.4)givea rough indicationof theexpansionof therailroadsystem.Theenormousgrowthofcitiesalsoprovidedmajor opportunities for profitable additions to the stock of structures andequipment.

TABLE2.4MILESOFMAINRAILROADTRACK

Year Mileage1869 46,8001879 86,6001889 161,3001899 190,0001909 238,100

SOURCE.AlbertFishlow,“ProductivityandTechnologicalChangeintheRailroadSector,1840–1910,”inNational Bureau of Economic Research, Conference on Research in Income and Wealth, Output,Employment,andProductivityintheUnitedStatesafter1800(NewYork:ColumbiaUniversity,1966).p.596.

HumanCapitalAccumulation

The useful skills of the labor force constitute an important part of thenation’s capital stock. Literacy, the most basic of these skills, was alwayswidespread in the United States. In 1870 about 90 percent of adult whiteAmericans could read and write; by 1910, 95 percent possessed these basicskills. For obvious reasons, literacy was much less prevalent among thenonwhite population—predominantly blacks—but improvement was rapid. In1870 only about 20 percent of the adult nonwhite populationwas literate; by1910theproportionhadincreasedto70percent.Theerstwhileslavesapparentlybelievedfromtheverystartoftheirfreeexistencethatinvestmentineducationwouldyieldarelativelyhighrateofreturn.Thattheirpropertyrightsinhumancapitalwerelesseasilyexpropriatedthantheirpropertyrightsinmaterialcapitalmayhelptoexplaintheblacks’rapidrateofadvanceinliteracy.

For the nation as a whole, formal education progressed erratically. Theschoolenrollment rate tendedslightlyupward, from48percentof school-aged

(5–19yearsold)childrenin1870to59percentin1910,butreversalsbesettheadvance.From1880to1900theenrollmentratefellsubstantially,from58to51percent, and then recovered in the first decade of the new century.We mustinterpret these figures cautiously, for actual attendance at schools fellsubstantially below enrollment, typically by as much as a third. The averagestudent actually attended schoolnomore than threeor fourmonths eachyear.Thequalityof the instructionwaspoor, teachers frequentlybeing trainedonlymarginallybetter than their students.Teenagegirls formedamajorpart of theteachingstaff,butmarriageusuallyremovedthemfromthejobafterafewyears.Teachers’ salarieswere relatively low; in rural districts they often earned lessthancommonlaborers.

Impressed by such evidence, one scholar has ventured the judgment that,considering the quantity and the quality of formal education in the nineteenthcentury,“TakentogethertheydonotsuggestthatformaleducationwasanythinglikeasignificantfactorinraisingthequalityoftheAmericanlaborforce,orinstimulatingeconomicgrowth.”6Inafundamentalsense,however,thisjudgmentmaymiss thepoint.Economicgrowthis thereturnonmutuallyinterdependentinvestments; we cannot neglect the complementarity among skilled workers,mechanization, and advancing technology.Growth simply cannot be sustainedforlongwherethebulkofthepopulationisilliterateandunskilled.IntheUnitedStatesilliteracyneverobstructedeconomicprogress.Andnotonlywasthelaborforcemostlyliterate,butanincreasingnumberofworkersinvestedinacquiringadditional skills as the tasks to be performed grew more complex andintellectuallydemanding.In1870onlyabout2percentofthoseatleast17yearsold had graduated from high school, but in 1914 the proportion exceeded 10percent. The number of bachelor’s degrees conferred increased from about10,000 in 1870 to over 44,000 in 1914, and in the latter year the nation’suniversitiesalsograntedmorethan3000master’sandover550doctor’sdegrees.Of course these data measure only very imperfectly the formation of humancapital, for much education is consumption rather than investment. Yet theevidence suggests quite strongly that the economically useful skills of theaverageworkerdid improveanddidcontribute toward raising theproductivityoflabor.Thequestionremains:howmuchgrowthcanbeexplainedinthisway?Unfortunately,afirmanswermustawaittheresultsoffuturestudy.

AlbertFishlow’s research indicates that thenation channeled an increasingproportion of its resources into the production of formal education during thenineteenth century (Table 2.5). Merely adding the amounts spent to provide

schoolbuildingsandtopayteachers’salariesdoesnotgiveacompleteaccountofthecostofeducation.Whethereducationisviewedfromthepointofviewofthe individual student or from that of society, there is an additional cost: theearningsthestudentforegoeswhenheoccupieshimselfwithstudiesinsteadofsome alternative productive occupation. This opportunity cost, which wassubstantial under nineteenth-century conditions of widespread child labor, hasbeentakenintoaccountinarrivingat the“totalresourcecost”figuresofTable2.5.The table also shows thatwhile public education expanded progressively,private education provided a substantial share during the early years and stillsuppliedmorethan20percentin1900.CatholicsandLutheransledinsupplyingprivateeducation.

TABLE2.5COSTSOFEDUCATION

SOURCE.AlbertFishlow,“LevelsofNineteenth-CenturyAmericanInvestmentinEducation,”JournalofEconomicHistory.XXVI(Dec.1966),430.

Workers acquired a large part of their skills not at schools but on the job.Skilled craftsmen—carpenters, masons, blacksmiths, coopers, wheelwrights,printers, mechanics, and many others—typically gained their skills throughapprenticeships. The same was true of engineers, lawyers, and physicians.Withoutdoubt,practicallyallfarmingskillsweretransmittedonthefarm,oftenwithinthefamily.Thesekindsoftrainingclearlyconstituteinvestmentinhumancapital, but the available evidence is insufficient to indicate the rates atwhichtheywereincreasing.On-the-jobtraining,however,mightwellhavebeenmoreimportant than formal education during the post-Civil War era. Despite itsimportance,thissubjecthasyettobesystematicallystudied.

Health,likeeducation,isaformofcapital,butnotuntilneartheendofthe

nineteenth century did Americans make substantial investments in improvingtheir health. Though probably superior to contemporary European standards,Americanhealth conditions in themid-nineteenthcenturywerebypresent-daystandardsalmostunbelievablypoor.Disastrousepidemicsoccurredfrequently—yellowfever, smallpox,cholera, typhoid,diphtheria, and typhuswerecommonscourges.Asiftheseperiodicafflictionswerenotenough,averysubstantialpartofthepopulationsufferedfromchronicdiseases.Hookwormdiseaseplaguedthepeople of the South. Malaria and dysentery, also prevalent there, spreadthroughout the great interior basin drained by the Mississippi River system,wherethepeoplecomplainedresignedlyofthe“ague,”andeveryautumnsawanewonslaughtof“fevers.”Tuberculosis, thegreatestkillerofall, flourished intherapidlyexpandingcities.Diseasenotonlytookaheavytollinhumanlives,butinadditionitfrequentlyleftthesurvivorsinadebilitatedandlessproductivecondition.

Theconditionsthatfosteredfrequentillnessareeasilyidentified.Perhapsthefirstthingnoticedbyamodernman,couldhebeprojectedbackintime-machinefashiontothemid-nineteenthcentury,wouldbetheubiquitousfilth.Citieswereprobablymoreobjectionablethanthecountryside,asevidencedbyaphysician’svividdescriptionofNewYork’sslumsin1865:

Domesticgarbageandfilthofeverykindisthrownintothestreets,coveringtheirsurface,fillingthegutters, obstructing the sewer culverts, and sending forth perennial emanationswhichmust generatepestiferous disease. In winter the filth and garbage, etc., accumulate in the streets to the depthsometimesoftwoorthreefeet.

Therefuseofthebedroomsofthosesickwithtyphoidandscarletfeversandsmallpoxisfrequentlythrownintothestreets,theretocontaminatetheair,and,nodoubt,aidinthespreadofthosepestilentialdiseases.

Athightidethewateroftenwellsupthroughthefloors[ofthecellarapartmentsoccupiedbysome18,000 New Yorkers], submerging them to a considerable depth. In very many cases the vaults ofpriviesaresituatedonthesameorahigherlevel,andtheircontentsfrequentlyoozethroughthewallsintotheoccupiedapartmentsbesidethem.7

Consciousdesigncouldhardlyhaveproducedconditionsmoreagreeabletothespreadofinfectiousdiseases,andthecostoflivingamidsuchfilthwasasicklyanduncertain existence.But although the stench andugliness sometimesgaverisetocomplaints,theconnectionbetweenfilthanddiseaseescapedwidespreadrecognition.

Untilneartheendofthecenturythecausesofalmostalldiseasesremainedshrouded in mystery, and hence no really effective steps could be taken tocombat them.Medical science, lacking a tested theory of infection, could do

very little to relieve the suffering; more often its false cures exacerbated theafflictions of the sick. Themost popular theory, that of miasmatic contagion,maintained that disease results from the breathing of air contaminated by thevapors rising fromdecomposing animal and vegetablematter. (TheNewYorkphysicianquoted aboveobviously subscribed to this theory.) Interestingly, thisfalsetheorydidleadtosomeimprovementsinpublichealth,foritprescribedtheconstruction of sewers and the removal of garbage from the streets, whichreduced the spread of certain diseases. The backwardness of formal medicalscience probably made little difference, for most physicians were untrainedanyhow.A Swedish immigrant recordedwith surprise: “A person I have seengoingaboutworkingasamasonservedforacoupleofmonthsasanassistantinadrugstoreinMilwaukee,whereuponhelaidasidethetrowel,gothimselfsomemedical books, and assumed the title of doctor.”8 The nineteenth centuryaboundedinsuchcuriousexamplesofrecruitment into themedicalprofession.Throughoutmostofthecenturyonlytwoseriousdiseasesrespondedtotheusualtreatments: smallpox to vaccination, and malaria to quinine. As late as 1860,“bleedandpurge”remainedthemostcommonprescriptionforthetreatmentofseriousdisease.Naturally,suchremediesdestroyedmanywhowouldotherwisehavesurvived.

TowardtheendofthecenturythediscoveriesofLouisPasteur,RobertKoch,andtheirfollowersmadepossiblethefirsteffectivecampaignagainstinfectiousdiseases.These scientists showed thatmany diseases result from the action ofmicroorganisms,bacteria,andthatthesecanbedestroyedbysubstancestoxictothembut not to the human organism itself.Within a few years bacteriologistshad identified the specificmicroorganisms responsible formanyailments. Inafewcasesvaccinesweredevelopedtocombatthediseases,butofmuchgreatersignificance was the impetus given to measures designed to impede thetransmissionofinfectiousagents.Armedforthefirsttimewithfirmknowledgeabout infectious disease causation and transmission, cities devoted increasingamounts of resources to sewage disposal and treatment, the pasteurization ofmilk, and the provision of pure water. The number of urban people drinkingfilteredwaterincreasedfrom30,000in1880toover20,000,000in1920.9

These investments in better health yielded returns in several ways. Onemeasureof the improvements inhealth is the fallingdeath rate. InNewYork,Boston,Philadelphia,andNewOrleans,takentogether,thedeathratestoodat30in1840–1864,at26in1865–1889,andat19in1890–1914.10Forthenationas

awholethedeathratedeclinedfromabout23inthe1870’stoabout15in1915.After 1900 great epidemics became increasingly rare and finally nonexistent.Life expectancy at birth increased substantially: in Massachusetts, for whichreliabledataexist,itrosefromabout40yearsin1855tomorethan50ontheeveoftheGreatWar;andfragmentaryevidencesuggeststhattheimprovementwasat leastasgreatelsewhere.Thatpeople lived longerandendured lessphysicalpaincannotbedoubted.Andsincemanyoftheseimprovementsworkedmainlytoreducechildmortality,thesorrowoflosingchildrenwasdiminishedandthecostoffruitlesspregnanciesmoreoftenavoided.Theseimprovementsinhealthare surely one of the most significant welfare gains to accompany economicgrowth.

OrganizationalChangesandEconomiesofScale

Inamarketeconomy the fundamentalunitofeconomicorganization is thebusinessfirm,ofwhichtherearethreebasickindsaccordingtoownership:thesingle proprietorship, the partnership, and the corporation. Each hascharacteristic advantages and might be preferred to the others under certaincircumstances. The single proprietorship generally prevailswhere the scale ofoperations is small. It allows the owner to have complete control over hisbusiness, to operate it as he thinks best. Financial difficulties often arise,however,when a single ownerwishes to expand his business; the partnershipthen becomes attractive. The necessity for mutual trust limits the number ofpartners.Ifthebusinessbecomessolargebytheadditionofnewpartnersthatnoonecankeeptrackofitscondition,allmaycometogrief,becauseeachpartner’slegalliabilityextendstohispersonalpropertyaswellastothatinvestedinthefirm. In addition, the limited life-span of the partners increases the risks ofcreditorswholendtothepartnership,andconsequentlythebusinesscanborrowonly at relatively high rates of interest. The corporate form of organizationsolves the interrelatedproblemsof size, liability, and longevity inherent in thepartnership. The corporation can usually obtain funds by selling its stocks—ownership shares in the firm—to the public. Investors often subscribe to suchsecurities evenwithout a detailed knowledge of the firm’s operations becauseeach risks only the amount of his subscription. Unlike the simpler forms oforganization,thecorporationlivesonwhenallofitsoriginalshareholdershavedied,becausethestockscanbepassedontoheirsorsoldwithoutdisruptingtheorganizationofthefirm.

Before theCivilWar theorganizationof economic lifehadbeen relativelyuncomplicated. Most businessmen conducted their affairs within small andhighly localized markets, and therefore proprietorships and partnershipspredominated. The few existing corporations appeared in industrieswhere the“public interest” intruded, such as turnpikes, railroads, banks, insurance, andutilities.AlthoughseveralsurgesofincorporationoccurredbeforetheCivilWar,thecorporationdidlittlemorethanholditsownwiththeotherformsofbusinessorganization.

After thewar, incorporation increasedgreatly, and although thenumberofincorporations typically fell during business depressions the trendwas sharplyupward for thenexthalfcentury. Incorporationsof financial firmsandutilitiesdeclinedrelatively,whilemanufacturingincorporationsbecamemoreprevalent.During the two decades from themid-1870’s to themid-1890’s entrepreneursadopted the corporation inmany fieldswhere it had not previously appeared.After the 1890’s the incorporation of trade and service businesses becameprogressivelymorecommon.11

The rise of the corporation reflected several influences. One was theincreasingsizeofmarkets.Asfirmsexpandedtomeetagrowingdemand,theytypically found it desirable to assume the corporate form, for reasons alreadydiscussed. Another influence was the development of formal markets forcorporatestocksandbonds,whichreducedthecostsofattractingnewinvestorsin corporate securities. Changes in the law also encouraged incorporation. Asearly as 1816 the legislatures of Connecticut andNewHampshire had passedstatutes providing for limited liability, thus resolving a long-unsettled legalquestion, and by 1860 this provisionwaswidespread among the states. In theearlypartof the century, incorporationhad typically requireda special chartergranted by a state legislature, which explainswhy somany corporations thenboreaclose relation to the“public interest.”Althoughsomestateshadpassedgeneralincorporationactsearlyinthecentury—forexample,NewYorkin1811—notuntil the1870’sdidconstitutionallyrequiredincorporationundergenerallaws become the rule in most states. Under these laws, entrepreneurs couldincorporatetheirfirmssimplybyfilingafewpapersandpayingasmallfee.Thecostsofincorporationbeinggreatlyreduced,increasingnumbersofbusinessmenselectedthisformoforganization.By1916morethan340,000corporationshadbeenformed,over80,000oftheminmanufacturing.

Aneconomyinwhichthecorporationisthemostimportantformofbusinessorganization is certain to differ in fundamental respects from one in which

proprietorships and partnerships prevail: fewer people are self-employed, andmore are wage earners; firms are larger, more impersonal, and morebureaucratic;evenpoliticalpowermaycometorestwiththosewhocontrolthelargecorporations.Theseareimportantconsequences,butourpresentconcerniswiththecorporation’srelationtoeconomicgrowth.Thequestioniswhethertheriseofthecorporationledtoincreasedproductivity,andtheansweristhatitdid.

Thecruciallinkbetweengreaterefficiencyandincorporationissize.Aswehaveseen,firmsnormallyassumedthecorporateforminordertofacilitatetheirexpansion.Butexpansiondidnotmeansimplyproducingmoreinthesameway,for larger firms could frequentlymake use of improved forms of organizationthatenabledthemtoreducetheaveragecostofproduction.Largersizepermittedgreaterspecializationoffunctionswithinthefirm,whichpromotedefficiency.Afamousnovel,writtenin1905,givesagraphicdescriptionoftheefficiencythatresultedfromthedivisionoflaborinthemeatpackingindustry:

The carcass hog was scooped out of the vat by machinery, and then it fell to the second floor,passingonthewaythroughawonderfulmachinewithnumerousscrapers,whichadjustedthemselvestothesizeandshapeoftheanimal,andsentitoutattheotherendwithnearlyallofitsbristlesremoved.Itwasthenagainstrungupbymachinery,andsentuponanothertrolleyride; thistimepassingbetweentwolinesofmen,whosatuponaraisedplatform,eachdoingacertainsinglethingtothecarcassasitcametohim.Onescrapedtheoutsideofaleg;anotherscrapedtheinsideofthesameleg.Onewithaswiftstrokecutthethroat;anotherwithtwoswiftstrokesseveredthehead,whichfelltothefloorandvanishedthroughahole.Anothermadeaslitdownthebody;asecondopenedthebodywider;athirdwithasawcutthebreastbone,afourthloosenedtheentrails;afifthpulledthemout—andtheyalsoslidthroughaholeinthefloor.Therewerementoscrapeeachsideandmentoscrapetheback;thereweremen to clean the carcass inside, to trim it andwash it. Looking down this room one saw, creepingslowly,alineofdanglinghogsahundredyardsinlength;andforeveryyardtherewasaman,workingasifademonwereafterhim.12

The use ofmore efficient techniques requiring highly indivisible, or “lumpy,”capitalgoodslikebristle-scrapingmachinesorconveyerswasadvantageousonlywhen large outputs were produced. An assembly line like the one describedabovewaseconomicalonlyforpackershandlinghundreds,perhaps thousands,ofanimalseachday. In sum, incorporationallowed firms togrow,andgrowthoften permitted the realization of various economies of scale, thus raisingproductivity.

Besides the riseof the corporation, numerousotherorganizational changesoccurred during the post-Civil War era. The merger movement, for example,reached a crest around the turn of the century. Mergers often led to greaterproductivity;inAlfredChandler’swords,

The transformation of a loose alliance of manufacturing or marketing firms into a singleconsolidated organization with a central headquarters made possible economies of scale throughstandardizationofprocessesandstandardizationintheprocurementofmaterials.Ofmoresignificance,consolidation permitted a concentration of production in a few large favorably located factories. Byhandling a highvolumeof output, consolidated factories reduced the cost ofmaking each individualunit.Theycouldspecializefurtherandsubdividetheprocessofmanufacturingandalsowereoftenabletodevelopandapplynewtechnologicalimprovementsmoreeasilythancouldsmallerunits.Toalesserextentconsolidationsofmarketingfirmsofferedcomparableadvantages.13

Expansion of themarket led to greater specialization and hence to higherproductivitywithinindividualfirms,asdescribedabove,buteconomiesofscalealsoappearedinabroadercontext.Inagrowingmarketmanyfirmsthemselvesbecamemoreandmorespecialized.Forexample,intheearlynineteenthcentury,textilemanufacturers produced their own equipment, for the total demand forsuch machinery was too small in any particular place to support a firmspecializinginsuchproducts,andtransportationchargesweretoohightopermitan economical centralization of machinery production. As the demand fortextiles became larger, the demand for textile machinery also increased, andabout the middle of the century specialized machinery producers began toappear. This specialization among firms raised productivity throughout thetextile industry, for itenabled themachineryfirms tobenefit fromthe learningprocess inherent in specialization and then, through competition with oneanother,topassbenefitsontotextilemakersintheformofreducedmachinerycosts. In a similar fashion countless other new industries emerged.Of specialsignificancewastheappearanceofadistinctindustryproducingmachinetools,instrumentsforcutting,grinding,andpolishingmetals.Thisbecameafocusforthediscoveryanddisseminationofnewtechniquesapplicabletoawiderangeofmanufacturingprocesses.14

Thecostsof transactingexchanges fell inmostmarketsduring thisperiod.For example, the financial markets, where savings are channeled intoinvestment, becamemore efficient on a national scale as funds began to flowmorefreelybetweenregions.Inagrowingmarketahostofspecialists—brokers,investmentbankers,financialjournalists,andothers—arosetoperformservices,typicallyinvolvingthecollectionanddisseminationofinformation,enablingthemarketsystemtooperatemoreefficientlyasaby-productoftheirownpursuitofwealth.

TechnologicalProgress

Technologicalprogressmeansanincreaseinusefulknowledge.Itisusefultothinkofitasoccurringinthreesteps:(1)invention,theoriginalconceptionofanewidea;(2)innovation,itsoriginalapplicationinafirm’sproductionprocess;and (3) diffusion, its spread from the innovator to applications in other firms.Someinventionsneverbecomeinnovations,andsomeinnovationsneverspreadbeyondtheiroriginalapplication.Thediffusionofanewideamayrequiremanyyears, or even decades. Very often new knowledge is applicable only inconjunction with a new capital good; economists then speak of technologicalprogress as “embodied” in the material capital. Because of this embodiment,material capital accumulation takes on an additional productivity-raisingdimension.Notonlydoesitaugmenttheproductivityoflaborbyincreasingthematerial capital/labor ratio, but it provides as well a vehicle for theimplementationofnewideas,forraisingtheintellectualcapital/laborratio.Theexamples of technological progress considered below comprise only aminutesample from a vast universe.Wemust remember, too, thatmajor productivitygains often resulted from a series of minor improvements. The spectaculartechnological advance captures everyone’s attention, but ultimately the small,unspectacularadvancesmayhavehadanevengreaterimportance.

The steamboat revolutionized inland transportation in the early nineteenthcentury, and in combination with the canals it gave the United States atransportation system that compared favorably with those of the advancedEuropeannations.ThetwodecadesbeforetheCivilWarwerethegoldenageofthesteamboat,butbeginninginthe1840’stherailroad,whichhadfirstappearedintheUnitedStatesin1830,begantofurnishseriouscompetitionforthewatercarriers.By 1860 the railroads operated over 30,000miles ofmain lines. Therailroadwasmuchlessanimprovementoverthesteamboatsthanthesteamboatshad been over flatboats, keelboats, and wagons. Still, the iron horseprogressively displaced water transportation in most lines. Mark Twainportrayedthetrendinacharacteristicdescription:

Boatusedtoland—captainonhurricaneroof—mightystiffandstraight—ironramrodforaspine—kidgloves,plugtile,hairpanedbehind—manonshoretakesoffhatandsays—

“Gottwenty-eighttonsofwheat,cap’n—begreatfavorifyoucantakethem.”“‘lltaketwoofthem”—anddon’tevencondescendtolookathim.Butnow-a-daysthecaptaintakesoffhisoldslouch,andsmilesallthewayaroundtothebackofhis

ears,andgetsoffabowwhichhehasn’tgotanyramrodtointerferewith,andsays—“Gladtoseeyou,Smith,gladtoseeyou—you’relookingwell—haven’tseenyoulookingsowell

foryears—whatyougotforus?”“Nuth’n,” says Smith; and keeps his hat on, and just turns his back and goes to talking with

somebodyelse.15

Thewatercarriers,beingrelativelymoreefficientinthecarriageofbulky,low-value-per-poundgoods, survived and even flourished transportinggrains, ores,andcoal.AftertheCivilWarthedevelopmentoftowboatbargesystemshelpedthe river carriers to retain much of their business on the Ohio and theMississippi, and enormous ore boats on theGreat Lakes continued to expandtheir trade.But thefuturebelongedto therailroad,andits impactwassogreatthat some historians have dubbed the post-Civil War era the Railway Age.Probably no other single invention in the nineteenth century had such far-reachinginfluence.

Railroadsdidnotsimplyprovidemorecheaplythesameservicethatcanalsand steamboats had previously supplied. In fact, transport rates on the canals,lakes,andrivers, incentsperton-mile,remainedlowerthanrailroadrates.Butthe railroad provided a service so superior in quality that it more thancompensatedforitshigherprice.Itsmajoradvantagesweremoredirectroutes,reduced transshipment, greater speed and safety, and year-round service.Withtheintroductionoftherailroad,insuranceratesandwarehousingchargesfell,asdid the degree of uncertainty surrounding shipping and delivery dates.Commerce became more predictable. Moreover, the railroad permitted thesettlementoflargepartsofthewesternUnitedStateswherewatertransportationwasnot feasible, and there its influencewasmost striking.The availability ofrailroad transportation in the trans-MississippiWest encouraged a far-reachingrelocationofagriculturalactivities;grainandmeatproductionsoonconcentratedin this area. This relocation contributed substantially toward raising overallagriculturalproductivity.16

In Communications great technological advances occurred. The telegraphhad appeared in the 1840’s; the telephone followed in the 1870’s; and bothcontinued todiffuse, supplyingprogressivelymore services. Informationcouldnow be transmitted in seconds instead of days. The availability of instantcommunications improved the working of markets by increasing theircompetitiveness,fortraderscouldnowcarryoutarbitrageoperationsquickly—buying in onemarket to sell in anotherwith lugher prices—thus insuring thatpricesindifferentmarketsforthesamegoodwouldnormallydifferonlybythecost of transportation between the places. Businessmen could discoveropportunitiesforremunerativesalesinmarketsthroughoutthenation.DavidA.Wellsnoted in1889that“thecommandthroughthe telegraphof instantaneousinformationthroughouttheworldoftheconditionsandprospectsofallmarketsforallcommoditieshasalsoundoubtedlyoperatedtoimpartsteadinesstoprices,

increase thesafetyofmercantileandmanufacturingoperations,and reduce theelementsofspeculationandofpanics to the lowestminimum.”17Inshort, thetelephone and the telegraph lowered the cost of information and therebycontributed toward increasing productivity throughout the entire economicsystemby reducing theuncertainties surrounding transactions andby reducingthequantityof resourcescommitted tosearchactivitiesor tiedup in inventorystocks. On the eve of World War I, Western Union handled more than 100milliontelegraphicmessagesannually,andover10milliontelephonesfacilitatedadditionalcommunications.

Technological advances in agriculture, where a large proportion of thenation’s total output originated, had a major influence in determining theeconomy’soverall rateofproductivitygrowth. Improved ironand steelplows,cultivators,seeddrills,reapers,andthreshingmachineshadallappearedbeforetheCivilWar,buttheirdiffusioncontinuedfordecadesafter1865.Avarietyofhorse-drawn implements like the springtoothanddischarrows, thegangplow,the self-binding reaper, and the “combine” reaper-thresher appeared after thewar. These examples illustrate “embodied” technological progress. Otheradvances,likenewmethodsofplowingandcroprotation,were“disembodied,”not requiring new capital goods for their implementation. Livestock keepersimproved the quality of their animals through selective breeding, and farmersraised the quality of their crops by carefully selecting hardier, more disease-resistantseeds.After1905thegasolinetractorcameintouse,givingindicationsof even greater productivity gains in agriculture that would come with thereplacementofhorsepowerbytheinternalcombustionengine.

Sweeping technological advances occurred in manufacturing. The sewingmachine,inventedinthe1840’s,wasputtovarieduseinthegarmentandshoeindustriesaswellasinhomes.Inthe1870’sthemillingindustryadoptedrollergrinding, which allowed the transformation of hardWestern wheats into fine,high-quality flour. Refrigerated railway cars and storage rooms mademeatpacking and fresh meat distribution into a unified national industry after1880, putting fresh meat from the Midwest on the tables of consumersthroughout the nation. The Bessemer converter and the open-hearth processrevolutionized the steel industry, permitting for the first time the large-scalemanufactureofsteelatpricesso low that it soonbecamecommonlyusedasabuilding material throughout industry (Figure 2.7). Steel makers made majorproductivitygainsbyrearrangingtheirplantstoeliminatemuchofthereheatingofmaterials and to capture valuable by-products.Theproductivity ofmachine

toolsincreasedrapidly.High-speedtoolsteel—analloythatretainsitsstrengthathigh temperatures—appearedaround the turnof thecentury,permittingcuttingoperations to be performedmuch quicker. During the 1870’s steam surpassedwater as a source of power, and after 1890 electrical power was increasinglyapplied in industrial uses. Between 1865 and 1915 aggregate energyconsumption increased more than fivefold, and mineral fuels (predominantlycoal),whichhadprovidedlessthan20percentofthisenergyin1865,furnishedover85percentin1915.

Figure 2.7 Steel production. Source: Peter Temin, Iron and Steel in Nineteenth-Century America(Cambridge,Mass.:M.I.T.Press,1964),pp.270–71.

MAINPATTERNSOFTRANSFORMATION

Thecompositionoftheeconomy’stotaloutputchangeddramaticallyinthepost-Civil War era (Table 2.6). As their incomes rose, consumers increased theirspending for the products of agriculture only slowly, and for manufacturedproductsmuchmore rapidly.Moreover, the rise in the fractionof total incomeused to finance material investment placed a greater demand on themanufacturing industries. As a result, the rate of return in manufacturingenterprisesbecame relativelygreater, andentrepreneursmoved toexpandsuchproduction;atthesametimemanyfarmers,discouragedbytheirrelativelackofsuccess,soughttoimprovetheirconditionbyseekingnonfarmoccupations.Theupshotofthesemovementswasthetransformationofapredominantlyagrarianeconomy into a great industrial economy—a transformation so sweeping andpregnantwithimplicationsthateconomichistorianshavecalleditan“industrialrevolution”andmade it thefocusofamajorpartof their researchfor thepastcentury. In 1870, after several decades of industrial growth, theUnited StateshadamanufacturingoutputequaltothatofFranceandGermanycombined,butonly about three fourths as large as that of theUnitedKingdom; by 1913 theAmerican manufacturing output equalled that of France, Germany, and theUnited Kingdom combined! Still the greatest producer of raw materials andfoodstuffs,theUnitedStateshadbecometheworld’sindustrialgiantaswell.

TABLE2.6PERCENTAGEDISTRIBUTIONOFCOMMODITYOUTPUT

Year Agriculture Mining Manufacturing Construction1869 53 2 33 121874 46 2 39 121879 49 3 37 111884 41 3 44 121889 37 4 48 111894 32 4 53 111899 33 5 53 9

SOURCE. Robert E. Gallman, “Commodity Output, 1831–1899,” in National Bureau of EconomicResearch, Conference on Research in Income and Wealth, Trends in the American Economy in theNineteenthCentury(Princeton,N.J.:PrincetonUniversity,1960),p.26.

Therapidgrowthofmanufacturing,trade,andtransportationoutputsandtherelativedeclineofagriculturaloutput led toparallelchanges in thedistributionof employment among the various sectors (Table 2.7). Most striking was thegreat reduction in the agricultural share: in1870well over half of allworkerswere farmers or farm laborers; by 1910 only one in three was. The relative

employment gains, being spread over several sectors, were less obvious thanagriculture’srelativelosses.Transportationemploymentgrewfastestofall,tradeemploymentsomewhatslower;andthestillslowerexpansionofmanufacturingjobs seems really quite moderate in relation to the immense outpouring ofmanufactured goods. The relatively slow expansion of manufacturingemploymentispartlyastatisticalillusionarisingfromchangesinthedefinitionofmanufacturingworkersstartingwiththecensusof1900,buttoalargerextentit reflects the enormous increases in output per worker achieved in themanufacturingsector.

TABLE2.7PERCENTAGEDISTRIBUTIONOFLABORFORCE

SOURCE. Stanley Lebergott, “Labor Force and Employment, 1800–1960,” in National Bureau ofEconomicResearch,ConferenceonResearchinIncomeandWealth,Output,Employment,andProductivityintheUnitedStatesafter1800(NewYork:ColumbiaUniversity,1966),p.119.

While thesectoralcompositionofoutputandemploymentunderwent rapidchanges, locationalpatternsshiftedinanequallyradicalway.Thethrustoftheinterregional movement was westward, but the pattern wasmore complicatedthan this simple statement suggests (Table 2.8). In general, opportunities forearning an income determined the locations of productive activities, andindividual workers and businessmen adjusted accordingly, though populationmovements did of course produce a feedback effect on decisions about thelocation of production. The overall impression of scholars who have studiedmigration patterns is that Americans moved readily in an attempt to improvetheir economic condition. This high mobility played an important role in thesuccessfulfunctioningofageographicallyvastmarketeconomy.

TABLE2.8PERCENTAGEREGIONALDISTRIBUTIONOFPOPULATION

SOURCE. Richard A. Easterlin, “Interregional Differences in Per Capita Income, Population, and TotalIncome,1840–1950,” inNationalBureauofEconomicResearch,ConferenceonResearchinIncomeandWealth,TrendsintheAmericanEconomyintheNineteenthCentury(Princeton,N.J.;PrincetonUniversity,1960),p.136.Percentagesmaynotsumto100becauseofrounding.Regionsaredefinedasfollows.NewEngland: Maine, Vermont, New Hampshire, Massachusetts, Connecticut, and Rhode Island. MiddleAtlantic: New York, New Jersey, Pennsylvania, Delaware, and Maryland. East North Central: Ohio,Indiana,Illinois,Michigan,andWisconsin.WestNorthCentral:Minnesota,Iowa,Missouri,NorthDakota.South Dakota, Nebraska, and Kansas. South Atlantic: Virginia, West Virginia, North Carolina, SouthCarolina.Georgia,andFlorida.EastSouthCentral:Kentucky,Tennessee,Alabama,andMississippi.WestSouth Central: Arkansas, Louisiana, Oklahoma, and Texas. Mountain: Montana, Idaho, Wyoming,Colorado,NewMexico,Arizona,Utah,andNevada.Pacific:Washington,Oregon,andCalifornia.

1Grossnationalproduct,usuallyabbreviatedGNP,isdefinedasthevalueatmarketpricesofallfinal

goodsproduced in a year. It is themost commonmeasure of an economy’s total output.Notice thatwecount only final commodities and services. For example, suppose a farmer sellswheat to amiller,whomakesitintoflourforsaletoabaker,whomakesitintobreadforsaletofinalconsumers.Onlythebreadisa final good; the wheat and the flour are intermediate goods. By accounting convention, we considerdurable capital goods and additions to inventories final, even though their sole purpose is to enlarge thecapacitytoproduce,andthereforetheyareintermediateinanimportantsense.ByspeakingofachangeinrealGNPwe refer to a comparison of two collections of goods valued at the same prices. Since pricestypically change over time,we canmake reliable statements about growth or decline of output only byweightinggoodswithconstantprices.SeeArmenA.AlchianandWilliamR.Allen.UniversityEconomics,2ded.(Belmont,Calif.:Wadsworth.1967).pp.513–16.

2The following analysis of price trends is highly simplified. For a detailed account, see MiltonFriedmanandAnna J.Schwartz,AMonetaryHistoryof theUnitedStates,1867–1960 (Princeton,N. J.:PrincetonUniversity,1963),pp,15–188.

3Thisbriefdiscussionnecessarilyomitsmanyaspectsof the seculardecline in fertility.Fordetailedanalysisanddescription,seeGaryS.Becker,“AnEconomicAnalysisofFertility.”inNationalBureauofEconomic Research, Demographic and Economic Change in Developed Countries (Princeton, N. J.:PrincetonUniversity,1960).pp.209–31,andcommentsbyJamesS.DuesenberryandBernardOkun,pp.231–40;andE.A.Wrigley,PopulationandHistory(NewYork:McGraw-Hill,1969),especiallypp.217–24.

4Theproblemssurroundingthesecalculationsarebothconceptualandempirical.Foranintroductiontothe literature on productivity measurement, see Solomon Fabricant, “Productivity,” in InternationalEncyclopediaoftheSocialSciences(NewYork:Macmillan,1968).ThemostsophisticatedcontributiontothisliteratureisDale:JorgensonandZviGriliches,“TheExplanationofProductivityChange,”ReviewofEconomic Studies,XXXIV (July 1967).But see also the important criticisms of the Jorgenson-Griliches

paperbyEdwardF.Denison,“SomeMajorIssuesinProductivityAnalysis,”SurveyofCurrentBusiness,IL(May 1969), Pt. II. The whole field is lucidly surveyed byM. Ishaq Nadiri, “Some Approaches to theTheory andMeasurement ofTotalFactorProductivity:ASurvey,”Journal ofEconomicLiterature,VIII(Dec.1970).

5Recreationalusesofresourcesconstituteexceptionstothesestatements,butsuchuseswereoflittleconsequenceduringthepost-CivilWarera.

6 Stanley Lebergott, “Labor Force and Employment, 1800–1960,” in National Bureau of EconomicResearch, Conference onResearch in Income andWealth,Output, Employment, and Productivity in theUnitedStatesafter1800(NewYork:ColumbiaUniversity,1966),p.126.

7CitedinC.-E.A.Winslow,TheEvolutionandSignificanceof theModernPublicHealthCampaign(NewHaven:YaleUniversity,1923),p.10.

8CitedinStanleyLebergott,ManpowerinEconomicGrowth(NewYork:McGraw-Hill,1964),p.120.9GeorgeC.Whipple,“FiftyYearsofWaterPurification,”inMazyckP.Ravenel,Ed.,AHalfCenturyof

PublicHealth(NewYork:AmericanPublicHealthAssociation,1921),p.166.10FrederickL.Hoffman,“AmericanMortalityProgressDuringtheLastHalfCentury,”inRavenel,op.

cit.,p.102.11 For detailed statistics concerning incorporation, see George Heberton Evans, Jr., Business

IncorporationsintheUnitedStates,1800–1943(NewYork:NationalBureauofEconomicResearch,1948).12UptonSinclair,TheJungle(NewYork:SignetClassics,1960),pp.40–41.13AlfredD.Chandler.Jr.,StrategyandStructure:ChaptersintheHistoryoftheIndustrialEnterprise

(Cambridge,Mass.:M.I.T.Press,1962),p.37.14 On the strategic role of the machine tool industry in economic growth, see Nathan Rosenberg,

“CapitalGoods,Technology,andEconomicGrowth,”OxfordEconomicPapers,XV(Nov.1963),andidem.“TechnologicalChange in theMachineTool Industry, 1840–1910,”Journal ofEconomicHistory,XXIII(Dec.1963).

15MarkTwain,LifeontheMississippi(NewYork:CharlesL.Webster,1891),pp.570–7116For calculations of the effect of thewestwardmovement on productivity in grain cultivation, see

WilliamN.ParkerandJudithL.V.Klein,“ProductivityGrowthinGrainProductionintheUnitedStates,1840–60and1900–10,”inNationalBureauofEconomicResearch,ConferenceonResearchinIncomeandWealth,Output, Employment, and Productivity in the United States after 1800 (New York: ColumbiaUniversity,1966).

17DavidA.Wells,RecentEconomicChanges(NewYork:Appleton,1889).p.82.

ADIGRESSION:HOWGROWTHBEGANCapitalformationisoneoftheconditionsofeconomicgrowth,andtheexistenceofalawofpropertyisone of the conditions of capital formation. . . . For if a resource and its fruit could not be protectedagainst thepublicat large, itwouldcertainlybemisused, andhardlyanypersonwould find itworthwhile to invest in its improvement. . . . [U]nlesswematchdifferentialeffortwithdifferential reward,men are unlikely to take the trouble to develop their talents and resources to the utmost of theircapabilities.

W.ARTHURLEWIS

EconomicgrowthdidnotbeginwithagreatleapaftertheCivilWar.Althoughour evidence onwhen it actually began is scanty, it appears certain that rapidgrowthoccurredinthetwodecadesbeforetheCivilWar,andoutputpercapitaprobably increased also in the two decades before 1840, although at a slowerrate.Inshort,sustainedeconomicgrowthbegansometimeinthefirsthalfofthenineteenthcentury.Perhapstheattempttodatethestartingpointwithanygreaterprecisionisreallynotafruitfulexercise.Afterall,economicgrowthdidnotjustsuddenlyappear;rather,itemergedslowlyandhaltingly,againstmanyobstaclesandwithmanytemporarysetbacks.

In a book concerned only with the post-Civil War era, we could easilydismiss the subject of how growth began as a question belonging to anotherstudy.Butthatwouldbeaseriousmistake,forunlessweunderstandhowgrowthbegan,wecannotreallyunderstandhowitcontinuedinaself-sustainingfashionthroughout thepost-CivilWarera.In thisdigression,weoffera theoryofhowgrowthbegan.Thoughweshallpresentsomeevidencethatitisconsistentwiththe facts of American economic history, no rigorous tests of the hypothesesimplied by this theory are presently available. Property rights, which play acentral role in the theory, areparticularlydifficult to incorporate into clear-cuthypothesis tests. Our hope is that by sketching the theory we will encourageothers to join in theattempt toextendand test it.Having issuedourcaveatsattheoutset,weproceedbelowwithoutqualification.

Beforethenineteenthcentury,relativelylittleinvestmentinmaterialcapital

tookplace,thetechnologyadvancedhaltingly,andworkersacquirednewskillsatasnail’space.Thisvirtualabsenceofproductivity-raisingactivities,extendingbackthroughmilleniaofcivilizedhistory,sprangfromtwosources.

The first was the prevalence of limited markets. The limitations on theeffectivesizeofmarketsaroseinsomeplacesfromsmallpopulations, inotherplaces from low levels of income per capita, and in most places from both.Primitive technologies of transportation and communication obstructed thewidening of effectivemarkets through interregional or international trade, andhigh costs of information about potential foreign markets restricted trade toitemswithhighvalue/weightratios,asinthefamousmedievalspicetrade.Withtherevivalofcommerceinthelatemedievalperiod,Europeanmarketsbegantowiden;populationgrowthpromotedthesameresult.Butthesechangesoccurredslowly,eversoslowly,andwithfrequentreversalsaswarsandraidingdisruptedtrade and as plagues, famines, and other natural disasters decimated thepopulation of Europe. Over the centuries, however, markets did grow, thesettlement of North America by English colonists being a simple overseasextension of this growth. The colonies expanded in response to the homecountry’s growing demand for American staples—tobacco, rice, indigo, fish,lumber, naval stores. Later, in the early nineteenth century, cotton became theleadingexport.Theexpansionofarapidlygrowingpopulationwestwardintoanapparentlyinexhaustibleareaoffertilelandmadepossibleanincreasingsupplyofthesegoods.WithintheUnitedStatesthegrowthofpopulationfromlessthan4millionin1790tomorethan31millionin1860providedvisibleevidenceofwideningmarkets.Atthesametimecanals,steamboats,andrailroadsmadethepopulation more internally accessible. Certainly before the middle of thenineteenth century, narrow markets no longer constrained the undertaking ofproductivity-raisingactivitiesinAmerica.1

Large markets alone, however, could not stimulate many individuals toinvent or to acquire skills. The second requirement was the development ofsecure private property rights, for evenwithwidemarkets the substantial riskremained that, havingmade investments in raising their productivity, investorswould be unable to capture gains sufficient to justify the effort. The sameinsecurity influenced the accumulation of material capital where the returnsaccruedoveralengthyanduncertainfuture.Asmarketsbecamegeographicallylarger, with many transactions being necessarily conducted at a distance, theproblemsofinsuringthatone’spropertywouldberespectedgrewmoresevere.Andalwaysthethreatwastwofold,forpropertyrightsmightbedisregardedby

governments as well as by other individuals.With private property rights ill-defined and ill-enforced, individuals could not form reliable expectations.Uncertaintydominated thefuture,andonly thefoolor thehumanitarianriskedvaluableresourcesinventurespromisinggreaterbutlaterrewards.

Englishmen, of course, had proceeded further than others toward securingthe rights of private property.Butmuch remained to be done even in the lateeighteenth century, and in many cases the American colonists enjoyed lessprotection than their cousins did at home.After all, theAmerican Revolutionwas in largemeasureprovokedbytheBritishgovernment’sarbitrary treatmentof American property. Mere independence, however, did not cure these illscompletely.Shays’Rebellion,a1786uprisingofMassachusettsfarmersdefyingcourtorderstorepaydebtsasagreedintheircontracts,alarmedmanythroughoutthenewnationandintensifiedconcernforthesecurityofproperty.InNovember1787, James Madison complained of a “prevailing and increasing distrust ofpublicengagements,andalarmforprivaterights,whichareechoedfromoneendofthecontinenttotheother.”Andtwomonthslaterhewrote:

The sober people of America are weary of the fluctuating policy which has directed the publiccouncils.Theyhaveseenwithregretandindignationthatsuddenchangesandlegislativeinterferences,incasesaffectingpersonalrights,becomejobsinthehandsofenterprisingandinfluentialspeculators,andsnarestothemore-industriousandless-informedpartofthecommunity.Theyhaveseen,too,thatone legislative interference is but the first link of a long chain of repetitions, every subsequentinterferencebeingnaturallyproducedbytheeffectsofthepreceding.Theyveryrightlyinfer,therefore,that some thorough reform iswanting,whichwill banish speculations on publicmeasures, inspire ageneralprudenceandindustry,andgivearegularcoursetothebusinessofsociety.2

Independence did create an opportunity for Americans to establish a newframework of property rights consistent with their desire for materialadvancement.TheConstitutionwas the first step, and inmanyways themostimportantone. Its provisions for security against foreignanddomestic threats,for post offices and roads, for duty-free interstate trade, and for uniformbankruptcylawsdirectlyhelpedtopromotetradeandspecialization.ItalsogaveCongress theright toprovideforapatentsystem:“Topromotetheprogressofscienceandusefulartsbysecuringforlimitedtimestoauthorsandinventorstheexclusive right to their respective writings and discoveries.” With greaterassurance of capturing the gains from their ideas, inventors emerged morerapidlythaneverbefore.Ofimmenseimportancewastheprovisionprohibitingany state frompassing a law thatwould impair the obligation of contracts. In1819 John Marshall, Chief Justice of the U. S. Supreme Court, recalled theinsecuritythathadafflictedtherightsofprivatepropertybeforetheConstitution:

“[A]courseoflegislationhadprevailedinmany,ifnotinall,ofthestates,whichweakened the confidence of man in man, and embarrassed all transactionsbetween individuals, by dispensing with a faithful performance ofengagements.”Marshallapparentlyhadinmindtheactspassedbysevenstatesin the1780’sauthorizing the issueofpapercurrency toserveasa legal tenderforthesettlementofdebtscontractedintermsofspecie.TheContractClauseoftheConstitution,hesaid,wasdesigned“tocorrect thismischief,byrestrainingthe power which produced it.”3 The Constitution also explicitly forbade thestates to coin money or to emit bills of credit. The Bill of Rights, tenamendments to theConstitution adopted in 1791, guaranteed “the right of thepeople to be secure in their persons, houses, papers, and effects, againstunreasonablesearchesandseizures”;itprovidedthatnoperson“bedeprivedoflife,liberty,orproperty,withoutdueprocessoflaw;norshallprivatepropertybetaken for public use, without just compensation”; furthermore, “in Suits atcommon law,where the value in controversy shall exceed twenty dollars, theright of trial by jury shall be preserved.” In brief, the Constitution laid thefoundation of private property rights so as to curb the arbitrary powers ofgovernmentandtopromotethesecurityrequiredforthepursuitofproductivity-raisingactivitiesofallkinds.

Uponthisfoundationanimposinglegalstructurearoseinthefirsthalfofthenineteenthcentury.Ofcentralimportanceweretheelaborationandextensionofthecommonlawofcontract.WithEnglishprecedentsasastartingpoint,judgessetdownnewrulesforthelegaltreatmentofnegotiableinstrumentslikenotes,billsofexchangeandlading,andwarehousereceipts.Inanexpandingandfar-flungmarket, uniform standards for dealingwith these commercial documentswere essential. Judges also clarified the legal responsibilities of factors andagents and extended the law with respect to banking and insurance. In 1836Congressreformedthepatentsystem,andthenewlaw,incombinationwithitssubsequent interpretations by the courts, did muchmore to protect inventors’rights to their ideas. In all these areas the general effect was to facilitate theoperation of private economic activities and to stabilize the expectations ofindividualsconcerning the legal statusofprivateproperty in itsvarious forms.Thedoctrineofstaredecisis—thatlowercourtsareboundbythepriordecisionof the highest court in the same jurisdiction in substantially similar cases—became firmly entrenched during this period, contributing further to theestablishmentofapredictablelegalorder.

The judgesofMassachusettspioneered inestablishingabodyofAmerican

precedents. Theophilus Parsons, Chief Justice of the Massachusetts SupremeCourtfrom1806to1813,becameknownas“TheGiantoftheLaw.”“Hewas,”says Daniel Boorstin, “a true New Englander both in his feeling for localcustoms and in his desire, especially in the laws of commerce, shipping, andinsurance, to follow thepracticeofmerchants.”4LemuelShaw,MassachusettsChief Justice from 1830 to 1860, contributed monumentally to the body ofcommonlaw.Hedidmuchtomakethelawconsistentwitheconomicprogressby adapting liability provisions to the special circumstances of railroadtransportation. He also introduced the notion of “eminent domain,” whichallowedthefullycompensatedconfiscationofprivatepropertyforpublicuse—as, for example, in establishing a railroad right-of-way. The distinguishingfeature of this new legal device was that governments might delegate theirconfiscatory power to private parties, such as railroad companies, for well-defined and limited purposes. Without the power of eminent domain, it isdoubtful that the nation’s transportation system, with all its associated socialbenefits,couldhavedevelopedasfastasitdid.

Lawwritersalsoperformedacrucialfunctionintheearlynineteenthcentury,foruntil theexistingruleshadbeensystematized, itwasdifficultandcostly toknow the legal consequences of many actions. Though lawyers and judgescommonly cited English precedents, some states attempted to restrict theircitation, and they were not uniformly observed. As Boorstin properly notes,“WithoutageneralAmericanlegalsystem,technicallydefinedandavailableinbooks,thefreecommerceamongourstatesandtheindustrialunityofournationmighthavebeen impossible.”5After thefirstquarterof thenineteenthcenturythisgapwassteadilyfilled.LandmarkwritingsincludedNathanDane’sGeneralAbridgement and Digest of American Law (8 vols., 1823), James Kent’sCommentariesonAmericanLaw(4vols.,1826–30),andthevoluminousworksof Joseph Story, an Associate Justice of the U. S. Supreme Court, includingCommentariesontheConflictofLaws (1834)andOnEquityJurisprudence (2vols.,1836).AmonghismanyaccomplishmentsStorycontributedagreatdealtothelawofpatents.Allthesewritersreliedonthetranscriptsofcourtproceedingsprepared by official reporters, appointed first to reportUnited States SupremeCourtcasesearly in thenineteenthcentury.BytheCivilWarall thestateshadofficial reporters, greatly facilitating the systematic compilation of cases onwhichthedevelopmentofcommonlawcruciallydepends.

FromhispositionasChiefJusticeoftheU.S.SupremeCourt,JohnMarshall

exertedapowerfulinfluenceontheestablishmentofalegalorderofsecurityforprivate property.His long tenure on the court extended from 1801 to 1835, acrucialperiodintheshapingofAmericanlaw.Marshall’sopinionsinthecasesof Fletcher v. Peck (1810) and Trustees of Dartmouth College v. Woodward(1819)weregiantstepsforwardinguaranteeingthesanctityofcontracts.Intheformercaseheaskedrhetorically:“Itmaywellbedoubtedwhetherthenatureofsocietyandof thegovernmentdoesnotprescribesomelimits to the legislativepower;andifanybeprescribed,wherearetheytobefound,ifthepropertyofanindividualfairlyandhonestlyacquired,maybeseizedwithoutcompensation?”The Constitution’s Contract Clause, he added in the latter case, “must beunderstoodasintendedtoguardagainstapowerofat leastdoubtfulutility, theabuseofwhichhadbeenextensivelyfelt,andtorestrainthelegislatureinfuturefrom violating the right to property.” In Gibbons v. Ogden (1824) Marshalldeclaredthevalidityof theInterstateCommerceClauseingivingthepowertoregulateinterstatetradesolelytothefederalgovernment,andbyproscribingtheobstructiveactionsof individual stateshehelped tocreate the legal conditionsthatwouldpermittheemergenceofabroadnationalmarket.InallhisdecisionshewasatpainstocombatthosewhowouldinterprettheConstitutionnarrowly,who would “explain away the constitution of our country and leave it amagnificentstructureindeed,tolookat,buttotallyunfitforuse.”6InhishandstheConstitutionbecame thebasic institutional foundationfor thepromotionofmaterialprogressinAmerica’smarketeconomy.

As the economy’s total output grew in response to the foreigndemand forAmerican staples,many inventions became attractive investments for the firsttime;theacquisitionofmanyskillsbecameworthwhileforthefirsttime;manyinvestmentsinmaterialcapitalwerejustifiedforthefirsttime.Inasettingwhereproperty rightswere defined and enforced in away that encouraged inventionandprotectedprivateproperty, economicgrowthcouldbegin.Andonceunderway, the whole process became self-sustaining, because material, human, andintellectual capital accumulation led to the growth of output per capita, thusexpanding markets and making it worthwhile to invent further, to acquireadditional skills, and to accumulate more material capital. In brief, the greattransformation that permitted men for the first time to escape from povertyrestedontwofundamentalbases:(1)thegrowthofmarkets,whichintheUnitedStates had its origins in increasing foreign demand and in population growthunder conditions of unlimited land; and (2) the evolution of secure privateproperty rights, including the private right to intellectual property. These

developments,stretchingbackforcenturies,havenoprecisedatesoforigin.ButtheConstitutionwas amajor landmark, and in the first half of the nineteenthcentury, when private property rights became firmly established, severalconvergent influences finally culminated. By the post-Civil War era, self-sustaininggrowthhadbecomethenormalconditionoftheAmericaneconomy.

Of course, nothing guaranteed the continuation of these conditions.But infacttherightsofprivatepropertywereconsolidatedandextendedduringthehalfcentury after the Civil War at the same time that markets were growing atunprecedentedrates.Inthewordsofthelegalhistorian,WillardHurst,

[T]hedevelopmentofthemarketsteadilyincreasedtheinterlockingcharacterofoperationsinthissocietyand thus tended to raisemen’sneed tobeable to relyononeanother’sperformance.Variousfeaturesofourgrowinglawofagreementsreflectedthis.Inmoreandmoreinstances,frommid-centuryon,thelawitselfprovidedaframeworkfortheparties’dealing,unlesstheyexplicitlycontractedoutofthe transaction which the rules of law shaped for them. This was notably true in respect to theinstrumentsofcommerce—billsoflading,warehousereceipts,stocktransferdocuments—andtheformsofassociation,especiallythepartnershiporcorporation.7

TheculminationofallthesedevelopmentscamewhentheSupremeCourtinthe1880’s declared that corporationswere legal “persons,” extending to them theprotectionoftheFourteenthAmendmentandmakingitimpossibleforstatestolevydiscriminatorytaxesuponthem.

In1890theSupremeCourtextendedthedefinitionofpropertyfromphysicalthingstotheexpectedearningpowerofthings—adefinitionalwaysobservedinthemarket—therebystrikingdownthepowerofstatelegislaturestodestroythevalue of private property by fixing unreasonably low prices on the servicesprovided by railways and other utilities. A few years later it recognized thatearning power depends on free access to markets. In Allgeyer v. Louisiana(1897),thecourtsaid:

ThelibertymentionedinthatAmendment[Fourteenth]meansnotonlytherightofthecitizentobefreefromphysicalrestraintofhisperson,butthetermisdeemedtoembracetherightofthecitizentobefree in theenjoymentofallhis faculties; tobe free touse them inall lawfulways; to liveandworkwherehewill;toearnhislivelihoodbyanylawfulcalling;topursueanylivelihoodoravocation,andforthatpurposetoenterintoallcontractswhichmaybeproper,necessary,andessentialtohiscarryingouttoasuccessfulconclusionthepurposesabovementioned....Hisenjoymentupontermsofequalitywithallothersinsimilarcircumstancesoftheprivilegeofpursuinganordinarycallingortrade,andofacquiring,holding,andsellingpropertyisanessentialpartoflibertyandpropertyasguaranteedbytheFourteenthAmendment.8

“Institutions,” Arthur Lewis has written, “promote or restrict growthaccordingtotheprotectiontheyaccordtoeffort,accordingtotheopportunities

theyprovideforspecialization,andaccordingtothefreedomofmanoeuvretheypermit.”9InalltheserespectsAmericaninstitutionswerebasictotheinitiationofeconomicgrowthandtoitssustainment.

1Foradetailedaccountofthewideningofmarketsintheearlynationalperiod.seeDouglassC.North,

TheEconomicGrowthoftheUnitedStates,1700–1860(Engle-woodCliffs,N.J.:Prentice-Hall,1961).2JamesMadison,inTheFederalist(NewYork:ModernLibrary,n.d.),pp.54.289.3 Trustees of Dartmouth College v. Woodward (1819), reprinted in Henry Steele Commager, Ed.,

DocumentsofAmericanHistory,4thed.(NewYork:Appleton,Century,Crofts,1948).pp.220–23.4DanielJ.Boorstin,TheAmericans:TheNationalExperience (NewYork:RandomHouse.1965).p.

39.5ibid.,p.38.6Gibbonsv.Ogden(1824),reprintedinCommager,op.cit.,pp.338–43.7 JamesWillardHurst,Lawand theConditionsofFreedom in theNineteenth-CenturyUnitedStates

(Madison,Wis.:UniversityofWisconsin,1(156),p.14.8CitedinJohnR.Commons.LegalFoundationsofCapitalism (NewYork:Macmillan,1914).p.17.

Seealsopp.11–16.9W.ArthurLewis,TheTheoryofEconomicGrowth(NewYork;HarperTorchbooks,1970),p.57.

III

THERISEOFCITIES

Wehadseveralcitiesofhalfamillion,andoneofmorethanamillion;wehadascoreofthemwithapopulationofahundredthousandormore.Wewereveryproudofthem,andvauntedthemasaproofofourunparalleledprosperity,thoughreallytheyneverwereanythingbutcongeriesofmillionairesandthewretched creatureswho served themand supplied them. . . . [T]heywerenot fit dwelling-places formen,eitherinthecomplicatedandluxuriouspalaceswheretherichfencedthemselvesfromtheirkind,or in thevast tenements, toweringheightuponheight, tenandtwelvestoriesup,wheretheswarmingpoorfesteredinviceandsicknessandfamine.

WILLIAMDEANHOWELLS

[O]nly thepoorest [servants],whocannot findemployment in thecity,willcome to thecountry,andtheseassoonastheyhavegotafewdollarsahead,arecrazytogetbacktotown.

FREDERICKLAWOLMSTED

THEURBANTRANSFORMATION

Themost significant aspect ofAmerica’s transformation in the post-CivilWarera was the relative shift of population from the countryside into cities ofincreasingaverage size (Table3.1).At the end of theCivilWar, fewer than aquarter of Americans were urban dwellers; 50 years later half the populationlivedincities(incorporatedplacesofatleast2500).In1870only14citieshadmorethan100,000inhabitants,butby1910,49placeshadattainedthissize,andthree—NewYork,Chicago,andPhiladelphia—exceeded1.5million.Indeed,onthe eve of the Great War, the population of New York City alone numberedabout 5 million! America had become urban as well as industrial, and theconsequenceswerelegion.

TABLE3.1PERCENTAGEOFTOTALPOPULATIONURBAN

ANDNUMBEROFCITIES

PercentageofTotal NumberofCities

PopulationUrban Over2500 Over100,000Year (1) (2) (3)1870 26 663 141880 28 939 201890 35 1348 281900 40 1737 381910 46 2262 49SOURCE.Col.1:UnitedStatesCensus,1950:Vol.1.Population,p.1–17.“Urban”meansresidingwithinanincorporatedplaceofatleast2500.Cols.2and3:U.S.BureauoftheCensus,HistoricalStatisticsoftheUnitedStates,ColonialTimesto1957(Washington:GovernmentPrintingOffice,1960),p.14.

Theurbaneconomycannotbedivorcedfromtheruraleconomy.Unlesstheproductivityofagriculturalworkerssomewhere in theworld ishighenough tosupportboth the farmers’ familiesandasubstantialnumberofothers,no largecity can exist. Given a sufficiently high level of agricultural productivity tosupportcities,theymightexistforavarietyofreasons,someofanoneconomicnature.The first knowncities, founded several thousandyears ago, apparentlyserved as centers of political administration and religious observance; somemodern cities—Washington, D. C., for example—also rest on such a basis.Moderncities,however,aregenerallyeconomicentities,andonlybyconsideringthem as such can we understand their growth during the past two centuries.Urbanization, a steady increase in the urban population relative to the totalpopulation,requiredthatagriculturalproductivitybecontinuallyrising;ineffect,it requiredeconomicgrowth.This relationexplainswhy,evenas lateas1800,the bulk of the population everywherewas rural, and large citieswere a greatrarity.Butifurbanizationwasaconsequenceofeconomicgrowth,itwasalsoacause, for cities served in various ways to accelerate the rate of productivityincrease. (Some of these urban contributions to economic growth we shalldiscusslaterinthischapter.)

An illuminating way to understand cities as economic entities is byconstructingatheorythatimpliesthatnocitieswouldexist!Sincecitiesdoexist,weknowthatoneormoreoftheassumptionsofsuchatheorymustbefalse.Buttherein lies thepurposeof theexercise, for thenegationsof theseassumptionsprovide sufficient reasons for the existenceof cities.Such a “no-citiesmodel”

helpstoclarifyourthinkingabouttheeconomicbasesofcities.1Theno-citiesmodelcontainsthreeassumptions.First,supposethattheearth

isafeaturelessplain,havingeverywherethesametopography,climate,fertility,andmineralcontent.Next,supposethatalleconomicactivitiesarecharacterizedbyconstantcost;thatis,nomatterhowmuchoutputwereproduced,theaveragecost of producing a single unit would be the same. Finally, assume that allmarkets, whether for outputs or inputs, are perfectly competitive. From theseassumptions it follows logically that no city will exist, for a concentration ofpopulationentailsnoeconomicadvantagebuthasadefinitedisadvantage.Theassumptions imply that every consumer can produce the bundle of goods hedesires at the sitewherehewishes to consume itwithno loss of efficiency—averagecostandoutputlevelareindependent,andresourcesareubiquitous—atthe same time avoiding all transportation costs. Furthermore, the populationunder these conditionswill spread itself out at theminimum possible density,because any attempt at agglomeration would raise land rents without anycompensatingbenefit.

The prediction of the no-cities model obviously fails to correspond withreality,andthereasonsareplain.First,theearthisfarfromhomogeneous.Areasdifferwidelyintopography,climate,fertility,mineralcontent,accessibility,andotherfeatures.Itmaythereforeproveadvantageoustoconcentrateproductionina small area—around a mineral deposit or at a river or railroad junction—forming a city even though the production of commodities occurs at constantcost. Generally, however, we cannot maintain the constant-cost assumption.Especially at rather small output levels, it seems characteristic of manyproduction processes that average unit cost declines as the rate of outputincreases; that is, economies of scale exist. Concentration of production maythen occur because the resulting reductions in average cost more thancompensate for the expenses of transportation incurred in assembling rawmaterials anddistributing the finishedproduct todispersedcustomers. In sum,cities can exist because of natural or man-made heterogeneity in the spatialenvironmentandbecauseofeconomiesofscale.

Onceacityexists, locating thereallows savingsof transportationcosts formany businesses that serve the local market. The city may also attract newbusinesses because the presence of already established activities reduces thecostsofoperatingrelatedbusinessesorbecauselargercitiescanmoreefficientlysupply certainmunicipal services like police and fire protection, good streets,water,andpower.Becausesuchadvantagesofanurbanlocationdonotdepend

on the actions of any individual firm, economists describe them as “externaleconomies”fromthepointofviewofthefirm.Newandexpandedbusinessesinturnattractnewworkers.Ofcourse,atsomepointfirmsinagrowingcitybeginto encounter external diseconomies in the form of traffic and housingcongestion, environmental pollution, and overloadedmunicipal facilities of allkinds. In this case the growth of the city imposes costs on the firm that areindependentofthefirm’sownactions.Whetheracitywillattractnewbusinessesand migrants therefore depends in part on the balance between externaleconomiesanddiseconomiesaswellasonthepotentialnewcomers’knowledgeofthesethings,whichisalwaysimperfect.

Wehavealreadyseenthateconomicgrowthgivesrisetochanges,especiallyin expenditure patterns, that encourage the movement of resources out ofagriculture and into manufacturing, trade, transportation, and othernonagricultural activities. By itself this need not lead to the growth of urbanpopulation, for nonagricultural goods might conceivably be produced in thecountryside.Butinfact, thesekindsofproductiontypicallyappearinanurbansetting.One reason is thatwhile farming is generally a constant-cost industry,many nonagricultural activities are subject to economies of scale. In addition,these activities often benefit from the external economies realizable only incities. Inshort, theyaremost remunerativewhenconductedona largescale—whichitselfmaycreateacity—orwhenlocatedinalreadyexistingcities.Withrising incomes, demand rose relatively faster for nonagricultural goods, andtherefore aggregate production increasingly concentrated in urban areas. Theresultwasamorerapidgrowthofurbanthanoftotalpopulation.

Thisargumentexplainswhy theurbanpopulationbecame relatively larger,but it does not explain how urban population gains were divided between anenlargementofexistingcitiesandtheestablishmentofnewcities.Toanswerthisquestion we must distinguish between at least two kinds of city: one iscommercial, producing mostly services, and the other has a substantialconcentrationofmanufacturingalongwithitsserviceactivities.

ForstatisticalpurposesweshallfollowtheCensusBureauindefiningacityasanincorporatedplaceofatleast2500people.Inthepost-CivilWareramostcitiesengagedprimarilyincommercialfunctions,especiallyinretail trade,andonly a minority possessed substantial amounts of manufacturing. This patternprevailedeverywhere,butitwasparticularlyevidentintheSouthandtheWest,where very few cities belonged to the manufacturing category. Most of themanufacturingcitiesappearedintheNortheastandGreatLakesregions.Asthe

populationbecamemoredenselysettledandpercapitaincomesrose,moreandmorecommercialcities—geographersaptlydescribethemas“centralplaces”—grew up in the East. And in the West agricultural settlement and theestablishment of central places went hand in hand. The South, with lowerincomes and less active trade,witnessed less of this kind of urbanization, buteven there the same process occurred (Figures3.1 and3.2). In every case thereasonswerethesame.Farmersandotherruralpeopledemandedfood,clothing,lumber, fuel, and blacksmith’s services at frequent intervals, and it wasuneconomicalforthemtotravelveryfartomakesuchpurchases.Providingsuchgoods, aswell as a railroad stationand localmarkets and storage facilities forfarmproducts,wasthefunctionofthecentralplacesof2500to10,000people.Suchplaces linkeda largeruralpopulation to therestof theeconomy, therebypromoting greater specialization. Commercial agriculture like that in theAmericanWestcouldoperateefficientlyonlywiththeaidofhundredsofalmostuniformly scattered central place cities. Significantly, in 1870 almost 500 ofAmerica’s663citieshadpopulationsof less than10,000;and fortyyears later1665of2262citieswereinthissizeclass.Ofcourse,notall thesesmallcitieswere central places. Some exploited minerals; others, particularly in the FarWest, provided mainly transportation services; and a few, especially in NewEngland,attractedmanufacturingenterprises.Butmostcitiesof2500to10,000were occupied in facilitating the exchange of manufactured goods and urbanservicesforfarmproducts.Inbrief,thevastmajorityofAmerica’scitiesservedcentral place functions, and the expansion in the number of such placesdependedquitesimplyontheincreasingruralpopulationdensityandtherisinglevel of per capita income. As long as local transportation was by horse andwagon thesesmallcitieswouldcontinue to thrive.Wemustnot forget that therural population, although declining in relative terms, grew in absolute terms,from less than 27 million in 1870 to about 50 million in 1910. This ruralpopulationalsobecamemoreandmorespecialized,demandingmoreandmoreurban-supplied goods.A rapid expansion in the number of central place citieswasapredictableconsequence.2

Figure3.1Percentageurbanin1870,bystates.Source:UnitedStatesCensus.1950:Vol.I,Population,pp.1–17to1–33.

Figure3.2Percentageurbanin1910,bystates.Source:UnitedStatesCensus,1950.Vol.I,Population,pp.1–17to1–23.

CentralplacetheoryallowsustoexplainthegrowthofthegreatmajorityofAmericancities in thepost-CivilWarera.Placesof2500 to10,000accountedforonlyafraction—decliningfrom24percentin1870to19percentin1910—ofthe total urban population, but many larger cities also served central placefunctions; indeed, a complete theory of central places predicts that a regularhierarchyofsuchcitieswillemerge.Smallcentralplacecitiesexistbecausetheirbusinessescansupplysomeservicessocheaply,onarelativelylargescale,thatpeopleinthesurroundingcountrysidewillincurtransportationcostsinobtainingsuchservicesfromthecityandstillbebetteroffthaniftheyprovidedthemforthemselves.Butwhilesmall-citybusinessescanrealizeanormal rateof returnontheproductionofsomeservices,thecityfacestoosmallademandtosupporta full rangeofpotentialurbaneconomicactivities.Wedonotexpect to findastockbroker, a symphonyorchestra,orabrain surgeon ina townof2500.Theresidents of small townsmust obtain such services in larger cities, where thedemand is sufficient to support them. Because a continuum of such “demandthresholds”exists, thelargeracityis, thegreater is thevarietyofbusinessesitwill contain. The city of 50,000 can surely boast a stockbroker, but thesymphonyappearsonly in largerplaces.Smallcitiescontainbusinesseswhoseeconomies of scale exist only at relatively small output levels; larger citiessupport businesses whose economies of scale continue relatively longer asoutput expands. The larger the city, the greater is its “range,” the maximumdistance fromwhich its customers travel. Greater scale economies, and hencelowercostsandprices,justifythebuyer’sincurringgreatertransportationcosts.Andthelargerthecity,thesmalleristheproportionofitscustomersfromruralareas,forverylargecitiesservemanybuyersandsellersfromsmallercitiesaswellaspeoplefromthenearbycountryside.Largercentralplacecitiesprominentin the post-Civil War era included such places as Atlanta, Indianapolis, DesMoines,Sacramento,andSpokane.Andsurroundingeachof thesecitieswasahierarchyofsmallerplaces,oftenfollowingafairlyregularrulethatthesecond-rankingplacewasaboutonehalfaslargeasthelargest,thethird-rankingplaceabout one third as large as the largest, and so forth. The appearance of suchhierarchiesconfirmedthatthefreemarketprovidedanefficientspatialallocationofactivitiesandresources.3

In 1870 the 14 cities of 100,000ormore containedover 4millionpeople,

morethan40percentofthetotalurbanpopulation;in1910the49citiesofthissizeclasshousedmorethan20million,almosthalfofthevastlyenlargedurbanpopulation.HerewefindtheurbanAmericathatstirredthestrongestemotionsamong reformers and rural boosters: the great monster New York, with itstoweringskyscrapersandcrampedtenements;sprawlingChicago,

HogButcherfortheWorld,ToolMaker,StackerofWheat,PlayerwithRailroadsandtheNation’sFreightHandler:Stormy,husky,brawling,CityoftheBigShoulders.4

HerealsoaredingyPhiladelphia,tubercularBoston,andnoisomeBaltimorethatreminded H. L. Mencken of “a billion polecats.” Table 3.2 shows howdramaticallythegreatAmericancitiesexpandedinthehalfcenturybefore1910.

Within thesecities lay thebulkof thenation’smanufacturing. In1890, tenmajorcities—all thoseinTable3.2exceptLosAngeles—accountedforalmost40percentof thevalueadded inAmericanmanufacturing. Indeed, somecitieswere commonly identifiedwith theirmajormanufacturing industry:Pittsburghwith iron and steel; Kansas City andOmahawithmeat-packing;Minneapoliswithflourmilling;Detroit,justbeforeWorldWarI,withautomobiles.Thegreatcities were also the focus of commerce, finance, and communications. Ingeneral, the larger the city, the greater was the number of distinct industriesrepresentedthere.Thoughthelargestcitiesalmostwithoutexceptioncontainedextensivemanufacturingactivities,theywereatthesametimemorediversifiedthansmallerurbanplaces,ascentralplacetheorywouldpredict.

Butcentralplacetheoryappliestomainlycommercialcities;itisinadequatetoexplain thegrowthof thegreatmanufacturingcenters.Wemustexplain theawesome expansion of these cities primarily as a result of the attempt bybusinessmen to benefit from the external economies inherent in urbanagglomeration. The printing and publishing trades provide a good illustration.These businesses were typically located near the city center. Because theydependedonagreatdealofface-to-facenegotiationbetweenbuyersandsellers—economists have described them as “communications oriented”—it wasessentialthattheyoccupyalocationofmaximumaccessibilitywithinthecity.Inalargecityavarietyofspecializedprintingandpublishingtradescouldflourish,andtheaccessibilityandefficiencyofthesespecializedproducersaccruedasanexternaleconomytotheircustomerswithinthecity.Inahostofothercasestheconcentratedmarket represented by a great city encouraged the emergence of

specializedproducerswhoseenhancedefficiencybecameanexternal economyfromtheircustomers’pointofview.Asnotedabove,municipalutilitiessubjectto economies of scale, such as electrical power generation, also providedexternaleconomiestothebusinessesinlargecities.

TABLE3.2POPULATIONSOFELEVENLARGECITIES,1860AND1910

City CityPopulation1860(Thousands)

CityPopulation1910(Thousands)

MetropolitanDistrictPopulation1910(Thousands)

NewYork 1175 4767 6475Chicago 112 2185 2447Philadelphia 566 1549 1972Boston 178 671 1520Pittsburgh 49 534 1045St.Louis 161 687 829SanFrancisco 57 417 687Baltimore 212 558 659Cleveland 43 561 613Detroit 46 466 501LosAngeles 4 319 438

SOURCE.AllanR.Pred,TheSpatialDynamicsofU.S.Urban-IndustrialGrowth,1800–1914(Cambridge,Mass.:M.I.T.Press,1966),p.23.

Thedensepressofpopulationandeconomicactivityon limitedurban landareaspushedlandrentstoastronomicallevels.Intheabsenceofcompletedataon rents, information on land values provides a good substitute. In Chicago’scentralbusinessdistrict,thesquaremilesurroundingStateandMadisonstreets,forexample,thevalueofthelandincreasedduring1873–1910fromabout$72milliontoabout$600million,anamazingincreaseofover700percent.In1910thissmallareaaccountedfor40percentofthevalueofallthelandinChicago!5Thatbusinessmenvaluedthelandsohighlyiscleartestimonytotheadvantagesofacentrallocationinagreatcity.

We can now summarize our discussion of the urban transformation. Thereasonsfortheriseintheurbanproportionofthepopulationlayintwoforces:theeconomicgrowththatgaverisetochangingexpenditurepatternsincreasinglyemphasizing nonagricultural goods, and the decreasing-cost and external-economiescharacteristicsoftheactivitiesbywhichthesegoodswereproduced.Under these conditions it was advantageous for entrepreneurs increasingly to

concentrate theirproductionincities.In theprocess thenumberofcitiesgrew,mainlybyaproliferationofcentralplacesattributabletorisingpercapitaincomeandpopulationdensityintheruralareas.Althoughthiskindofurbanexpansionoccurred in all regions, it can be seen most clearly in the West, whereagriculturalsettlementandtheestablishmentofhundredsofnewcentralplacesoccurred concomitantly. The enormous growth of the largest cities had itssourcesintheattemptbybusinessmentorealizetheeconomiesinherentinurbanagglomerationandat thesame time inmanycases tosave transportationcostswhileservingalargelocalmarket.

THEECONOMICSOFIMPROVINGURBANHEALTH

Rapidurbanizationraisedmanynewhealthproblemsandexacerbatedsomeoldones.Inanerawhenhighlycommunicable,infectiousdiseaseswereresponsibleformostdeathsandagreatdealofsickness,agglomerationofthepopulationindensely inhabitedareashadobviousdrawbacks.Theprimitivestateofmedicalandpublichealthknowledgemilitatedagainstaneffectiveapproach tosolvingthese problems in the immediate post-Civil War years, but the emergence ofbacteriology largely eliminated this critical obstacle; by 1890 the germ theorywaswidely known and accepted. In the three decades beforeAmerica’s entryintotheGreatWarthehealthimprovementsrealized,thoughoftendependentonthe progress of scientific knowledge, were largely the outcome of economicdecisions. The investments made by urban people in an attempt to reap thereturnsofimprovedhealthwereimportantintheirownright,butinmanycasestheyhadanadditionaldimension:theyrepresentedattemptsbygovernmentstoimproveonconditions inwhich theunhamperedactionof individuals failed topromotethesocialwelfare.

In the mid-nineteenth century the health of urban dwellers was markedlyinferior tothatofruralpeople.Whilethedeathrateinthecountrysidewasnotmuchover20per1000population, thedeathrate in the largecitieswasin theneighborhoodof30.The reasons for thiswidedivergenceareapparent.Denseconcentrationofpopulationincreasedthelikelihoodthatcommunicablediseasessuchastuberculosisanddiphtheriawouldspreaddirectlyfrompersontoperson.Water wells were more likely to be fouled by drainage from poorly sealedprivies, and alternative forms ofwater supplywere relatively very expensive.Safe sewage disposal was enormously more difficult than in the countryside.Urban people had less access to freshmilk, fruits, and vegetables, and a poor

dietmadethemeasytargetsforavarietyofinfectiousdiseases.Beginninginthe1880’ssubstantialimprovementsweremadeinurbanhealth

conditions. In part these gains reflected the rising income levels that allowedpeople to enjoy better diets and more spacious housing. To some extent,however, they resulted from conscious efforts to improve the public healthaspectsof theenvironment.Theseefforts included theprovisionofpurewatersupplies and improved means of sewage disposal, the pasteurization of milk,regulargarbagecollection,swampdrainage,andavarietyofotheractions.Theresults were striking. In a group of 35 large cities in 1898–1908, 17 had atyphoid death rate ofmore than 30 per 100,000 and the others all had a rateexceeding15;by1917–19allbuttwoofthesecitieshadreducedtheratetolessthan15.6AsTable3.3suggests, thereduction indeathratesappliedaswell toallthemajorinfectiousdiseases.

Individualsoftenmadeexpendituresforimprovedhealthinthefreemarket.Onecouldvoluntarilyallocatemoreofhisincometowardobtainingabetterdietor more spacious living quarters, though lack of knowledge about nutritionhampered the former effort. The important point, however, is that within theconstraintsoftheirincomesandtheirknowledge,consumershadfullcommandover the purchase of better health in these ways; the success of one man’sinvestmentinimprovedhealthdidnotdependontheactionsofhisneighbors.

In other cases interdependencies prevented individuals from acting alonesuccessfully.Suppose,forexample,thatJohnDoehaddiscoveredtheilleffectsofprivydrainageincontaminatinghiswell.Hemightthenhaveinvestedintheconstructionofaproperlysealedprivy;butitwaslikelytobeawasteofmoney,because he had no way of compelling his neighbors to undertake similarinvestments. Unless everyone acted together, any individual’s efforts wereunlikelytobesuccessful.

TABLE3.3DEATHSPER100,000POPULATIONINNEWYORK,BOSTON,

PHILADELPHIA,ANDNEWORLEANS

Disease AnnualAverage1864–88 AnnualAverage1889–1913Tuberculosis 365 223StomachandIntestinal 299 196ScarletFever 66 19TyphoidandTyphus 53 25Smallpox 40 2

Cholera 8 0Diphtheria 123 58YellowFever 14 1

SOURCE.FrederickL.Hoffman,“AmericanMortalityProgressDuringtheLastHalfCentury,”inMazyckP.Ravenel,AHalfCenturyofPublicHealth (NewYork:AmericanPublicHealthAssociation,1921),p.102.

One way of dealing with such cases is through negotiation and mutualagreement, perhaps including pecuniary compensations, among the partiesinvolved.When the number of involved persons is very large, however, as ittypicallyisinurbanpublichealthproblems,thiskindofnegotiatedagreementisquite difficult and costly; such problems are therefore seldom resolved in thisway.

Analternativemannerofapproachingtheseproblemsisthroughgovernmentaction.Becauseof thegovernment’s ability to coerceuncooperativeminoritiesand to assure aminimum of “free riding” by taxing all the beneficiaries of apublicinvestment,governmentactionshaveoftentakentheplaceofthemarketin cases where important interdependencies prevent individuals from actingeffectively. In dealingwith the problems of urban public health this approachwasgenerallysuccessful,eventhoughitopenednewavenuesforcorruptionandpolitical conflict. Sanitary regulations enforced by newly created urban healthboards,compulsoryvaccinationagainstsmallpox,tenementbuildingcodes,andpublic investments inwaterpurificationandsewagedisposal furnishexamplesofthewiderangeofgovernmentactionsundertakeninthefieldofurbanpublichealthduringthepost-CivilWarera.

Water filtration provides a striking illustration. Before the late nineteenthcentury,peoplegenerallyjudgedthequalityofwateraccordingtoitsclarityandtaste,withoutregardforthedisease-carryingorganismsitmightharbor.Withthedevelopmentofbacteriology,thepublicincreasinglydemandedfilterscapableofstrainingout harmful bacteria, and inventors soondeveloped avarietyof suchdevices. These reduced the incidence of many diseases, especially typhoid.Filtrationloweredthetyphoiddeathrateper100,000populationfrom121to26inLawrence,Massachusetts;from104to26inAlbany,N.V.;from49to11inBinghamton,N.Y.;andfrom68to20inWatertown,N.Y.7Table3.4showsbya dramatic contrast how powerful the impact of filtration could be: Albanyinstalleditsfilterin1899;Troy’swatersupplycamefromthesamesource,theHudsonRiver,withoutfiltration.

TABLE3.4EFFECTOFFILTRATIONONDEATHRATESATALBANY,N.Y.,ANDA

COMPARISONWITHTROY,N.Y.,WHERETHEWATERWASNOTFILTERED

DeathRateper100,000

PercentageReduction1894–98 1900–1904

ALBANY TyphoidFever 104 26 75Diarrhealdiseases 125 53 57Childrenunder5years 606 309 49Totaldeaths 2264 1868 17

TROY TyphoidFever 57 57 0Diarrhealdiseases 116 102 12Childrenunder5years 513 435 18Totaldeaths 2157 2028 6

SOURCE.GeorgeC.Whipple,Typhoid Fever: Its Causation, Transmission andPrevention (NewYork:JohnWileyandSons,1908),p.276.

The interrelatedproblemsofwater supplyand sewagedisposal inChicagoprovideanotherinterestingcase.Before1900thecityusedLakeMichiganbothasasourceofwaterandasareceptacleforsewage.Ahighincidenceoftyphoid,includingperiodicepidemics,wasjustoneoftheundesirableconsequences.Asthecityanditssewagedischargecontinuedtheirspectaculargrowth,Chicagoansfound this arrangement more and more intolerable. The city’s low elevationcompounded its sewerage problems, natural drainage being almost totallylacking. In 1886 the Chicago City Council created the Drainage and WaterSupplyCommission,whichfinallyprovidedasolutionbydivertingallsewagefromLakeMichigan, discharging it into theDes PlainesRiver, fromwhich itpassed into the Illinois River and hence into the Mississippi River drainagesystem.ThisschemealsoreversedthedirectionoftheChicagoRiver’sflowtoprovideaflushingactionforthesewagedischarge.Workontheprojectbeganin1890,butthedrainagecanaldidnotopenuntil1900.

FewcitiesrequiredasspectacularaneffortasChicago’s.Still,theproblemswereseldomeasilysolved,andcontinuedurbanexpansionoftenmadefacilitiesinadequate soon after their installation. On balance, however, public healthworkers made great progress. Compulsory vaccination, for example, reducedsmallpox from a major killer to a statistical rarity by World War I. Filters,chlorination,andaqueductsfrompuremountainstreamsdramaticallyimproved

the quality of water supplies. Compulsory pasteurization of milk reduced theincidenceoftuberculosis,typhoid,andavarietyofotherdiseases.Constructionof modern sewer systems contributed greatly toward a more healthfulenvironment. In the words of a distinguished public health worker, “The twodecades between 1890 and 1910 formed in a sense the golden age of publichealth.. . .Nopreviousperiodoftwentyyearshadeverseenequalprogressintheapplicationofsanitaryscienceanditisdoubtfulifanysimilarperiodinthefuturewilleverwitnessquitesuchphenomenalachievements.”8

Significantly, almost all these improvements involved substantialinvestments.Contemporarieswerewell awareof thecostsbutwereconvincedthat the benefits far exceeded them. Recognizing the greater productivity ofhealthierworkers, theeconomiclossesfromdeaths,andthewasteofresourcesattending sickness, a sanitary engineer asserted in 1908: “To remedy all theseconditionswillcostmoney,butitwillpay.Itwillpaynotonlyinthesatisfactionof having clean and healthful cities to live in, not only in the joy of havingrelievedthesufferingandsavedthedying,butitwillpayinhardcash.”9Oftenthese investments promised a positive return only when undertaken bygovernmentsorundertheumbrellaofgovernmentsponsorshiporauthority.Theinterdependencies that made it difficult or impossible for individuals to copesuccessfullywiththeproblemsofurbanhealthdidnotforeverblockasolution,forinthisareagovernmentsprovedtheircapabilityforprovidingserviceswherethe free market could not function properly Moreover, a by-product of thesegovernment actions was amore rapid dissemination of the new public healthknowledge than would otherwise have occurred—for example, through theschool nurse program—and with this knowledge people could better actindividuallytoimprovetheirhealth.

In his recent study of investments in improving health within a group ofNortheastern statesduring theperiod1880–1910,EdwardF.Meeker considersexpendituresmadeonsanitarysewers,purewatersupplies,andmunicipalhealthconservation projects. He then estimates the monetary value of increased lifeexpectancy and reductions in work missed because of sickness. The rate ofreturn implied by these costs and benefits is 25 percent. Though Meekerqualifiesthisresultinvariouswaystotakeintoaccountunmeasurablecostsandbenefits, his findings suggest strongly that investments in health paid asubstantially greater return than investments inmaterial capital during the latenineteenthandearlytwentiethcenturies.10

URBANIZATIONANDINVENTION

Whileurbanizationdependedoneconomicgrowth, theconversewasalso true,fortheconcentrationofthepopulationincitiesincreasedtherateofadvanceinproductivity. Entrepreneurs employing techniques thatwere relatively efficientwhenconductedona large scaleoftencreatedcities around theirplants;moreoftentheysimplylocatedinexistingcities,wheretheirlabordemandscouldbereadily satisfied.Avariety of external economies attracted businessmen to thecities.New ideas spreadmore rapidly in anurbanenvironment, andhence theaverageplantbecamemoreup-to-datethanitwouldhavebeenunderconditionsofgeographicallydispersedproduction.

Urbanization also stimulated economic growth by facilitating an expandedflowofinventions.Inventiveactivity,wehavepreviouslyargued,isgenerallyaneconomicendeavor;thegreatertheexpectedrateofreturn,themoreinventionswillbeforthcoming.Byextendingthisargumenttoincludeaspatialdimension,wecanshowthaturbanpeoplewouldbeexpected toproducemore inventionsthanruralpeople.

Aninventionisusefullydefinedasanewcombinationofpreviouslyexistingknowledge that satisfies some want. Inventive activity, then, is nothing morethan the process of creating new useful information. From this conception ofinventiveactivity,itisonlyashortsteptopostulatingthatjusttwoinputsentertheprocess:inventivetalentandpriorinformation.

If we suppose that inventive talent (native creativity) is distributedthroughout the population independently of location, then differences ininventive activity among regions or places must depend on variations in theexpected costs of acquiring information. Since rates of return depend on bothrevenues and costs, two kinds of information are relevant. The first isinformation about opportunities for invention, that is, about the extent of themarketforinvention;thesecondisinformationthatcanserveasinputsintotheproduction of inventions. The former determines the potential inventor’sexpectation of the revenue stream that his invention will generate, while thelatterdetermineshisexpectationofthecostofproducingtheinvention.Togethertheseimplyanexpectedrateofreturn,asignalencouraginghimeithertodevotehisenergiestoinventiveactivityortousehistalentsandtimeinanalternativemanner.Tolinkinventivenesstourbanizationwithinthisanalyticalframework,wemustshowthat informationcostsdifferedsystematicallybetweenruralandurbanareas.Suchdifferencesare in factquiteplausible for thepost-CivilWar

era.The expected rate of return depends in part on the expected stream of

revenuefrominvention.Underconditionsprecedingmasscommunication,whenmost reliable information was acquired by direct observation or by word ofmouth, the average search cost of information about potential markets forinventionswasanincreasingfunctionofmarketdistance;therefore,themarketasperceivedbyapotential inventorwas largely restricted tonearby locations.Assuming that the locational distribution of actual inventive opportunitiescoincidedwiththatofthepopulation,theprobabilitythatanopportunitywouldbeperceivedwasthenmuchhigherforurbanthanforruralpersons.Giventheassumed relation between market distance and the average search cost ofinformation,thispropositionfollowsfromthecommondefinitionofacityasanarea of spatially agglomerated population. Moreover, if the more reasonableassumptionismadethat,inrelationtopopulation,actualinventiveopportunitieswere disproportionately concentrated in the cities, there are even strongergroundsforpostulatingthattheexpectedstreamofrevenuefrominventionwaslargerforurbanthanforruralpersons.

Theexpectedrateofreturnalsodependsontheexpectedcostsofinventing,and here we propose an inverse relation with urbanization. “In a pre-mass-communications context, such as the relatively compact cities of the latenineteenthcentury,wherediffusionoftechnicalknowledge[was]highlyreliantupon personal interaction, the possibilities for invention ought to [have been]enhanced by the . . . network of interpersonal communications andconfrontations.”11 In the absence of well-developed means of masscommunication,thecostsofacquiringinformationdependedheavilyonspatialproximity. The expected search costs of acquiring informational inputs werelower for the potential urban inventor than for his rural counterpart simplybecauseoftheenormouslygreaterproximityofurbaninformationcarrierstooneanother.Thegreatesthandicapof ruralpersonswas theirspatial isolationfromone another. To the extent that urban people were better educated, theiradvantageswerecompounded.

Combining the assumptions about the expected revenue stream and theexpectedtotalcostsofinventing,weconcludethattheexpectedrateofreturnoninventiveactivitywashigherinthecitythaninthecountryside.Itisnoweasytoderivethetestablehypothesisthat,otherthingsbeingequal,anincreasinglinearrelationexistedbetweeninventiveness—that is, inventionspercapita—andthe

proportionofthepopulationincities.12Asubstantialbodyofevidenceisconsistentwiththisviewofinventiveness.

OnerecentstudyfoundthatamongAmericanstatesinthe1870–1920periodadifferenceof10percentagepoints in theproportionof thepopulation living incities was positively associated with a difference of 6–9 patents per 100,000population,evenwhentheinfluencesofmanufacturingandregionaldifferenceswereheldconstant.13AnotherstudyfoundthatwithinConnecticut,thenation’smost inventive state, urbanization and inventiveness were closely associated.Citizensofthe12largestcitiesgenerallyprovidedaboutthreefourthsofallthepatentedinventionsinalargerandomsample,andthenumberofinventionspercapitawasgenerallymorethantwiceasgreatinthesecitiesaselsewhereinthestate(Table3.5).

TABLE3.5ESTIMATEDLEVELSOFPATENTEDINVENTIONSPER10,000

POPULATION,CONNECTICUTLOCATIONS,1870–1910

SOURCE.RobertHiggs, “Cities andYankee Ingenuity,1870–1920,” inKennethT. JacksonandStanleySchultz,Eds.,FromVillagetoMetropolis:EssaysontheCityinAmerica(NewYork:Knopf,1972).

These findings may well be significant for the explanation of economicgrowth as a self-sustaining process during the post-Civil War era. To vastlyoversimplify, urbanization was a response to changes in the relative rates ofreturn on agricultural and nonagricultural activities, which in turn resultedlargelyfromchangesinexpenditurepatternsaspercapitaincomesrose.Inbrief,economic growth gave rise to urbanization. But because urbanizationencouraged greater inventiveness, it produced a feedback effect on growth bypromoting more rapid technological progress. In this way urbanization was acause aswell as a consequence of economic growth, and the circle of a self-sustainingprocesswasclosed.Eveniftheexistenceofthisfeedbackmechanismisgranted,however, themagnitudeof its influenceongrowth remainsopen toconjecture.

CITYVERSUSCOUNTRY:THENATUREOFTHECHOICE

Inthepost-CivilWarerarapidurbanizationgaverisetoavarietyofproblems.Housing,sanitation,water,education,andmanyothergoodsweredemandedonanunprecedentedscale,andsuppliesexpandedonlyafteralag,Slums,withtheirassociatedcrimeanddisease,developedatafrighteningpaceinthelargercities,inspiringawholegenerationofreformerstowardprojectsofcivicimprovement.Butnomatterhowloudlycriticsmightdamntheprocessofurbanization,urbanbusinesses boomed and the migration to the cities continued unabated. Ruralvirtueswerestillextolled,butby theiractionsbothAmericansand immigrantsrevealedthatthecity,evenwithallitsdefectsandproblems,seemedpreferabletothecountryside.

Unfamiliarwith and romantic about rural life,manymodern scholarshaveregardedthismigrationasratherparadoxical,asamovementfrombadtoworse.Contemporary writers and later historians alike have heavily emphasized theunsavoryaspectsofurbanization;slumhousing,unemployment,disease,crime,and alienation figure prominently in urban histories and collections ofdocuments.ACaliforniafarmerin1884declaredit“inexplicablethatthecharmsofthecityshouldbesufficientlypotential[sic]toattracttheboysandgirlsfromthefiresidesof thecountry.”14Perhaps thequestion shouldbe raised:was themovementtothecitiesagreatmistake?Afterall,peopledomakemistakes,anditiseasytobelievethatmanymigratedtothecityexpectingsomethingthatwasnot really there.Nevertheless, this isaweak interpretation, for it seemshighlyunlikely that a movement based on false information would have continuedunabatedovermore than a century.Thoughpeople sometimesmakemistakes,theyalsolearnfromexperienceandattempttorectifytheirmistakes.

Without ignoring the problems of the city, it is possible to interpret themigration as a rational response to alternative opportunities. Henry George’scharacterization was surely close to the situation as perceived by millions ofcommonruralpeople:

Considerthebarrennessoftheisolatedfarmer’slife—thedullroundofworkandsleep,inwhichsomuch of it passes. Consider, what is still worse, the monotonous existence to which his wife iscondemned; its lack of recreation and excitement, and of gratifications of taste, and of the sense ofharmonyandbeauty;itssteadydragofcaresandtoilsthatmakewomenwornandwrinkledwhentheyshouldbeintheirbloom.Eventhediscomfortsandevilsofthecrowdedtenement-housearenotworsethanthediscomfortsandevilsofsuchalife.15

Eventhefarmerquotedearlier,whofoundthemovementtothecitiespuzzling,

admittedatanotherpointthat“farmlifeistoooftenthesynonymforunrequitedtoil and harrowing discontent.”16 (In the next chapter we shall elaborate ontheseobservationsofrurallife.)

Amoreimportantpoint,however,isthatfocusingonurbanproblemsgivesadistortedviewofcitylife.Onlyaminorityofcitydwellerslivedinthefesteringslums,yetthestoriesofthesepeoplemakeupamajorportionoftheliteratureofurbansocialandeconomichistory.Attheveryleastthehighermoneyincomesearned by urban people should be noted. In 1890, for example, estimatedaverage annual earnings were $233 for farm laborers; they were $439 formanufacturingworkers, thebulkofwhomlived incities.17Nodoubtsomeofthis difference can be attributed to the greater skills of the averagemanufacturingworkerandtothelowercostsoflivinginthecountryside,butitisprobablethatevenaftersuchcorrectionsasubstantialgapwouldremain.Incomedifferences,however,werebutoneaspectoftheadvantagesofurbanliving.Therangeofcommoditiesandservicesonwhichthehigherurbanincomesmightbespentwasenormouslygreaterthaninthecountryside.Culturalamenitieslikethetheaterandconcertmusicwereavailableonlyincities.Thelibrarieswerethere;so were the daily newspapers—not to mention telephones and electric lights.Sociologists have said a great deal about urban alienation, yet from theperspectiveof theformerresidentofanisolatedfarmstead, themereproximityofneighborsopenedupnewopportunitiesforsocialintercourse,ifnothingmorethanadrinkandconversationafterwork.

Theaccountsofcontemporarywriters,reformers,andsocialworkerscanbehighly misleading. Ultimately people reveal their preferences by their actualchoices, and in the post-Civil War era they increasingly chose an urbanresidence.Wecansurelylearnagooddealaboutthecities—andthecountryside—byfocusingonthereasonsforthatchoice,byconsideringitnotasaparadoxbut as a rational response to alternative opportunities. The problems ofurbanizationought toberecognized,butourcalculationsmust includebenefitsaswellascosts ifweare toassess thewelfareeffectsof themovement to thecities.

1Thefirstexpositionoftheno-citiesmodelappearsinTjallingC.Koopmans,ThreeEssaysontheState

of Economic Science. (New York: McGraw-Hill, 1957), pp. 153–54; see also Edwin S. Mills, “AnAggregativeModel of Resource Allocation in aMetropolitan Area,”American Economic Review, LVII(May(1967),198.

2For some statistical tests of hypotheses derived from central place theory, seeRobertHiggs, “TheGrowthofCitiesinaMidwesternRegion,1870–1900,”JournalofRegionalScience,IX(Dec.1969).

3 On the development of urban hierarchies, see Harvey S. Perloff, et al., Regions, Resources, andEconomicGrowth(Baltimore:JohnsHopkins,i960),pp.17–19;andRobertHiggs,“CentralPlaceTheoryandRegionalUrbanHierarchies:AnEmpiricalNote,”JournalofRegionalScience,X(Aug.1970).

4CarlSandburg.“Chicago,”1916.5HomerHoyt,OneHundredYearsofLandValuesinChicago(Chicago:UniversityofChicago,1933),

p.337.6C. E.A.Winslow,The Evolution and Significance of theModern PublicHealth Campaign (New

Haven:YakUniversity,1933).p,38.7GeorgeC.Whipple.TyphoidFever: ItsCausation,Transmission,andPrevention (NewYork: John

WileyandSons,1908).pp.281–82.8Winslow,op.cit,pp.36–37.9Whipple,op.cit.,p.285.10 Edward F. Meeker, The Economics of Improving Health, 1850–1915 (Unpublished doctoral

dissertation,UniversityofWashington,1970),pp.117–53.11AllanR. Pred,The SpatialDynamics ofU. S.Urban-IndustrialGrowth, 1800–1914 (Cambridge,

Mass.:M.I.T.Press,1966),p.96.12Thisproofrequiresonlyalittlealgebra.Bydefinition,thetotalnumberofinventionsIisthesumof

thosemadebyurbanpeopleIuandthosemadebyruralpeopleIr.Thus,I=Iu+Ir.Iuisproportionaltotheurban populationPu, and Ir is proportional to the rural populationPr; but because of differences in thesearch costs of information, and therefore in the expected rate of return on inventive activity, the urbanproportionality factorα isgreater than the ruralproportionality factorß.Thus, Iu=αPu,andIr = ßPr,where α > ß > o. If we substitute these equations into the definition of I and divide both sides of theequationbythetotalpopulationP,weobtainanexpressionforinventiveness:I/P=αPu/P+ßPr/P.SincePr/P=(1–Pu/P),itfollowsthatI/P=ß+(α–ß)Pu/P,where(α–ß)>o.

13 Robert Higgs, “American Inventiveness, 1870-1920,” Journal of Political Economy, LXXIX(May/June1971).

14A.G.Burnett, “Address toCalifornia StateAgricultural Society,”Transactions of the CaliforniaStaleAgriculturalSocietyduringtheYear1884(Sacramento,1885),reprintedinAgriculturalHistory,XLII(April1968),102.

15HenryGeorge.TheWritingsofHenryGeorge(NewYork:DoubledayandMcClure,1898),III,236.16Burnett,op,cit.,103,17 U. S. Bureau of the Census,Historical Statistics of the United States, Colonial Times to 1957

(Washington:GovernmentPrintingOffice,1060),p.92.

IV

THEUPSANDDOWNSOFTHEFARMER

This isanewageto thefarmer.Heisnow,morethaneverbefore,acitizenof theworld.Cheapandexcellentbooksandperiodicalpublicationsloadtheshelfandthetableinhissittingroomandparlor.Hetravelsmorethanheeverdidbefore,andhetravelslongerdistances.Hischildrenarereceivingabettereducation thanhe receivedhimself, and theydressbetter thanhedidwhenhewasachild.Theyaremore frequently in contactwith townandcity life thanhewas.Theyhavea topbuggy, anda fancywhip,andaprettylaprobe,withafaststeppinghorse,whereastheirfatherhadanoldwagonandalessexpensivehorse.Thefarmer’stableisbettertoo;hisfoodismorevaried,andmoreofitisboughtbyhimandlessofitisraisedonhisfarm.

GEORGEK.HOLMES

[N]osplendorofcloud,nograceofsunsetcouldconcealthepovertyofthesepeople,onthecontrarythey brought out,withmore intolerable poignancy, the gracelessness of these homes, and the sordidqualityofthemechanicalroutineoftheselives.

HAMLINGARLAND

AGRICULTURALDEVELOPMENT

ThedevelopmentofAmericanagricultureinthehalfcenturyaftertheCivilWarwassocomplex—nottosayperplexing—thatnosimpledescriptionispossible.In someways this periodwas a veritableGoldenAge of agriculture; in otherways, it was, at least until the late 1890’s, a time of massive failure anddisappointmentforfarmpeople.Inthischapterweshallattempttosortouttheseconflicting aspects of the story, applying some elementary economic theory tounderstand the relation between agricultural development and the economicgrowthandtransformationofthewholenation.OnlyrecentlyhavehistoriansofAmerican agriculture begun to apply economic theory and to test their

hypotheses statistically. As a result, many important questions remain to beansweredbyfurtherresearch.Giventhisstateofknowledge,ourdiscussionheremustnecessarilybe incompleteandunsatisfactory,butperhapswecansuggestsomewaysinwhichanewapproachtothesubjectmightproveusefulinfuturestudies.

Theoutputof agricultural products expanded rapidly in thepost-CivilWarera.Between1869and1914,estimatedwheatoutputincreasedfrom290to897million bushels, corn from782 to 2524million bushels, and oats from284 to1066millionbushels.Theoutputofcotton,thegreatSoutherncashcropandthenation’smajorexportproduct,rosefrom2.5to16.1millionbalesof500poundsgross weight. The estimated slaughter of cattle went from 4.6 to 11.5 billionpoundsofliveweight,whilethesamemeasureforhogsincreasedonlyfrom9.0to12.0,areflectionofashiftinconsumerdemandawayfromporkandtowardbeefasincomesincreased.Variousindexesoftotalfarmoutputshowanincreaseofabout200percentduringthisperiod(Table4.1),whilethenation’spopulationincreasedabout150percent.

One source of this outpouring of farm products was an expansion ofmeasurable inputs.Between1870and1910, improved land in farms increasedfrom 189 to 479 million acres. Investors also augmented the stocks of otherformsofmaterialcapital,increasingthestockoffarmmachineryandequipmentfastestofall (Table4.2).Though itbecameaprogressivelysmallerpartof theeconomy’stotallaborforce,thefarmlaborforcegrewsubstantiallyinabsoluteterms,from6.8to11.8millionworkers.

TABLE4.1GROSSANDNETFARMOUTPUT(MILLIONSOF1929DOLLARS)

YearGrossFarmOutputIntermediateProductsConsumedNetFarmOutput1869 3,950 440 35101879 6,180 730 54501889 7,820 1000 68201899 9,920 1360 85601909 10,770 1620 9150SOURCE, John W. Kendrick, Productivity Trends in the United States (Princeton, N.J.: PrincetonUniversity,1961),p.347.

TABLE4.2MATERIALCAPITALSTOCKSINAGRICULTURE(MILLIONSOF1929

DOLLARS)

SOURCE. John W. Kendrick, Productivity Trends in the United States (Princeton, N. J.: PrincetonUniversity,1961),p.367.

Astheratioofcapitalofallkinds(material,human,andintellectual)tolaborincreased,outputperman-hour rose.Between1869and1914,net farmoutputperman-hourincreasedbyabout50percent.UsingthesamemethodemployedintheAppendix,wecancalculatethatonlyabout30percentofthisincreasewasdirectly due to the accumulation of material capital, the remainder beingattributable to (unmeasurable) human and intellectual capital accumulation.Inventionsofimprovedreapers,threshers,plows,cultivators,andagreatvarietyof other agricultural machinery and the progressive dissemination of theseinstruments apparently played major roles in augmenting agriculturaltechnology, though “unembodied” technological advances such as thedevelopmentofdryfarmingmethodsandbettercroprotationswerealsoevident,especiallyafter1900.

Regionaldifferencesinagriculturaldevelopmentweremarked.IntheSouth,15yearsormorewererequiredmerelytorestorethelossessustainedduringtheCivilWar.EugeneLernerhasgivenanexcellentsummary:

Duringthedecade1870–1880,thephysicalcapitaldestroyedbywarwasreplacedandby1880,15yearsaftertheendofthewar,mostoftheseriesreachedorexceededtheir1860levels.Thenumberofcattle(otherthancows)andacresoffarmsintheSouthwerealmostasgreatin1880astheywerein1860;thenumberofhorses,mules,cows,andimprovedacresintheSouthrangedfrom4to27percenthigher.However,inspiteofthisgrowthofresources,thevalueseries,thoughgenerallyhigherin1880thanin1870,werestillbelowtheir1860levels. In1880thevalueoffarmswas33percentbelowits1860level,thevalueoffarmimplementswas31percentlowerandthevalueoflivestockwasdown24per cent. . . . After the war, the South’s farm labor force, predominantly Negro, became seriouslydisorganized,thusretardingtherecoveryofagriculture....Inadditiontoadisorganizedlaborforce,thedestructionofcapitalitselfwasapowerfulforceretardingagriculturalexpansion.Livestockcouldonlybereplacedwiththepassingoftime,andevenhadthelaborforcebeenefficient,fieldscouldnotgive

abundantyieldswithashortageofmules,plows,andhorses.Moreover,capitalmarketsmusthavebeenhighly imperfect right after thewar.Planters and farmers probably couldnot borrow to replace theirdepletedstock,andtheprincipalsourceoffundsavailabletofarmersundoubtedlycamefrominternalsources,Sinceoutputwaslow,savingswerelow,andrecoveryretarded.Thecurseofthepooristheirpoverty!1

InthehighlyindustrializedNortheasternstates,agriculturaloutputremainedonaplateau,although itscompositionchangedsubstantiallyas farmersshiftedoutofcerealsandlivestockintovegetables,fruits,dairyproducts,andpoultry—outputsforwhichtherateofreturndependedcruciallyonimmediateaccess tolarge urban markets. Elsewhere east of the Mississippi River, including theSouth,farmoutputsexpandedsubstantially,butthemostrapidgrowthoccurredwestoftheMississippi,wheresettlementbroughtavastandfertileareaquicklyunder the plow. In 1869 the states west of approximately the 95th meridianproduced about 6 percent of the nation’s farm output; 40 years later theyaccountedforabout30percent.

Before World War I, patterns of regional specialization clearly emerged.Cottonproduction,whichcontinuedtopredominate in the“old”South,pushedwestward into Texas and Oklahoma, the former state becoming the nation’sleadingproducer.Winterwheat production concentrated in centralKansas andNebraska,springwheatinMinnesotaandtheDakotas,whilethe“cornandhogbelt” stretched from Ohio into eastern Nebraska. Cattle raising most heavilyoccupied an area between southern Texas and Chicago, the nation’s greatestmarket for live beef cattle. Figures 4.1–4.5 give a good indication of theenduring patterns of regional specialization in agriculture, except that thedistribution of wheat production changed substantially during 1900–1915 asCalifornia’soutputdeclinedandthatofKansasandNebraskaincreased.

Figure 4.1 Spatial distribution of cotton production, 1899. Source: U. S. Department of Agriculture,Yearbook,1921(Washington:GovernmentPrintingOffice,1922),p.332.

Figure 4.2 Spatial distribution of wheat production, 1899. Source: U. S. Department of Agriculture,Yearbook,1921(Washington:GovernmentPrintingOffice,1922),p.94.

Figure 4.3 Spatial distribution of corn production, 1899. Source: U. S. Department of Agriculture,Yearbook,1921(Washington:GovernmentPrintingOffice,1922),p.173.

Figure 4.4 Spatial distribution of hogs, 1900.Source:U. S.Department ofAgriculture,Yearbook, 1922(Washington:GovernmentPrintingOffice,1923),p.190.

Figure4.5 Spatial distributionof cattle, 1900.Source:U.S.DepartmentofAgriculture,Yearbook, 1921(Washington:GovernmentPrimingOffice,1922),p.237.

The productivity of farmers varied enormously from region to region, andtherelativedispersionactuallybecamegreaterbetween1870and1910.In1870output per farmer was lowest in the South, highest in the Northeastern andPacificCoast states;40years later theSouthernstates remainedat thebottom,theNortheastern and Pacific states had fallen somewhat closer to the nationalaverage(althoughtheyremainedsubstantiallyaboveit),andfarmersintheCornBelt, Great Plains, andRocky-Mountain regions hadmademajor productivitygains.2Economictheoryassertsthatdifferencesinoutputperworkerresultfromdifferences incapitalperworker.Amajorproblemin testing thishypothesis isthatstocksofhumanand intellectualcapitalcannot, in thepresentstateofourknowledge, be measured. However, on the reasonable assumption that theaccumulationofthesekindsofcapitalishighlycorrelatedwiththeaccumulationofmaterial capital, the hypothesis becomes as follows: output perworker andmaterialcapital,includingland,perworkeraredirectlyrelated.Evidenceshownin Figure 4.6 is remarkably consistent with this hypothesis, indicating thatregional differences in the productivity of farmers can indeed be ascribed todifferencesintheamountsofcapitaleachfarmerhadtoassisthiminproduction.

Figure4.6Grossfarmincomeandphysicalcapitalperpersonengagedinagriculture,tenfarmingregions,1910. Source: Alvin S. Tostlebe, Capital in Agriculture: Its Formation and Financing Since 1870(Princeton,N.J.:PrincetonUniversity,1957),p.95.

THEFARMER’SCOMPLAINTS

From the late 1860’s to the late 1890’s numerous agrarian protestmovementsenlivenedtheAmericanpoliticalscene.TheyincludedthePatronsofHusbandry,betterknownas theGrangers,whosepoliticalstrengthwasconcentrated in theMidwestinthe1870’s;theFarmers’AlliancesoftheSouthandtheMidwestinthe1880’s;and thePeople’sParty,orPopulists,well represented in theSouth,theGreatPlains,andtheFarWestinthe1890’s.Thesemovementsdifferedinavarietyofways,buttheyhadatleastonesignificantbeliefincommon:thattheAmericanfarmerreceivedlessthanhis“fairshare”ofthenationalproduct.Theexplanationsadvancedtoaccountforthisallegedinequityweremany:railroadscharged the farmer rates that were “too high”; “speculators” and “landmonopolists”engrossedthebestofthepubliclands,whilethehomesteadsystemthatmighthaverelievedthefarmerplayedonlyaminorroleinthedispositionof

the public domain; pernicious land-tenure systems, especially in the South,shackled the farmers and resulted in rapacious “mining” of the soil anddestruction of its fertility;money lenders charged interest rates thatwere “toohigh”;a fallingprice level increased the realburdenofdebt repaymenton thefarmers’ mortgages; farmers sold in competitive markets but purchased from“monopolists,”andtheresultwasasteadydeteriorationintheirtermsoftrade;wemightextendthelistalmostindefinitely.

Towhat extentwere these charges valid?Unfortunatelywe cannot offer acompleteanswer,eventhoughseveralgenerationsofhistorianshaveconcernedthemselveswiththeseissues.Theearlyhistoriansusuallyacceptedthefarmers’chargesquiteuncritically,andthesebiasedinterpretationscolortheaccountsofwidelyusedtextbookseventoday.Modernagriculturalhistoriansapproachthesesubjectsmuchmorecriticallythandidtheirpredecessors,butthemarshallingofevidence and its systematic analysis are still at an early stage. Although theevidenceissufficientforanevaluationofsomeofthefarmers’complaints,itisalmostnonexistentonothers,and insomecases themost interestingquestionshave never been asked. We shall examine in turn each of the complaintscataloguedabove.

RailroadRates

For 30 years after theCivilWar, “excessive” railroad freight rateswere apersistent grievance among farmers. During the past two decades, however,economichistorianshavegenerallydismissedthiscomplaintasinconsistentwiththe facts. The historians are apparently unanimous in believing that railroadfreightratesfellsteeplyandsteadilythroughouttheGildedAge.Arecentstudyhasshown,however,thatthehistorians’belief,insofarasitconcernsfarmers,isprobably false.3 The evidence on which it rests is certainly inadequate,consisting almost exclusively of nominal rates. While these were typicallyfalling,soweremostotherpricesuntilthelate1890’s,whenthedownwardtrendof the overall price level finally gaveway to an upward trend.Since only therelative price of transportation ismeaningful, nominal transport ratesmust becompared with a relevant price index. Making this comparison, we shalldiscoverperiodsofincreaseaswellasperiodsofdeclineinrealfreightrates.Inthiscasehistoriansfailedtoasktherightquestion.Theyaskedwhetherrailroadrateshadfallen,butthatquestionisreallymeaningless.Theyshouldhaveasked

whether railroad rates fell fasteror slower than theprices farmers received fortheirproducts.

Figure4.7shows themovementover timeof thewheatprices,cornprices,and cotton prices received by farmers divided by an index of railroad freightrates for the1867–1915period.Given thedescriptionsof recenthistorians,wewould expect that, despite year-to-year fluctuations, the trends of the curveswouldmovesteadilyupward.Itisevidentthattheydonot.Infact,threeaspectsof the series stand out: first, they vary enormously fromyear to year; second,before1897thetrendisapproximatelyhorizontal;4andthird,realimprovementin the farmers’ position begins only in the late 1890’s. The depression of themid-1890’s put growers of all three crops at a particular disadvantage.Wheatgrowers in 1894 were in their worst position in the entire period, with theexception of the years 1869, 1870, and 1874. Corn growers in 1896 had notfacedsuchunfavorabletermsoftradewiththerailroadssince1878.Forcotton,where reliable data are unavailable before 1876, the low mark for the entireperiodoccurredin1894.Itmustbeemphasized,however,thatmoreisinvolvedhere than farmers suffering from the depression of the 1890’s. Even if weconsider only theyears before1893, thedata still fail to showany substantial(statisticallysignificant)improvementinthefarmers’position.Inbrief,farmersdidnotbenefitfromlowertransportationchargesoverthethreedecadesbefore1897.Theamountsofcotton,corn,orwheatexchangedforaton-mileofrailroadtransportation remained substantially unchanged throughout the Gilded Age.This findingmakes the farmers’ complaint about “high’’ railroad freight ratessomewhatmorecomprehensible.

Figure 4.7 Indexes of farm price/railroad rate ratios. Source: Robert Higgs, “Railroad Rates and thePopulistUprising.”AgriculturalHistory,XLIV(July1970),295.

Transportchargeswereanimportantpartoffarmers’costs.InsomeareasoftheGreatPlainsandtheFarWestthefreightchargesincurredinmovingcropstoamarketmightabsorbasmuchashalfofthecrops’valueatthatmarket.Undersuchcircumstancesthefailureoftransportratestodeclinebymorethan10to15percentwhile farm priceswere collapsing by 30 to 50 percentwas a genuineeconomic source of farm distress in the mid-1890’s.Where transport chargeswere a relatively high proportion of farm costs—for example, in Kansas,Nebraska, and the Dakotas—the Populists were most active and successful,whilerelativelylittleprotestcamefromareaswheretransportchargeswerelessimportant, such as Iowa, Missouri, and Illinois. And most importantly, theexperience of the previous 25 years gave farmers no reason to expect animminent improvement. It is difficult to say whether they objected that rateswere higher than they “should” have been or whether they considered their

position to have been worsening, but one thing is clear: they recognized norecent improvement with respect to railroad rates. Notably, the two decadesprecedingtheWorldWar,forwhichthedatashowsuchsubstantialimprovementin the farmers’ position (Figure 4.7), also witnessed the disappearance ofwidespread agrarian unrest. Of course, we should not attribute the decline ofagrarian radicalism exclusively to declining real railroad rates, since otheraspects of the rural economyalso improvedduring the twodecadesprecedingthe American entry into World War I; but neither was this correspondenceentirelyaccidental.

“LandMonopolists,”“Speculators,”andtheHomesteadSystem

In1862CongresspassedtheHomesteadAct,whichprovidedthat160acresof thepublic domainmight be acquiredby a settler if he livedon the landorcultivated it for five consecutive years. The federal government continued,however,tosellsomelandatauctionaswellastodonatelandtothestatesandto railroad companies as subsidies. Because several different methods oftransferringthepublicdomaintoprivateownersweresimultaneouslyemployed,thedispositionoffederallandsinthepost-CivilWarerahasbeencharacterizedas occurring within an “incongruous land system.” In a famous article, thehistorianPaulGatescriticizedthissystem,assertingthatcompetingmethodsofdisposition subverted the true purpose of the Homestead Act and that“speculation and land monopolization continued after its adoption as widelyperhapsasbefore.”5Thisinterpretation,whichcontinuestoinfluencehistorians,suffersfromafundamentalmisconceptionofhowamarketeconomyoperates.

Economistsusetheterm“monopoly”todescribeamarketwithinwhichonlyone seller offers a well-defined product. Certainly, when historians speak of“landmonopoly”theydonotmeanthatallthelandbelongedtoasingleowner.Economistsalsousetheexpression“monopolypower”todenoteanattributeofasellerwhoprovidessuchalargepartofthemarketsupplythatbyvaryingtheamountheoffersforsalehecanaffectthemarketpriceoftheproduct.Certainlynooneinthenineteenthcenturyeverownedenoughlandtobeabletoaffecttheprice of land in general.Millions of different owners held land, and even theverylargest—likeWilliamChapman,whoheldoveramillionacresofCalifornialandinthe1870’s,ortheland-grantrailroadcompanies,whichheldmuchmore—were incapableof influencing theaveragepriceof land: theirholdingswere

simply insignificant in comparisonwith the total stock of land.Of course, anownermightsetanypricehelikedforhisownland,butthatistrivial,becauseifhesetthepricetoohighnoonewouldbuy.Themarketforlandwaseverywherehighlycompetitive.Whatthehistorianreallymeanswhenhespeaksofa“landmonopolist”isanownerofanunusuallylargeacreage,sometimesnomorethan500 or 1000 acres. That the size of holdings varied widely is commonknowledge, however, and the expression “land monopolist” neither addsanything to that knowledge nor is useful in analysis. The term is simplypejorativeandoughttobeabandoned.

Historianshavesimilarlyerredbyusingtheterm“speculator”tocharacterizea person who buys solely with the intent to resell and not to cultivate. Theobjection to this usage is that in a private property system every owner of anassetisnecessarilyaspeculatorinthesensethathebearstheriskofreductionsin the value of the asset but hopes that the value will rise. Of course landspeculators purchased the public domain; every purchaser was a speculator.AllanBoguehasobservedthat“certainlythemanwhocamewest,boughtatractofthesizethathethoughtnecessaryforhisfarmingoperations,andthentilleditfor the rest of his lifewas rare indeed.Themore commonpicturewasoneofseveralmovesorrepeatedpurchasesandsales.”6Andthesettlerwhocontinuedto hold his landwas no less a speculator than his neighborwho sold out andmovedon,butmerelyonewhoperceivedthatthehighestrateofreturncouldbeobtained by continuing to hold what he had. Some purchased large acreages,others small acreages; all speculated. To describe the large purchasers asspeculatorsandthesmallpurchasersas“actualsettlers”obscurestheidentityoftheir reasons for holding land: to obtain the highest possible rate of return.Boguealsofoundinhisexcellentstudyofagriculture inIllinoisandIowathat“from theverybeginning, largenumbers of settlers and farmers in this regionhadastrongcommercialorientation.Theysoughttomaximizethereturnsfromtheir farmingoperations, and, if in the earlyyears cash itselfwas scarce, theyundoubtedly evaluated the material possessions that they accumulated—theirlandsand livestock—in termsofmoney,”7Rationalpeople, itmightbeadded,couldhardlyhavecalculatedtheirrealincomesinanyotherway.

Thegreatbulkofthelandputintocultivationafter1865waspurchasedfromfederalandstategovernmentsandfromland-grantrailroads;lessthanonefifthwas homesteaded. This fact has led some historians to conclude that theHomesteadActwasafailure.Perhapsamoreinterestingquestionconcernsthe

effectofthehomesteadsystemontheeconomicgrowthofthenation.Wemightask:wasthenationalproductgreaterorlessasaresultofthehomesteadsystem?Economictheoryprovidesastraightforwardanswer.

Forconsideringthisquestion,itismostusefultoconceiveofthehomesteadsystemasoneofmanypossiblewaysoftransferringownershipofthelandfromthe federal government to private individuals. Any system of transferringownership—whetherhomesteading,outrightsales,orsomethingelse—requiredthe commitment of resources: land must be surveyed, titles established, andrecordskeptinanyevent.Theopportunitycostoftheresourcesinvolvedinsuchactivities constituted the “transaction cost” of transferring property rights. Butthehomesteadsystemoftransferringownershipinvolvedadditionaltransactioncosts,foritrequiredtherecipientofthelandtoliveonorcultivatethelandforfive consecutive years before he could receive the title; moreover, the lawprovided that a maximum of 160 acres could be acquired. In effect, theseprovisionsoftheHomesteadAct,totheextentthattheywereenforced,requiredtherecipienttocombinecertainminimumamountsoflaborandcapitalwiththeland.Itiscertainlyconceivablethatinmanyinstancestherequiredcommitmentsof laborandcapitalexceededtheeconomicallyoptimalamounts.Forexample,inareassuitedonlyforgrazing, thehomesteadsystemdictatedtoomuchlaborandcapitalrelativetoland.Undersuchcircumstancestheopportunitycostoftheeconomically excessive resources constituted a pure transaction cost oftransferringownershiptotheprivateindividual.

Some scholars have argued that the homestead system had the effect ofluringtoomuchlaborandcapital intoagriculture, that thesystemmisallocatedresources and thereby reduced the national product. This argument is correctonly in the transaction-cost sense noted above; and such misallocation mustsurelyhavebeennegligible in itseffectonthenationalproduct.Theimportantpoint is thatwhatever resourcemisallocationdidoccurwas transitory.Had theland been sold at auction instead of being homesteaded, it would havecommandedacertainpricebasedonitsabilitytocontributetowardearningthefarmer an income. That price is exactly what the land commanded once theprivateownerhadacquired the title throughhomesteading.Therefore,whetherthelandwassoldorhomesteaded,itspricewasultimatelythesame,andhencefarmers combined labor and capitalwith it in exactly the same proportions inbothcases.Homesteadinginducednolong-termmisallocationofresources.

Thereal importanceofthehomesteadsystemwasthatit transferredwealthtotherecipientsofthelandandawayfromfederaltaxpayers,whosetaxescould

have been less had the land been sold. Whether this redistribution of wealthaffectedpatternsofsavingandinvestmentinawaythatalteredthegrowthpathof the economy is unknown. In fact, scholars are at present uncertainwhetherthiswealthtransfermadethedistributionoftotalwealthmoreorlessequal,forlittle is known about the wealth of those who acquired the homesteads, andwidespread fraud within the homestead system complicates research on thesubject.

Ownership,Tenure,andEfficiency

Nooneconsidersitparadoxicalthattodaymanywealthypeoplerentratherthan own their houses or apartments. For various reasons somepeople simplyprefertorent;andthedecisiontorentorpurchaseisreallyadecisionabouttheform in which people wish to hold their wealth. Many historians, however,continuetousetheextentoffarmtenancyasanindexoffarmdistress,relyinguponstatisticslikethoseinTable4.3toillustratetheirargument.Suchstatisticsarevaluable,butforadifferentreason;theyarecertainlynotareliableindexoffarmdistress.

Why did many farmers rent rather than buy? The answers are many, butprobablyoneismostimportant:theylackedthemoneytobuyandwereunabletoborrowonacceptableterms.Oneshouldnot,however,jumptotheconclusionthatsuchmenweredispossessedformerownersornecessarilypoor.Farmswereexpensive, varying from less than a dollar tomore than a hundred dollars peracre depending on the time and place. At these prices a hundred-acre farmrangedfrom$100to$10,000,substantialamountsatatimewhenfarmlaborerstypically earned less than a dollar a day. Many tenants were young menaccumulatingthesavingsthatwouldultimatelypermitthemtopurchaseafarm.Newcomers to an area, even though they had themoney to buy immediately,oftenrentedforayearortwowhilesearchingforinformationabouttherelativemeritsoflandsforsale.IntheSouthtenancyprovidedawaytobringthelaborofmillionsof penniless former slaves togetherwith the lands and tools of theformer slave owners. It should be noted, however, that in all the regions,includingtheSouth,atleast62percentofthefarmsin1890werecultivatedbytheirowners(Table4.3).

TABLE4.3

PERCENTAGEDISTRIBUTIONOFFARMSBYCLASSOFTENURE,1890

Region CultivatedbyOwners RentedforFixedMoneyValue RentedforSharesofProductsNorthAtlantic 82 8 10SouthAtlantic 62 13 26NorthCentral 77 8 16SouthCentral 62 14 24Western 88 5 7

UnitedStates 72 10 18

SOURCE.UnitedStatesCensus,1890:Agriculture (Washington:GovernmentPrintingOffice.1895),pp.118–19. Percentages may not sum to 100 because of rounding. Regions are defined as follows.NorthAtlantic:Maine, NewHampshire, Vermont,Massachusetts, Rhode Island, Connecticut, NewYork, NewJersey, and Pennsylvania. South Atlantic: Delaware, Maryland, District of Columbia, Virginia, WestVirginia, North Carolina. South Carolina, Georgia, and Florida. North Central: Ohio, Indiana, Illinois,Michigan,Wisconsin, Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska, and Kansas.SouthCentral: Kentucky, Tennessee, Alabama,Mississippi, Louisiana, Texas, Oklahoma, andArkansas.Western:allotherstatesandterritorieswithinthecontinentalUnitedStates.

Within the two great classes of tenancy, cash rental and sharecropping, alargevarietyofdistinctsubtypesofrentalarrangementexisted.Whatdeterminedthe form of these contracts? Steven Cheung has proposed the followinghypothesis:

[T]hechoiceofcontractsisdeterminedbyweighingthegainsfromriskdispersionsandthecostsofcontracting associated with different contracts. Two factors appear to be important in explainingdifferentpatternsofcontractualchoicesindifferentlocalities.First,differentphysicalattributesofcropsandtypesofclimateoftenresultindifferentvariancesofoutputsindifferentagriculturalareas.Second,differentlegalarrangements...affectthevariancesofincomesaswellasaffectingtransactioncostsforthecontractingparties.8

Toclarifythishypothesis,considertwoareasidenticalexceptthatoneissubjectto a larger variation in rainfall from year to year. Because erratic rainfallincreasestheriskofoccasionalcropfailure,wewouldexpectsharecroppingtobeamoreprevalentformofleaseintheareaoferraticrainfallthanintheotherarea.Share leases allow the tenant to shift someof the riskonto the landlord,whilecashleasesgivethelandlordafixedmoneyrentwhethercropsbegoodorbadandhenceplaceall the riskon the tenant.Tenants thereforedemandshareleases and persuade landlords to shoulder some of the risk by offering themhighershares.

Contractsmustbe enforced aswell asmade, and the costsof enforcementvarywiththeformofthecontract.BoguefoundthatinIllinoisandIowa,

shareleasesprobablywerealwaysmorecommonthancashleases.Undersuchagreementsthelandlordsharedtheuncertaintiesofnature.Absenteelandlords,however,alwayspreferredacashpayment,sinceshare agreements were difficult to supervise from a distance. Declining grain prices during the lastquarterofthenineteenthcenturyandanactivedemandforrentalfarmsalsoinclinedthelandlordstoaskforcashratherthanshareagreements.9

Locallandlordsweremorelikelytoacceptashareleasebecausetheirproximitytothelandallowedthemmorecheaplytoensurethatthetenantdidnotdisposeofsomeofthecropbeforethesharesweredivided.

It seems clear that contract forms and terms varied with changes in therelativesupplyofanddemandforcontractsofaparticularsort.Thishypothesisfurnishes a basis for improving our understanding of land tenure patterns andshouldbetestedmoreextensivelybyfutureresearch.

For at least a century, students of land tenure systems have asserted thatsharecroppingis inimical to improvementof thesoilbecausethetenanthasnosecure claim to the long-term returns from his investments in the land, and,especiallyintheSouth,theyhaveblamedthedeteriorationofsoilqualityontheprevalence of sharecropping. Data shown in Table 4.3 cast doubt on thisinterpretation.Mostofthefarmerseverywhere,includingtheSouth,ownedtheirfarms,andthereturnsfromaninvestmentwouldhaveaccrueddirectlytothem.Why did landowners not investmore in preserving the fertility of their land?Oneinterpretationisthatuntilthelatenineteenthcenturyfarmersofallclasses,bothownersand tenants,paid littleattention topreserving the fertilityof theirland.And such action, or lack of action, was probably quite rational, at leastfromaprivatewealth-maximizingpointofview.Whenvirginlandwascheaplyavailable fartherwest, it simplydidnotpay to invest in fertilizationandothercostlyimprovements;amorelucrativestrategywasto“mine”thesoilandthenmoveon.Notably,thefarmersofGeorgiaandtheCarolinas,farfromthefrontierandfacedwithrelativelyhighcostsofmigrationwestward tovirginsoil,werethefirsttomakemajorapplicationsofcommercialfertilizers.10

The economic theory of share tenancy provides an additional argumentagainst the view that sharecropping was especially damaging to the soil. InCheung’swords:

Itdoesnotmatterwhetherthelandlordstipulatesthatthetenantistoinvestmoreinlandandchargesa lower rental percentage orwhether the landowner invests in land himself and charges the tenant ahigherrentalpercentage;theinvestmentwillbemadeifitleadstoahigherrentalannuity.11

And again Bogue’s evidence for the prairie region is consistent with the

hypothesis:“Thelessimprovedafarmwas,thegreaterthechancethatthetenantcouldnegotiateleasingtermsthatwouldrewardhimforimprovements.”12

Thesebitsofhypothesisandevidencesuggestverystrongly that thewholesubjectoflandtenureinUnitedStateshistoryneedstoberestudiedinthelightofrecentadvancesineconomictheory.Untilthatisdone,ourunderstandingofthe relative efficiency of different tenure arrangements must remain highlyimperfect. It now appears that in this field, as in so many others, failure toconsider the influenceofcompetitionwithin theconstraintsofprivatepropertyrightshasledtoerrorsofanalysis.

InterestRates,Debts,andDeflation

Duringthelastthirdofthenineteenthcentury,agrarianradicalsincreasinglyvilified the moneylender: the agent of an Eastern, or even international,“conspiracy,” this “hyena-faced Shylock” tricked innocent farmers intoborrowing funds theydidnot“need”at interest rates thatwere“toohigh,”hisobjectbeingto“rob”themoftheirlandsthroughforeclosures.Thisdescriptionisanobviouscaricature,but thebusinessofmortgage lendingwasasourceofconcernalsotolessimpassionedobservers.Fortunately,recentresearchonthissubjectshedsconsiderablelightontheproblemssurroundingfarmmortgages.

Whydidfarmersmortgagetheirlands?Theanswersarelegion,forfarmersusedthefundsobtainedonthesecurityoffarmrealestatetopayalimony,erecttombstones, provide daughters with dowry, and enter horses in races—tomentiononlyasmallfractionofthemoreinterestinguses.Thebulkofthefundsborrowed,however,wasputtomoreprosaic,andmoreproductive,uses.Inareasof recent settlement farmers frequently borrowed to purchase livestock,machinery,andotherfarmequipment,buttheprincipaluseoffundseverywherewasapparentlytheacquisitionofrealestate.Inshort,farmersborrowedonthesecurityoftheirpresentlandholdingsinordertoacquireevenmoreland.Suchborrowingwasconcentrated inperiodsofprosperityandhardlyqualifiesasanindexofagriculturaldistress.

Though moneylenders were often accused of being “monopolists,”competitionwasactiveinmostareasofthecountryduringthe1870’sandgrewevenmoreintenseovertime.InIllinoisandIowa,Boguefoundthat

by 1870 at least, most country towns had several agents competing for themortgage business. Thefarmerwithgoodsecurityandafinepersonalreputationinthecommunitymightplaythemoffagainst

eachotherandwinconcessionsontheinterestrate,theamountofcommissionchargedbytheagent,orin theformand typeofpaper. . . . [I]f the lendersofone towncombined theymightfind themselvesundercutbytheenergeticagentsofsomenearbyprairiecenter,aswellasbypettylenders.13

The accumulation of savings in the Eastern states, in combination with arelativelyhighdemandforcreditintheWesternagriculturalareas,gaverisetoanew kind of business agent, theWesternmortgage broker. Hundreds of thesebrokers organized during the 1890’s, and 1880’s. Many failed during thedepressionofthe1890’s,butsomesurvivedtofacilitatethecontinuingtransferoffundsfromanareaoflowinterestratestooneofrelativelyhighinterestrates.The broker’s task was essentially the collection and sale of information. Hesought out potential credit-worthy borrowers and willing lenders and broughtthemtogetherinmutuallyagreeableloancontracts;thatis,heinformedthemofone another’s demands. The result was that Easterners earned higher rates ofreturnontheirsavings,Westernerspaidlowerratesofinterestontheirloans,andthemortgage broker’s commission gave him an income for his trouble.Moregenerally, the broker’s information-gathering and -disseminating servicesallowedamoreefficientfunctioningofthecreditmarketonanationalscale.

Theinterestrateonfarmmortgagestendedtofalleverywherethroughoutthelast quarter of the nineteenth century, though rate differences among placespersisted, reflecting differences in the risks attending loans. In the areas ofIllinois, Iowa, Kansas, andNebraska for which Bogue obtained evidence, theinterestrateonfarmmortgagesfellbyat leastonehalfduringthe last thirdofthe nineteenth century, and the same downward trend was probably the caseelsewhere.InTexas,“competitionamongthelendingagencieswaskeenby1886atleast....By1888therewastalkofcombinationtohaltthedeclineinlendingrates, but therewas evidently no concerted action on this score.”14 As manystates passed usury laws placing an unreasonably low ceiling on the rate ofinterest, lenders devised a variety of commission charges to circumvent therestriction,andonlydetailedstudiescanrevealwhatthefullinterestratepaidbythefarmeractuallywas.J.B.Watkins,amortgagebrokerwholoanedmillionsofdollarsintheGreatPlainsarea,obtainedinterestof16to17percentinthemid-1870’s.Boguefoundthat“inallprobabilitythetotalratestoodbetween10and12 percent in western Kansas during the late 1880’s. Meanwhile rates haddropped in centralKansas,wheremoney could be obtained on the security ofgood land at a total cost of between 8 and 9 percent.”15 By the turn of thecenturyrateswereintheneighborhoodof5to6percentoverlargeareasofthe

Midwest.Storiesofmortgageinterestratesreaching40or50percent,ofwhichthePopulistoratorsweresofond,werecertainlyatypical,iftrueatall.

Interest rates fell for two reasons. First, with increasing accumulation ofsavings, and new business agents like theWestern mortgage brokers and therepresentativesofinsurancecompaniestochannelthesefundswheretheywouldearn thehighest rateof return,competitionamong lenders forced interest ratesdown.Farmmortgagesweregenerallydrawnfortermsofonetofiveyears,andwhen extensionsor new loanswerenegotiated farmersusually contracted at anew, lower rate of interest. A second reason for the decline in rates was thegeneraldownwardtrendinpricesduringthethreedecadesbefore1897.Generaldeflationmade a dollar increasinglymore valuable in terms of its purchasingpower over goods. The real rate of interestwas the nominal rate adjusted forchanges in the purchasing power of money.16 For example, the farmer whoborrowed at 10 percent for a year duringwhich the price level declined by 5percentpaidthesamerealrateasthefarmerwhoborrowedat15.8percentforayearduringwhichpriceswerestable.Recognizingthatdeflationseemedtobeafact of life,many farmersnodoubtbargainedwith lenders for a lower rateofinterestinanticipationoffallingprices.

Fallingpricesinspiredmuchcomplaintamongagrarianradicals.Inarecentstudy,Robert Fogel and JackRutner have argued, however, that the increasedrealburdenofdebtrepaymentattributabletofallingpriceswasalmostnegligiblefor farmers in general. “[C]apital losses on mortgages due to unanticipatedchanges in the price level had only a slight effect on the average profit offarmers.[SeeTable4.4.]...

TABLE4.4AVERAGEANNUALPERCENTAGECAPITALGAINONFARMS

Period WithoutAdjustment AdjustedforLossonMortgages1869–79 2.8 2.31879–89 2.8 2.61889–99 –0.4 –0.4

SOURCE.RobertWilliamFogelandJackRutner,“TheEfficiencyEffectsofFederalLandPolicy,1850–1900:AReportofSomeProvisionalFindings,”UniversityofChicagoCenterforMathematicalStudiesinBusinessandEconomics,Report7027,June1970,p.17.Theadjustment ismadeon theassumption thatpricechangeswereneveranticipated;theadjustmentisthereforeanupperlimit.

[T]hedebttoassetratiowaslow(about13percent)formostfarmers.Itwasonlythefarmerwithahighdebt toasset ratiowhowasbadlyhurtby thedeclining

pricelevel.Butsuchfarmerswereatypical.”17Weneednotdisputethisfindingtomaintain that thecombinationofdeflationandheavy indebtednessprobablyhurtthefarmersofsomeareasbadly;andafterall,farmerswhojoinedactivelyin the various agrarian protest movements were also atypical. Heavyindebtednesswastypicalofnewlysettledareas.WalterNugent’scarefulstudyofKansas revealed that “mortgage distress was not only real, but particularlysevere for the Populists.”18 And the same conditions probably prevailed inNebraska, theDakotas,andotherWesternstrongholdsofPopulism, thoughthequantitativeresearchthatwouldtestthishypothesisremainstobedone.

RelativePricesandIncomes

Farmersoftencomplainedthatthepricestheypaiddeclinedmoreslowlyorrosemorerapidlythanthepricestheyreceived.Duringsomeshortperiodstheirclaim was surely valid, but they were seldom heard from when the reverseobtained,aswasalsothecasefromtimetotime.Whatwewouldliketoknowisthe trend of prices paid relative to prices received by farmers. Unfortunatelysuch statistics were not collected before 1910, so proxies will have to serve.Several price series exist for goods at wholesale markets; they do not tell usexactlywhatwewouldliketoknowbecausetheydonot takeintoaccountthecostsofgetting farmproducts from the farmer to thewholesalemarketandofcarrying nonfarm goods in the opposite direction. We know, however, thattransportchargesduringthethreedecadesbefore1897probablyfellonaverageaboutasrapidlyasthepricesreceivedbyfarmersforwheat,corn,andcotton;ontheassumptionthatthisdeclineappliedequallytothecarriageofbothfarmandnonfarmgoods, it isprobablysafe touse thewholesaleprice ratios to indicatethetrendofrelativepricesreceivedandpaidbyfarmers.Wholesalepriceseriesshowthetrendoffarmpricesfallingaboutasfastasthetrendofnonfarmpricesbefore 1897; if any difference existed it was that nonfarm prices fell morerapidlythanfarmprices.Incaseswherethequalityofnonfarmgoodsincreasedsubstantially,thefarmer’struetermsoftradeimprovedevenfasterthanthepriceratios indicate.During the two decades before theAmerican entry intoWorldWarI,farmpricesclearlyadvancedmorerapidlythannonfarmprices.

Merelyknowingthetrendofrelativeprices,however,tellsusnothingaboutfarmers’relativeincomes.Afarmer’sincomedependednotonlyonthepricehereceivedforhisoutput,butalsoontheamountofoutputheproduced.Duringthe

post-Civil War era, farm productivity did not grow as fast as nonfarmproductivity. Therefore, during the period 1865–96,when relative priceswereapproximately unchanged, the average farmer’s income grew at a slower ratethan that of the average nonfarm producer. Although farmers becamesubstantially better off in absolute terms, they became worse off relative toothers.Andeventhoughrelativepricesturnedinthefarmer’sfavorafter1896,relative farm incomesmight stillhavedeclined,because farmoutputperman-hourhardlyincreasedatallduringthenexttwodecades.Theoveralltrendsmasksubstantialdifferencesamongregions:farmers’incomesrosehardlyatallintheNortheastern states, somewhat more rapidly in the South, and fastest in theMidwest.

Production for home use and receipts from saleswere not the sum of thefarmer’s income. Farmers owned large stocks of capital,mainly land, the realvalue of which steadily appreciated. To find the farmer’s total income in anyyear,wemustaddtothereceiptsfromsalesandtheimplicitvalueofproductionforhomeuseanamountequaltotheappreciationofthefarmcapitalstock.Theamount added in this way would certainly be substantial for some times andplaces,especiallyforareasinanearlystageofsettlementorformostareasintheearlytwentiethcentury,whenlandvaluesappreciatedrapidly.Farmersobviouslytooksuchcapitalgainsintoaccountindecidingontheirbestcourseofaction.Afailuretoconsidercapitalgainsaspartofincomehasmarredmuchdiscussionoftherelativeincomeofthefarmer;thatsuchgainsweretypically“automaticallyreinvested” is beside the point.Evenwhenwe correctly compute the farmer’sincome, however, we find that it is still lower on the average than that ofnonfarmincomeearners.Themajorconsequenceofthisdifferencewasthatfarmpeopleseekingtobetter themselvesmigrated inasteadilyswellingstreamintononfarmoccupations.

ASummaryandSomeAdditionalGrievances

Our survey of the farmer’s major complaints has yielded no strikingconclusions. During the late nineteenth century particular groups of farmers,thoughnotfarmersingeneral,werehurtbyacombinationoffallingpricesandheavy indebtedness; the homestead system probably contributed to a slight,temporary misallocation of resources but had little or no effect on either thenational incomeor the development of agriculture generally; interest rates fellmarkedly,while therelativepriceofrailroad transportandthefarmer’soverall

termsof tradewereapproximatelystable.Taken together,all these findingsdonot amount to much, certainly not enough to enlarge substantially ourunderstanding of nineteenth century agrarian radicalism. Farmers’ incomes,however, did not increase as fast as did the incomes of nonfarm producers, adifference attributable to the relatively slow advance of farm productivity.Complaint,politicalprotest,andmigrationwerethepredictableconsequencesofthis widening gap, but any conclusions must be qualified by substantialdifferencesamongcrops,times,andplaces.

Perhaps other sources of unrest were also at work. Farmers generally ledquiteisolatedlives.UnlikethepracticeinEurope,wherefarmerslivedtogetherin villages and went out each day to tend their fields in the surroundingcountryside, the American farmer generally lived on his farm, a half mile ormore from the closest neighbor and severalmiles from the nearest town. Thelonelinessofsuchalifemusthavecutdeeperasthenumberofurbanalternativesgrewandbecamemore accessible.Farmwomenappear tohave sufferedmostfrom the social barrenness of the countryside, but perhaps the historians havemerely recorded disproportionately thewomen’s expressions of grievance andbothsexessufferedequally.Onehundredandsixtyacreswasasmallworld,andmanyhadless.

Probably greater sources of unrest were the extreme instability andconsequent unpredictability of farm production. Insects, diseases, droughts,prairie fires, floods, hailstorms and blizzards—all took their erratic toll fromyear to year. Yields fluctuated madly. Because these random occurrencesaffected differently the various parts of the supplying area—which might benational or even international, depending on the crop—the farmer could notexpectthatalowyieldwouldnecessarilybeoffsetbyahighprice.Itmightbe,butthenitmightnotbe;onecouldonlyhope.Farmersgenerallyunderstoodthereasonsforthisinstabilitybutcouldneithercontrolnorreduceit.

Economists now recognize that certainty itself is for most people aneconomicgood.Whenfacedwith twoalternativeoccupations,bothhaving thesame expected average earnings over the long run but one fluctuating wildlyaroundthemeanwhiletheotherremainsstablefromyeartoyear,mostpeopleprefer the jobwith stableearnings.Expectedaverageearningsare the same ineach,butoneoffersgreatercertainty.Earningsinnonfarmoccupationswerebynomeans perfectly predictable in the post-CivilWar era; urbanworkers knewthemeaningofunemploymentandwagecuts.But theuncertainty surroundingfarmproductionwassubstantiallygreaterthanthatassociatedwithmosttypesof

nonfarmwork. It is reasonable toconclude, therefore, that farmersmigrated tononfarmjobsseekinggreatercertaintyaswellashigherrealincomes.

THELEARNINGPROCESSINAGRICULTURE

TheAmericanfarmerinthepost-CivilWareranecessarilyhadtomakefrequentdecisions.Whatcropsshouldheplant,when,and inwhatproportions?Shouldhebuyorselllivestock?Shouldhepurchaseorhireanewlydevisedimplement?Shouldhebuyorrentmoreland?Shouldheusefertilizer,andifso,whatkindand how much? Not even the farmers of the older states could avoid suchchoices, for the technological and economic environments within which theyoperatedchangedconstantly.Theyhadacquiredfamiliaritywiththetopographyandclimateoftheirareasthroughlongexperience,butnewcompetitionfromtheWest,thegrowthofnearbyurbanmarkets,newtechnology,andahostofotherchanges forced adjustment on them if they were to continue to earn theiraccustomed rate of return. In the newly settled areas the range of necessarychoiceswasconsiderablywider.Theweather,insects,cropandanimaldiseases,length of growing season, soil conditions—all thesewere different, and hencenew choiceswere required.ANorwegian immigrantwrote from Iowa: “I cantruthfullysaythattheonlythingsthatseemtobethesamearethefleas,fortheirbiteisassharpandpenetratinghereaselsewhere.”19

The rapid growth and transformation of the economy and the sweep ofsettlementacrosshalfacontinentinlessthan50yearscreatedanenvironmentofextremeflux for the farmer.Hehad toadjust to thenewconditions.Buthow?Distinguishing the influence of long-run shifts in supply or demand from thetemporaryvagariesof themarketwasadifficult task.Quicklydetermining thebest production methods or crops in a newly settled area called for greaterscientificprowessthanthescientistsoftheday—muchlessthefarmers—couldboast. Yet new choices were made that ultimately resulted in a more or lesssuccessfuladjustmenttotheneweconomicandnaturalenvironments.Alearningprocess layat theheartoftheseadjustments.Theeconomictheoryoflearning,which seeks to explain both the creation of new and the dissemination of oldknowledge,hasonlyrecentlybeenmuchexplored,butalreadyitpromisessomeusefulcluesforthehistorian.

The creation of new knowledge can occur in several ways: within specialresearch institutions, through individualexperimentation, andby learning from

experience. In the first two cases resources are deliberately committed to thesearch for newknowledge; in the third case the knowledge is a by-product ofeffortsmadeforotherpurposes.Thequantityofresourcescommittedtoseekingnew knowledge within research institutions or through individualexperimentation depends on the expected rate of return, though in the formercase political influences often intervene, because the institutions are publiclysupported and administered.The output of newknowledge is, on the average,proportionaltotheinputofresources.Theoutputofnewknowledgeacquiredasa by-product of production experience depends crucially on the kind ofproduction. Some activities almost inevitably involve a good deal of learning,whileothersmightbepursued indefinitelywithoutyieldingan intellectualby-product.

TheUnitedStatesDepartmentofAgriculture,createdin1862,andthestateexperiment stations, established by theHatchAct of 1887,were the principalresearch institutions concernedwith agriculture during the post-CivilWar era.Until the twentieth century, however, their output of newknowledgehad littleeffectinexpandingagriculturaltechnology.Theland-grantcolleges,establishedbytheMorrillActof1862,likewisehadlittleeffect.Theytrainedafewstudentsandprovidedspeakersforfarmers’meetings,butthroughoutmostoftheperiodtheyoccupied themselveswith establishing the basic curriculum and staff thatwould allow them later to make a genuine contribution to education andresearch.Ofcourse,theseinstitutions,especiallytheDepartmentofAgricultureandthecolleges,hadotherdutiesbesidesresearch,and theirsuccessorfailureshouldbeevaluatedintermsthatincludetheirotheractivitiesaswell.

Lacking institutions to provide a substantial flow of new knowledge,American farmers were left to their own devices—individual experimentationand learning fromexperience. In a sense, farmerswere always experimenting,fortheyseldomconductedtheiraffairsinpreciselythesamewayfromoneyeartothenext,buttheinstabilityofnatureandofmarketsmadetheresultsofsuchinherent experimentation difficult to evaluate. Deliberate, controlledexperimentationwasalmostexclusivelytheprovinceofthewealthyfarmer,andfor good reason. Lacking a body of scientifically established principles as astartingpoint, the farmerwhoexperimentedassumedsubstantial risks.For therich farmer with a large and perhaps geographically dispersed holding, a fewfailuresdidnotleadtodisaster,butthesmallfarmersimplycouldnotaffordtotakesuchchances.Theproblemwasnot,astoooftenasserted,thatthebulkofthefarmerswerebackward,stubborn,or toounenlightened tosee thevirtueof

tryingnewmethods.Ingeneral,thesmallfarmer’straditionalconservatismandskepticismabout“bookfarming”wererationalattitudestowardtheassumptionoflargerisks.

Learningfromexperiencewasopentoallfarmers,buttherateatwhichtheyacquired new knowledge depended crucially on the technical and economiccharacteristicsof thecrop.NathanRosenberghassuggested that thedifferencebetweentheratesoflearningintheMidwestandintheSouthmightbeexplainedintheseterms:

Somecropsrequireanunskilledlabourinputperformingnothingbutsimple,routinized,repetitivetasks—e.g.,cotton....[M]idwesternU.S.agriculturehasprovidedaradicallydifferentexperience.ThepatternofagriculturalactivityintheAmericanmidwestwasofsuchanaturethatitdevelopedahighdegree of commercial and technical sophistication on the part of the labour inputs. Much of theexplanationliesinthefactthatthiswasanagriculturecenteredonlivestockhusbandrywhichrequiredahighlyefficientandsophisticatedsystemofmanagerialdecision-making. . . .Themidwesternfarmisoften a fairly elaborate enterprisewhere thedecision-makermustbe close to thedetailedday todayoperations of the farm andwhich require a familiaritywithmarket phenomena and awide range oftechnicalskills.Midwesternfarminghasthereforeproducedeffectivemanagersandpeoplewell-versedinmechanicalskills....20

Figure 4.8 Relation between physical capital accumulation and growth of income in agriculture, tenfarming regions, 1870–1910. Source: Alvin S. Tostlebe. Capital in Agriculture: Its Formation andFinancingsince1870(Princeton,N.J.:PrincetonUniversity,1957),p.95.

ItmightbeaddedthatapparentlythepurelytechnicaldifficultiesofmechanizingtheharvestofthemajorSoutherncrops,cottonandcorn,weregreaterthantheproblemsencounteredinthemechanicalharvestingofsmallgrains.

Tobeofanyconsequencenewknowledgemustbeputtouse.Notonlytherate of invention but also the rate of diffusion of new ideas is crucial indeterminingtherateatwhichproductivitycanadvance.Inthepost-CivilWarerathree important avenues of diffusionwere available: printedmaterial,word ofmouth,and theembodimentofnewideas innewcapitalgoods.Farmerscouldobtain printed information from an extensive rural press, from the reports ofstate agricultural societies, and from the publications of the Department ofAgricultureandthestateexperimentstations.Probablyonlyasmallfractionofall farmers ever read these sources of information. Those who did, however,weretypicallytherelativelywealthy,largelandownerswhoweremoreinclinedtowardsystematicexperimentation.Theyweretheleadersintheircommunities,and their successful experimentswere readilyobservedand imitatedbyotherswhomightneverhaveobtainedinformationdirectlyfromthepublishedsources.It seems certain that the most extensive avenue for the transmission ofinformation in the countryside was simply word of mouth. Farmers talked offarmingwithoneanother—overthefence,atthegeneralstore,afterthesermononSunday.EvenGrangemeetings,sooftenconsideredfromapoliticalpointofview,mightwellhavebeenmoreimportantasvehiclesforthedisseminationoftechnicalandeconomicinformation.Countyandstatefairsperformedasimilarfunction.

Competitionamongmachinerymanufacturersledthemtoembodynewideasin their equipment, and their ubiquitous salesmen were quick to bring suchadvancestotheattentionoffarmers.Sincetheembodimentofnewideasinfarmmachinerywasanimportantavenueofdiffusionfortechnologicaladvances,therate of productivity increase was indirectly as well as directly tied to theaccumulationofmaterialcapital.Figure4.8shows thataclosecorrespondencedid exist between the rate of advance of output per worker and the rate ofincreaseofmaterial capitalperworker.Suchevidence isverycrudeandbearsonly indirectly on the embodiment hypothesis; nevertheless, the available dataareconsistentwiththehypothesis.

1 EugeneM. Lerner, “SouthernOutput andAgricultural Income. 1860–1880,”Agricultural History,

XXXIII(July1959),117.120,121.2AlvinS,Tostlebe,CapitalinAgriculture:ItsFormationandFinancingsince1870(Princeton,N.J.:

PrincetonUniversity,1957),p95.3RobertHiggs,“RailroadRatesandthePopulistUprising,”AgriculturalHistory,XLIV(July1970).4 In a statistical sense, the hypothesis that the pre-1897 trend is horizontal cannot be rejected at

customarylevelsofconfidence.Forthestatisticaltest,seeibid.,pp.294,296,n.17.5 PaulWallaceGates, “TheHomesteadLaw in an Incongruous Land System,”American Historical

Review,XLI(July1936),655.6AllanG.Bogue,FromPrairietoCornBelt(Chicago:UniversityofChicago,1963),p.51.7Ibid.,p.193.8 Steven N. S. Cheung, “Transaction Costs, Risk Aversion, and the Choice of Contractual

Arrangements,”JournalofLawandEconomics,XII(April1969),29–30.9Bogue,1963,op,cit.,p.60.10FredA.Shannon,TheFarmer’sLastFrontier:Agriculture,1860–1897(NewYork:Holt,Rinehart,

and Winston, 1945), pp. 115, 169–72. A recent study found that during 1880–1960 “variations in thefertilizer-landpriceratioaloneexplainalmost90percentofthevariationinfertilizers.”SeeYujiroHayamiandV.W.Ruttan,“FactorPricesandTechnicalChangeinAgriculturalDevelopment:TheUnitedStatesandJapan.1880–1960,”JournalofPoliticalEconomy,LXXVIII(Sept./Oct.1970),1133.

11StevenN.S.Cheung,“PrivatePropertyRightsandSharecropping,”JournalofPoliticalEconomy,LXXVI(Nov./Dec.1968),1121.

12Bogue,1963,op.cit.,p.61.13ibid.,p,174.14AllanG.Bogue,Moneyatinterest(Ithaca,N.Y.:CornellUniversity,1955),p.160.15ibid.,p.272.16“Therelationshipbetweenthe‘real’interestrate,r,inmoneyunitsforastablepricelevel,andthe

actualmarket interest rate,R, inmoneyunits, if theprice level isknown tobechangingat the rateofppercent a year, is:R = (1 + r) (1 + p) – 1.” See Armen A. Alchian andWilliam R. Allen.UniversityEconomics,2ded.(Belmont,Calif.:Wadsworth,1967).pp.437-38,

17RobertWilliamFogelandJackRutner,“TheEfficiencyEffectsofFederalLandPolicy,1850–1900:A Report of Some Provisional Findings,” University of Chicago Center for Mathematical Studies inBusinessandEconomics.Report7027,June1970,p.19.

18WalterT.K.Nugent,“SomeParametersofPopulism,”AgriculturalHistory.XL(Oct.1966),264.19Bogue,1963,p.238.20NathanRosenberg, “NeglectedDimensions in theAnalysisofEconomicChange,”Bulletin of the

OxfordUniversityInstituteofEconomicsandStatistics,XXVI(Feb.1964),69–70

V

GROWTHANDINEQUALITY

[W]hateverdisadvantageordetrimenttheintroductionanduseofnewandimprovedinstrumentalitiesormethodsofproductionanddistributionmay temporarily entail on individualsor classes, theultimateresult isalwaysanalmost immeasurabledegreeof increasedgood tomankind ingeneral. [However]Thatmanyofthefeaturesofthesituationare,whenconsideredbythemselves,disagreeableandevenappalling,cannotbedenied.

DAVIDA.WELLS

REGIONALDISPARITIESINDEVELOPMENT

Generalizations concerning the entireUnited Statesmust often be qualified totakeintoaccountsubstantialdifferencesamongregions;suchwasthecaseinourdiscussions of population growth, urbanization, and agricultural development.Personal income per capita, a crudemeasure of the average level ofmaterialwell-being, also differed markedly in the various parts of the nation. Amongcontemporaries these differences sometimes gave rise to political antagonism,and“sectional”issuesplayalargepartinAmericanpoliticalhistory.In1880,thefirstyearwithinthepost-CivilWareraforwhichstateincomedataareavailable,estimatedpersonalincomepercapitavariedfromalowof$46inNorthCarolinato a high of $318 in Nevada. Southern states generally had income levels ofabout half the national average; someWestern states had income levelsmorethantwicethenationalaverage;andotherstatesvariedbetweentheseextremes(Table5.1).

TABLE5.1REGIONALPERSONALINCOMEPERCAPITARELATIVETOTHE

NATIONALAVERAGE(NATIONALAVERAGE=100)

Regions 1880 1900 1920Northeast 141 137 132NewEngland 141 134 124MiddleAtlantic 141 139 134

NorthCentral 98 103 100EastNorthCentral 102 106 108WestNorthCentral 90 97 87

South 51 51 62SouthAtlantic 45 45 59EastSouthCentral 51 49 52WestSouthCentral 60 61 72

West 190 154 122Mountain 168 139 100Pacific 204 163 135

SOURCE. Richard A. Easterlin, “Regional Income Trends, 1840–1950,” in Seymour E. Harris, Ed.,AmericanEconomicHistory(NewYork:McGraw-Hill,1961),p.528.RegionsaredefinedasinTable2.8.Therelativeincomeof163fortheWestin1900,whichisgivenintheabovesource,isinerror.Thefiguregivenhere,154, is computed fromdata shown inRichardA.Easterlin, “InterregionalDifferences inPerCapita Income, Population, and Total Income, 1840–1950,” in National Bureau of Economic Research,ConferenceonResearchinIncomeandWealth,TrendsintheAmericanEconomyintheNineteenthCentury(Princeton,N.J.:PrincetonUniversity,1960),p.137.

Southern income levels remained substantially below those elsewherethroughout thepost-CivilWarera,but scholarshave toooftenexaggerated theproblems of Southern development. Statistics themselves—it would be moreaccurate to say naively interpreted statistics—are partly to blame for afascinationwithSouthern“backwardness”and“stagnation.”Moneywagelevels,forexample,weretypicallylowerintheSouththanelsewhere;butbecausethepricesofconsumergoodswerealsotypicallylower,thegapbetweenrealwagesin theSouth and elsewherewas less than simple comparisons ofmoneywagefigureswouldindicate.CorrectionfortherelativelyhighpricesoftheFarWest,itmightbeadded,wouldsubstantiallyreducetherelativeincomesofthatarea.Evenwhenwemake such corrections, however, it remains true that Southernearnings on the average fell below those elsewhere. No special theory of“Southernbackwardness” is required to explain thisdifferential; indeed, itcanbeexplainedbyageneraltheorythataccountsfordifferencesofincomelevelsamongalltheregions.

Economic theory asserts that output (or income) perworker differs amongregions because of differences in the amounts of material, human, andintellectualcapital—inputsthataregenerallyhighlycorrelatedwithoneanother—eachworkerhas to assist him inproduction.Aswe sawwhen investigatingagricultural output per worker in the various regions, the crude and indirect

evidencethatexistsisconsistentwiththishypothesis.Althoughwelackthekindofdatathatwouldpermitadirecttestofthemoregeneralhypothesisconcerningregionalincomedifferentials,avarietyofindirectevidenceisconsistentwithit.Onestudyfoundthatamongthestatesin1919,wagesperworkerandmaterialcapitalperworkerinmanufacturingweresignificantlyrelated.1Manystudiesofmorerecentperiodshavediscoveredsuchasignificantrelation,whichcausesustosuspectthattherelationalsoexistedintheearlierperiod.Weemphasizeagain,however, that such evidence is consistent with the hypothesis only under theassumptionthatthethreekindsofcapitalaccumulationarehighlycorrelated.

Investmentinformaleducationwascloselyrelatedtothelevelofincomepercapita. Notably, the cluster of states in the lower left corner of Figure 5.1, aposition indicating both relatively low investment in formal education andrelatively low income, consists of the 11 states of the Confederacy plusKentuckyandWestVirginia;thelowestrankingnon-SouthernstateexceedsthehighestrankingSouthernstateinbothdimensionsofthefigure.Therelationalsoobtained among the non-Southern states, with the exception of two frontierminingstates,NevadaandColorado,forwhichthedivergencieshaveanobviousexplanation.Of course, the correlation portrayed in the figure does nothing toestablish thedirectionofcausality,but it is consistentwith thehypothesis thatrelativelysmallinvestmentsinhumancapitalcontributedtowardrelativelylowpercapitaincomesamongthevariousstates.

Between1880and1900,incomepercapitaincreasedasrapidlyintheSouthas in the non-South, while Western incomes grew substantially slower andNortheastern incomes slightly slower than the national average (Table 5.1).Contrary to assertions of Southern “stagnation” in the post-CivilWar era, theSouthdidnotlagbehindtherestofthenationafter1880.Ofcourse,eventhoughits rate of growth was equal to the national average, the absolute differencebetweenSouthernandnon-Southernincomelevelsbecamewider.Perhapsthisisthegapthathistoriansandotherobservershavehadinmindwhendiscussingtheincreasing“backwardness”oftheSouth.Regionalgroupingsobscuresubstantialdifferencesamong the individual states,but thedispersionof the statesaroundthenational average levelof incomedidbecomesomewhat smallerduring thetwo decades after 1880. Between the turn of the century and 1920 the Southmade large gains, while the Northeast and the West again sustained lossesrelativetothenationalaverage.Overall,thefourdecadesafter1880witnessedarelativenarrowingofregionaldifferencesinpersonalincomepercapita.

Figure5.1Relationbetweenincomeandinvestmentinformaleducation,bystates,1880.Source:LewisC.Solmon,“EstimatesoftheCostsofSchoolingin1880and1890,”ExplorationsinEconomicHistory,VII(Supplement:1970),534.

Howcanthisnarrowingbeexplained?Atheorytoanswerthisquestionisasimple extension of the theory employed to explain regional differences at apoint in time. At any given time in the post-Civil War era the resourceendowmentofanyregiondifferedfromthatofotherregions.Forexample, theWestpossessedrelativelylargequantitiesofland,theNortheastrelativelylargequantities of all kinds of capital except land, and the South relatively largequantitiesofunskilledlabor.Theresourcethatwasrelativelymostabundantinaregion commanded a relatively low rate of return. For instance, unskilledlaborers inAlabama,where theywere relativelyabundant, earneda lower realwage than they did inCalifornia,where theywere relatively scarce.Resourceowners sought to obtain higher returns by moving their resources—whetherlabor or some formof capital—to areas characterizedby a relative scarcity ofthat resource.Workersmigrated to placeswhere they could obtain higher real

wages, and capitalists sought to invest in areas promising the highest rate ofreturn,aswehavealreadyseeninthediscussionoffarmmortgagelending.2Ifunderlying economic conditions had remained unchanged, such movementswouldeventuallyhaveresultedinanapproximateequalizationofreturnsamongallregionsforeachkindofresource.Butofcoursetheworlddidnotstandstill.Beforeacompleteadjustmenthadbeenmade,newchangesoccurredindemandand technology, upsetting the old pattern of adjustment. In practice, therefore,the interregional transfer of resources produced only a tendency towardequalizationofreturns,neveranactualrealizationofequality.Moreover,someof the adjustments occurred at a snail’s pace, so divergencies persistedthroughout the period, especiallywhen the causes of the original divergencieswere self-reinforcing. The same differentials among returns that gave rise tointerregionalmigrationofresourcesalsoencouragedindividualswithineachoftheregionstoaccumulate thatformofcapitalbeingattractedfromotherareas.Togethertheaccumulationofcapitalwithinregionsandthetransferofresourcesamongregionsproducedthetendencytowardequalization.

Whatweknowaboutthemovementofresourcesinthepost-CivilWareraisbroadlyconsistentwiththehypothesisjustsketched.Netin-migrationrelativetopopulationwaslargestintheWestandsubstantiallylowerintheNortheastandGreatLakesregions;andintheSouththenumberofout-migrantsexceededthenumber of in-migrants in every decade of the period. Eastern capitalists didtransfer their resources to the South and the West more frequently than thereverseoccurred.Withworkersmovingintoareasofrelativelaborscarcityandcapital into areas of relative capital scarcity, the ratio of capital to labor drewcloser to equality among the regions, and anarrowingof interregional incomedifferentialswas the consequence. That differences remained is attributable todeficiencies of information about opportunities elsewhere, to costs oftransferringresources,todifficultiesinborrowingtofinancethetransfer,andtocontinuing disturbances in the economy that altered the distribution ofopportunities among the regions and changed the desirable pattern ofadjustments.

It is curious that historians have often condemned the capital movementsamong regionsasharmful to theareas receiving thecapital.ThedistinguishedhistorianoftheSouth,C.VannWoodward,forexample,refersagainandagaintothe“heedlessexploitationofSouthernresourcesandpeoplebyNortheasterncapital.”3Thisinterpretationissimplywrong.Surelyanyreasonabledefinition

of“exploitation”—thoughthisvalue-ladenwordwouldbebetterabandonedthandefined—requiresthatan“exploited”regionbeworseoffthanitwouldbeifleft“unexploited.”ButthetransferofNortheasternresourcesintotheSouthcertainlydidnotmake that regionworseoff; rather, the reversewas true.Evenhad theowners of the capital removedall their earnings from the region—which theydid not—the Southwould still have benefited from the increased demand forlocallaborandmaterials,theexpandedtaxbase,andallthebenefitsattributableto thenewactivities forwhich theownerscouldnotcharge—forexample, thelearning from experience gained by their employees. Interregional transfers ofresources occurred through free contracting among the parties involved; thatindividualsvoluntarilyarranged the transfer suggests thateachsideconsideredthearrangementtoitsownadvantage.

Underlying the claimsof regional “exploitation” seem frequently tobe theimplicitassumptionsthatallregions“should”beequallyindustrializedandthatwhilemanufacturing is aGoodThing, agriculture andmining are activities fitonly for slaves and other “exploited” people. Such viewsmake no sense.Thepeopleofanyregioncanmaximizetheirincomesbypursuingtheactivitiesthatmakerelativelyintensiveuseofresourcesthatarerelativelyabundant,andhencerelativelycheap,inthatregion.Topursueotheractivitieswouldbetosacrificethe benefits of specialization and trade. It is obvious that given the resourceendowmentsof their regions, theadvantageofSouthernersandWesterners laymainlyinagricultureandotherextractiveindustries,whileNortheasternersstoodtogainbyconcentratingonmanufacturingandothernonagricultural activities.Noonehadtodictatethesepatternsofspecialization,andnoonedid.Therateofreturn on the various activities attempted in the different regions provided asignal, informing entrepreneurs of theways inwhich they, and therefore theirregions,couldobtainthehighestpossibleincomes.

Ifweagreethatinterregionaldifferencesinincomepercapitaresultedfromdifferences in the capital/labor ratio and that during the 1880–1930 period theSouth actually gained on the rest of the nation, the really crucial questionbecomes:whywasthecapital/laborratiorelativelysolowintheSouthin1880?Howcouldone region fall so faroutof linewith theothers inaneconomyofmobile—though not costlessly mobile—resources? To answer this questionrequiresadigressiontoconsidertheprewareconomy.

Before theCivilWar, slaves lackedproperty rightsof anykind.Moreover,theywereproperty,themostimportantformofSoutherncapitalexceptland.Inapplying economic theory topredict thedecisionsof investors before thewar,

wemust consider slaves in the same terms asmachines, land, or inventories,simplyasaformofcapital.Undersuchcircumstanceseconomictheorypredictsthattheinterregionalflowofresourceswouldtendtoequalizeonlytheincomesper capita of the free population of each region. And indeed the evidence isconsistent with this prediction. Richard Easterlin found that in 1840, “if theslavesandtheirincome(estimatedatsubsistence)areeliminated,onefindsthatthe incomeof thewhitepopulation in theSouthexceededthenationalaverageandcomparedfavorablywiththatoftheNortheast.”4BecauseSouthernincomesgrewsomewhatmorerapidlythanthenationalaverageduringthetwodecadesbefore the CivilWar, the level of Southern personal income per white capitaexceededthenationalaverageevenmorein1860.5

The emancipation had two important effects. First, it destroyed part of theassetsownedbythewhitesbyoutlawingtheirpropertyrightsinslaves;second,it added about four million persons to the Southern free population.EmancipationinnowayaffectedthestockofrealresourcesintheSouth;fromasocial point of view it destroyed nothing. In effect, it merely relabeled“machines” as “citizens” and gave them property rights to match their newstatus. (That the actual rights of blacks turned out to be more restricted thanthose of whites does not affect the present argument.) This change raisesinsurmountableproblemsofintertemporalcomparison.Tocomparethelevelofincomeperfreecapitain1860withthesamemeasureforapostwaryearmakesno sense; but neither does a comparison of incomes per capita of the totalpopulationwhena thirdof thatpopulationconsistedof“machines”at the firstdate.Per capita incomes at the two dates simply are not comparable in anymeaningfulsense.Theemancipationinasinglestrokeincreasedthedenominatorofthefraction(income/freepopulation)bytransformingpartofthecapitalstockintopart of thepopulation.Of course the level of incomeper free capita thendramaticallydeclined,quiteapartfromthevastwartimedestructionofSouthernhumanandmaterialcapital.Bya revolutionary restructuringofproperty rightsthe emancipation created a completely different set of feasible opportunitiesfromtheinvestor’spointofview,changingtheslaveowner’svaluableassetintothebodyofanewcitizen.Inthisnewlegalframeworkinvestors,includingnowthe freed-men,groped towardanadjustment,channeling their investments intothoseavenues—includingmigration—promising thehighest rateof return.Butwe would hardly expect the achievement of a new equilibrium to occurimmediately. The blow to the Southern asset structure was too disturbing for

Southerners to adjust to quickly; in the economist’s jargon, the emancipationcreatedamassive“portfoliodisequilibrium.”Inaddition,postwarconditionsdidlittletoassistandmuchtoretardanewadjustment.6Inretrospect,itisperhapsmostremarkablethattheSoutherneconomymanagedtoreboundasquicklyasitdid.

Amajorimplicationoftheprecedingargumentsdeservestobeemphasized.The decline of Southern incomes below the national average is entirelyattributabletotheCivilWaranditseffects,andtheregionhasbeencatchingupever since. The relative poverty of the South in the post-CivilWar era—andindeed right up to the present day—is therefore entirely attributable to (1) theexistence of the slave system and (2) the abolition of that system throughdestructive civil war and haphazard emancipation. Moralists might well holdSouthernersaccountableforthefirst,buthardlyforthesecond.Howironicthatthe Great Emancipator should have engineered a policy that has keptSoutherners,blackandwhitealike,relativelypoorforoveracentury.Tobesure,theUnionwassaved,butonlyatsuchgreatandenduringcost.HadAmericansbeenablein1860toforeseethefuture,itseemslikelythatafullycompensated,carefully organized emancipation would have appealed more strongly to bothNorthernersandSoutherners.

IMMIGRANTSAND“EXPLOITATION”

Thepeoplewho left theirEuropeanhomes in searchofbetter opportunities intheUnitedStatestypicallydiscoveredsomethinglessthanthePromisedLand,In1890JacobRiisgaveaclassicaccountoftheirlivingconditionsintheslumsofNewYorkCity,themajorreceivingcenter.TheretheJewishchild,onlyrecentlyarrivedfromPoland,“worksunchallengedfromthedayheisoldenoughtopullathread.Thereisnosuchthingasadinnerhour;menandwomeneatwhiletheywork,andthe‘day’islengthenedatbothendsfarintothenight.Factoryhandstaketheirworkwiththematthecloseofthelawfuldaytoekeouttheirscantyearningsbyworkingovertimeathome.”NotfarawayRiisfoundtheBohemianssufferingfromwhatseemedtohim“aslaveryasrealasanythateverdisgracedtheSouth.”7Andhewentontorecordinheartrendingdetailthelonghoursandmeagerearningsofotherrecentlyarrivedimmigrantgroups.Suchfactshaveleda distinguished historian of immigration to conclude: “The immigrant was anexploited unskilled laborer.”8 And this interpretation seems standard in the

historicalliterature,Riis accurately, if somewhat overdramatically, describedwhat he saw.But

hisobservations,thebasisforsomanysubsequentaccountsoflivingconditionsamongtheimmigrants,werenotrepresentative;infact,theyweresystematicallybiased.Hismaininterestwasinimprovinglivingconditionswithinthetenementdistricts, and it is hardly surprising that in his visits to the slums he observedimmigrantswhoweremostlypoor,someofthemdesperatelyso.However,notall immigrants lived in the slums,norwere theyuniformlydestitute.AsTable5.2 shows, the earnings of immigrant workers actually varied widely. Just asregional differences make it hazardous to generalize about the entire UnitedStates,sodifferencesamongthevariousimmigrantgroupsmakeithazardoustogeneralize about “the” immigrant. But this variation itself raises an obviousquestion:howcandifferencesinearningsamongthevariousimmigrantgroupsbeexplained?Weshallseethatananswertothisquestionalsoleadsdirectlytoan explanation of why each group “came in at the bottom of the economicladder”andhoweachsubsequently“workeditswayup.”

Scholarshaveadvanced twoalternativehypotheses toexplainvariations inearningsamongimmigrantethnicgroups.Thefirstisthatthegroupspossessedon the average different amounts of useful skills, and therefore their laborservices commanded different earnings in the marketplace. The secondmaintains that ethnic prejudice against immigrants from southern and easternEurope resulted indiscrimination against them in the labormarket, depressingtheir earnings below the level of equally skilled native-born workers orimmigrants from northwestern Europe. The second hypothesis often takes theformofclaimsthatcertainimmigrantgroupswere“exploited.”

TABLE5.2CHARACTERISTICSOFADULT,MALE,FOREIGN-BORNWORKERSIN

MININGANDMANUFACTURINGOCCUPATIONS,1909

SOURCE.U.S.ImmigrationCommission,Report(Washington:GovernmentPrintingOffice,1911),I,pp.367,474,439,352,Inthistable,“literate”meansabletoread.

Totestthehypothesisofskilldifferentials,arecentstudyemployedthedatashowninTable5.2.9LiteracyandtheabilitytospeakEnglishserveasindexesof skill. The study found that the relation between earnings, ability to speakEnglish,andliteracyisbestrepresentedbytheequation

Y=2.55+0.0383E+0.0796L

whereYisagroup’sweeklyaverageearningsindollars,Eisthepercentageofagroup speaking English, and L is the percentage of a group literate in anylanguage. The equation can be interpreted as follows: holding the level ofliteracy constant, a 10-percentage-point increase in the proportion of a groupspeakingEnglishwasassociatedwithanincreaseofabout38centsperweekinthegroup’saverageearnings;holdingthe levelofEnglish-speakingconstant,a

10-percentage-pointincreaseintheproportionofagroupliteratewasassociatedwith an increaseof almost80centsperweek in thegroup’s average earnings.Each of these partial relations is statistically significant—could have beenproducedbypurechance less thanone time inahundredexperiments—whichmeans that the data are consistent with the hypothesis of skill differentialsleading to earnings differentials. The overall relation statistically “explains”almostfourfifthsofthevarianceamongtheearningsofthegroups;instatisticaljargon,theequationprovidesagood“fit”forthedata.

TheImmigrationCommission,whichobtainedthedatashowninTable5.2,also collected information from 41,933 native-born white employees inmanufacturingandminingoccupationstoobtainacontrolgroupforitsstudyofimmigrants.Theaverageearningsoftheseworkers,allofwhomspokeEnglishand 98.2 percent of whom were literate, was $14.37 per week. To test thehypothesisthatimmigrantsweretheobjectsofethnicdiscrimination,weusetheequationrelatingskillstoearningsamongimmigrantstopredicttheearningsofthenative-bornworkers.Ifemployersactuallydiscriminatedagainstimmigrants,suchapredictionwouldfallsignificantlybelowtheactualearningsofthenative-bornworkers.Remarkably, thepredictionfallsonly1percentbelowtheactualfigure, a result that casts grave doubt on the notion that ethnic discriminationoperatedonawidescaletothedetrimentofimmigrantworkers.10

This finding does not mean that no ethnic prejudice existed, and there isplentyofevidencethatsuchprejudicedidexist.But it isapparent that ifsome(discriminating)employersoffered the immigrantawagelower than theactualvalue of his labor services to the firm, another employer could increase hiswealthbyhiringthatemployeeataslightlyhigherwage.Ofcourse,withmanyemployers,eachattemptingtomaximizewealth,competitionforworkerswouldsoon force thewage up to a level atwhich it equalled the actual value of theworker’s labor services to the firm. Not every employer must be a wealthmaximizertoobtainthisresult,however.Inprinciple,justonewouldbeenough,foritwouldpayhimtooutbidother(discriminating)employersforlaborandtoexpandhisbusinessaslongashecouldcontinuetoobtainworkersatlessthanthe going rate for equally skilled native-born workers. The evidence is quiteconvincing that at least some employers in the post-Civil War era stronglypreferredwealthtothepleasuresofdiscrimination.(Noticethatourargumentisjustthereverseofthecommonbeliefthatdiscriminationallowstheemployertoincreasehiswealthby“exploiting”hisworkers;thispopularfallacyfailstotake

competitionforlaborintoconsideration.)11Fromthesefindingsitisonlyashortsteptoanexplanationofwhyeachnew

immigrantgroup“cameinatthebottomoftheeconomicladder.”Itwaspartlybecauselatergroupswereuponarrivallessliterate,whichprobablyimplieslessskilled generally, than those having resided longer in the United States, andpartlybecausetheyhadlesscommandofEnglish,TheabilitytospeakEnglishwas almost perfectly correlated with the duration of a group’s residence inAmerica(Figure5.2)—agoodexampleof learningfromexperience,sincefewofthesemeneverreceivedformalinstructionintheEnglishlanguage.Overtimethe immigrants gained fluency in English and other skills, and in the processtheirearningsrose;thosearrivinglatermerelyfollowedinthefootstepsofthosearrivingearlier,andethnicdiscriminationhadlittleornoeffectontheprocess.Atanypoint in time,however,differentgroupsoccupieddifferentpositionsontheladderofskillacquisition,andhencecorrespondinglydifferentpositionsontheearningsscale.

Figure 5.2 Relation between ability to speakEnglish and length of residence inU. S., 31 non-English-speakingethnicgroups,1909.Source:Table5.2above.

INEQUALITIESBETWEENWHITESANDBLACKS

Inequalitiesbetweenwhitesandblacksapparentlyexistedinvirtuallyallaspectsof social and economic life throughout the post-Civil War era. Beyond thissweepingandobviousstatement,however,verylittlecanbesaid,foreconomichistorians have just begun to study trends in racial inequalities during thisperiod, and reliable findings have yet to appear. The absolute well-being ofblackscertainlyimprovedtosomeextentduringthehalfcenturyaftertheCivilWar;theextremelylowstartingpoint, ifnothingelse,madesomegainsalmost

inevitable. Thousands of blacks migrated to regions of greater opportunity; asubstantialmajoritylearnedtoreadandwrite;andmanyacquiredlandandotherproperty—all of which worked to raise black incomes. Whether the rate ofgrowth of black incomes exceeded the rate of growth of white incomes,however, remains open to conjecture. Given this dearth of knowledge, ourdiscussioninthissectioncandolittlemorethanlaythegroundworkforresearchthatremainstobedone.

Lacking income or earnings statistics, Gary Becker in his study ofdiscrimination constructed an index of occupational standing for male blacksrelativetomalewhitesinnonfarmoccupationsin1910.Thisindexstoodat73percentintheNorthand67percentintheSouth12.AsimilarbutmoredetailedandinclusiveindexconstructedbyDaleL.Hiestandstoodat78percentfortheentirenation in1910.13Unfortunately, however, the typeof index constructedbyBeckerandHiestandisbiasedupwardasanindicatorofrelativeearnings,forit assumes that the only difference between the races lay in their distributionamongthevariousoccupations—theindexbeinglessthanunitybecauseblackswere more concentrated in the lower-paying jobs. But a second source ofdifferencesinearnings,notcapturedbythisindex,isthatwithinaparticularjobclassification blacks typically earned less than whites. Moreover, blacks mayhavebeenmorefrequentlyunemployed.Clearly,indexesofrelativeoccupationalstandingareopentoseriousobjections,andinanyeventearlierobservationsarerequiredbeforewe can reach any conclusions about trends in thehalf centuryaftertheemancipation.

Anydiscussionof inequalitiesbetweenwhites andblacks in thepost-CivilWar eramust take slavery as its point of departure. Under that system, slaveownershadaninterestinmaintainingslavesatalevelofwell-beingthatwouldpreserve theirphysicalvitality,butbeyond that levelanyoutlayswerewasted.Consequently,slavesexistedatapproximatelythelevelofaphysicalsubsistenceincome.Upon emancipation, blacks found themselveswith few skills,withoutphysicalproperty,andconcentratedinthedevastatedSouth.InthefollowinghalfcenturytheydiscoveredthatdespiteConstitutionalamendmentsandcivil-rightslaws theyhadyet toattain full rightsofcitizenship.Lynch law took its toll indeathsandintimidation;manystatesdevisedwaysoflimitingblackaccesstothepolls;andwhite-dominatedcourtsdealtoutsomethinglessthanequaljustice.Ineffect,blackslaboredunderinsecurecivillibertiesanduncertainprivatepropertyrights, and this kind of “official” oppression constituted much more of an

obstacle to their economic progress than discrimination against them in themarket,thoughthatalsoexisted.

Atanytimeinthepastcentury,blackearningsfallconsiderablybelowthoseofwhites.Thisfactalone,however,impliesnothingaboutracialdiscriminationinthelabormarket.Todeterminewhetherracialdiscriminationexists,wemustbe careful to compareworkers identical in every respect except race, for evenwithout racial discrimination, earnings differentials might exist because ofdifferentials in age, sex, education, health, and other “productivity factors.” Ifearnings differentials remain after adjustment for productivity factors, theevidenceisconsistentwiththehypothesisofpurelyracialdiscrimination.14Itistrue,ofcourse,thatevenifnodiscriminationexistsinthelabormarket,earningsdifferentialscouldstillbeascribed todiscrimination ifblacksaredeniedequalaccesstoeducationorequaltreatmentunderthelaw.Thus,discriminationmayexist at two levels—in both the market and nonmarket sectors of resourceallocation—anditisimportanttodistinguishbetweenthem.

In the section above on “Immigrants and ‘Exploitation’,” we found thatamong immigrantgroups in1909,earningsandskillswerecloselyrelated.Wesaw too that the earnings-skills relation gave an accurate prediction of theearnings of native-born white workers of comparable age, sex, and industrialaffiliation.The ImmigrationCommission,whichobtained thedata used in ourearliertests,alsocollectedcomparableinformationfrom6604adult,native-bornblack males employed in mining and manufacturing industries in 1909. Theworkersinthissampleearnedanaverageof$10.66perweek.Asacrudetestofthe racial discrimination hypothesis, we can use the earnings-skills relationpresentedintheprevioussectiontopredicttheearningsoftheblackworkers.Ifracialdiscriminationexisted,thepredictedearningsshouldsignificantlyexceedactualearnings.Infact,theearningspredictedforthissampleofblackworkers,allofwhomspokeEnglishand76.4percentofwhomwereliterate,stands$1.80above their actual earnings—a finding consistentwith the hypothesis of racialdiscrimination,thoughaverycrudefindingtobesure.15

To say something more definite about the extent of labor marketdiscriminationagainstblackworkers,wemustobtainmoredetailedinformationon earnings and skills. Table 5.3 presents some crude industry data obtainedfromthereportoftheImmigrationCommission.Thesedataindicatenoapparentrelation between relative earnings and relative literacy or age, a finding thatsuggests that the earnings differentials may have been partly determined by

discrimination.Fortheeightindustriesasawhole,however,blackliteracydoesfallbelowwhite literacy in roughly thesameproportionasearnings fall short.Still,thesedataaremuchtoocrudeandtoofewtosupportanyfirmconclusions.

TABLE5.3EARNINGS,LITERACY,ANDAGEOFBLACKSRELATIVETOWHITES,

ADULTMALEEMPLOYEES,1909

Industry RelativeMeanEarnings RelativeProportionLiterate RelativeMeanAge

Agriculturalimplementsandvehicles 0.86 0.93 1.09

Cigarsandtobacco 0.62 0.80 1.04Bituminouscoalmining 0.86 0.78 1,03Construction 0.74 0.75 0.92Glass 0.72 0.86 1.09Ironandsteel 0.64 0.76 1.00Ironoremining 0.92 0.62 1.04Meatpacking 0.93 0.95 0.98

SOURCE. Calculated from data in U. S. Immigration Commission, Report (Washington: GovernmentPrintingOffice,1911),XX,pp.227–28,270–71,581,1068–69.

Theevidenceconsideredinthissectionillustratessomeofthedifficultiesinhistoricalstudiesofracialdiscrimination.Perhaps,too,itcanserveasawarningagainstdrawingquickconclusionsaboutasubjectthatengagesstrongemotionsbut remains little explored by scientific research. At present we can do littlemore than offer some conjectures for consideration in future studies. First, allexistingevidenceindicatesmoreintensediscriminationintheSouththanintheNorth. This fact suggests that a major determinant of the relative economicpositionofblackshasbeen their regionaldistribution.Weneed toknowmuchmoreaboutwhatvariablesdeterminedtherateanddirectionofblackmigrations,both interregionally and within the South. Second, differences between theeconomic progress ofEuropean immigrants and of blacks suggest threemajorhypotheses: thatblacksbegan toaccumulate skills fromamuch lower startingpoint than the immigrants; that blacks experienced greater discrimination thanimmigrantsinthenonmarketsector,especiallyinobtainingeducationandequaltreatment under the law; or that ethnic prejudice against blacks in the labormarket was more intense and widespread than that against immigrants.Combinationsof thesehypothesesareofcoursepossible.Third,discriminationagainstblacksinthemarketoftendependedondiscriminationinthenonmarket

sector,as,forexample,whenSouthernwhiteemployerswhostronglypreferredwealth to discrimination, and would have bid up black wages, were illegallyintimidatedbyfellowwhitesintentonkeepingtheblack“inhisplace.”Weneedtoknowmuchmore about the relationbetween themarket and thenonmarketvarieties of discrimination and about the enforcement techniques employedwithinthewhitecommunitytomaintaineffectivediscrimination.

WASPROGRESSWORTHITSPRICE?

A comparison of the American economy in 1865 with the economy in 1914points up a variety of changes. On the eve of the Great War Americansconsumed about three timesmore economic goods per capita than they had ahalfcenturyearlier.Theylivedlongerandhealthierlivesandspentlesstimeatwork andmore at recreation. Theywere better housed and educated, traveledmore,readmore,andwerebetterinformedabouttheirownandothercountries.AllofthiswecustomarilycallProgress.

Against the gains of economic growth, however, must be set the costs ofrealizingthegains.Economicgrowthwasaninherentlydisruptiveprocess,andbecause certainty itself is an economic good, unanticipated disruptionsconstituted one of the costs of growth. Business depressions erraticallypunctuated the course of growth, leavingworkerswithout jobs and employerswithlosses,butinanunregulatedmarketeconomysuchfluctuationswerebothunavoidableandunpredictable(Table5.4).

TABLE5.4ESTIMATEDPERCENTAGEOFLABORFORCEUNEMPLOYEDIN

SELECTEDDEPRESSIONYEARS

Year PercentageUnemployed1876 12–141885 6–81894 181908 8

SOURCE.StanleyLebergott,ManpowerinEconomicGrowth (NewYork:McGraw-Hill,1964),pp.187,512,522.

Though inventions led to increased efficiency in production, they oftenmeantbankruptcy for those employing older processes. David A. Wells, despite his

pervasive optimism, was perceptive enough to recognize that “nothing marksmoreclearlytherateofmaterialprogressthantherapiditywithwhichthatwhichis old and has been considered wealth is destroyed by the results of newinventions and discoveries.”16 Though migration allowed young people toobtainhigher incomes, itoften left theirparents lonelyandunhappyin theoldhome.ThoughthesettlementoffertileWesternlandsprovidedcheaperfoodforurban dwellers, it oftenmeant ruin for Eastern farmers.And similar contrastsmightberecitedatgreatlength.Wecouldsaythatpeopledidadjust;ultimatelyeveryonewasbetteroff.Butsuchaninterpretationisincompleteandignoresthecosts imposed on people by the disruptive transformations that inevitablyaccompaniedeconomicgrowth.

The inescapable fact is that economic growth hurt many people. Somerecoveredtheirlosses,butothersdidnot.EconomicgrowthmeantProgressfromasocialpointofviewbecauseitcreatedmorewealththanitdestroyed,butthedistribution of the gains and losseswas quite unequal. Ifwe are interested inindividualwelfare, the answer to thequestion“Wasprogressworth itsprice?”mustnecessarilybethatforsomeitwas,andforothersitwasnot.Itwillhardlydo to say that individuals “freely chose to have economic growth,” becausegrowthwas a social process; the actions of a single individual simply did notmatteronewayortheother.Anindividualcoulddeterminehisownprogramofsaving and investment, but he could neither foresee nor control the futuredevelopment of the market system. He could not know that the investmentsmade in such hopeful expectations and based on the most reliable availableinformationwereoftendestinedtobecomereductionsinhiswealth.

Americansocietyencouragedeconomicgrowthbyguaranteeingindividualssecureprivatepropertyrightsandfreeaccesstomarkets,butthespecificationofproperty rights did not permit all economic actions and their effects to bedetermined through free contracting. In the absence of all-embracing rights ofcontract—an impossibility in any event—many external or “spillover” effectswereinevitable,someofthembeneficialbutothersquiteharmful.TheSupremeCourtclearlyrecognizedtheproblemindecidingthecaseofCoppagev.Kansas(1915):

No doubt, wherever the right of private property exists, there must and will be inequalities offortune; and thus it naturally happens that parties negotiating about a contract are not equallyunhamperedbycircumstances. . . .Since it is self-evident thatunlessall thingsareheld incommon,somepersonsmusthavemorepropertythanothers,itisfromthenatureofthingsimpossibletoupholdfreedomofcontractandtherighttoprivatepropertywithoutatthesametimerecognizingaslegitimate

thoseinequalitiesoffortunethatarethenecessaryresultoftheexerciseofthoserights.17

By not holding people liable for all the effects of all their actions, Americansociety widened the scope of free individual actions, but at the same time itforfeitedthekindofsecurityandorderthatcanexistinastationaryeconomy.Inafreemarketeconomytheracewasto theswift—and,ofcourse, to the lucky,foreventheswiftsometimesraninthewrongdirection.

1 Harvey S. Perloff, et al., Regions, Resources, and Economic Growth (Baltimore: Johns Hopkins,

1960),p.579.The simplecoefficientofcorrelationbetweenwagesperworkerandcapitalpetworker is0.63,alevelthatcouldhavebeenproducedbypurechancelessthanonetimeinathousandexperiments.

2Actually,resourcetransferisattractiveonlywhenthepresentvalueoftheexpectedgainsobtainablebythetransferexceedsthecostsofthetransfer:themigrationofresourcesshouldbeconsideredinthesametermsasanyotherinvestment.Inthepresentdiscussionweareabstractingfromthecostsofthetransfer.

3C.VannWoodward,OriginsoftheNewSouth,1877-1913(n.p.:LouisianaStateUniversity,1951),p.473.

4RichardA.Easterlin,“Regional IncomeTrends,1840–1950,” inSeymourE.Harris,Ed.,AmericanEconomicHistory(NewYork:McGraw-Hill,1961).p.527.

5 Stanley L. Engerman, “The Economic Impact of the CivilWar,”Explorations in EntrepreneurialHistory,III(Spring/Summer1966),194,n.20.

6 In particular, theNationalBankingAct, passed during theCivilWar, didmuch to retardSouthernrecovery.SeeRichardSylla, “FederalPolicy,BankingMarketStructure, andCapitalMobilization in theUnitedStates,1863–1913,”JournalofEconomicHistory,XXIX(Dec.1969).

7JacobRiis,HowtheOtherHalfLives(NewYork:CharlesScribner’sSons,1890),pp.123–24,136.8OscarHandlin,TheUprooted(Boston:Little,BrownandCompany,1952),p.195.9 Robert Higgs, “Race, Skills, and Earnings: American Immigrants in 1909,” Journal of Economic

History, XXXI (June 1971). This paper contains an assessment of the data shown in Table 5.2; it alsopresentsthetechnicalfeaturesofthestatisticalresultssummarizedbelowandamoredetaileddiscussionoftheproblemsexaminedinthissection.

10Thepredictedearningsfigureis2.55+0.0383(100.0)+0.0796(98.2)=14.20.11 For a complete discussion of the theory summarized in this paragraph, see Gary S. Becker,The

EconomicsofDiscrimination(Chicago:UniversityofChicago,1957),especiallypp.35–37.12Ibid.,p.113.13 Dale L. Hiestand, “The Changing Position of NegroWorkers,” in John F. Kain, Ed., Race and

Poverty(EnglewoodCliffs,N.J.:Prentice-Hall,1969),p.72.14 For an example of a study thatmakes such adjustments, employing data for 1960, see JamesD.

Gwartney,“DiscriminationandIncomeDifferentials,”AmericanEconomicReview,LX(June1970).15Thepredictedearningsfigureis2.55+0.0383(100.0)+0.0796(76.4)=12.46.16DavidA.Wells,RecentEconomicChanges(NewYork:Appleton,1889),p.31.17CitedinJohnR.Commons,LegalFoundationsofCapitalism(NewYork:Macmillan,1924),p.291.

APPENDIX:TheSourcesofEconomicGrowth

ThisappendixexplainsthederivationoftheconclusionspresentedinChapterIIconcerningthesourcesofeconomicgrowthfortheperiod1869–1914.

The basic assumptions are that the economy has an aggregate productionfunction characterized by constant returns to scale and that allmarkets are incompetitiveequilibrium.Given theseassumptions, theproduction functioncanbewrittenas

(1)Y=AKαL1–α

whereY=totaloutput,A=indexoftotalinputproductivity,K=materialcapitalstock(includingland),L=man-hoursworked,andα=shareofpropertyownersin total income. By taking logarithms and then differentiating with respect totime,wecanexpress(1)as

(2)Y′=A′+αK′+(1–α)L′

where primes denote proportional rates of change. This states that the rate ofgrowth of total output is the sum of the rates of growth of total inputproductivity,labor,andmaterialcapital,wherethegrowthratesoftheinputsareweightedbytheirrelativeincomeshares.

BysubtractingL’fromeachsideof(2),weobtain

(3)y′=A′+αk′

wherey=outputperman-hourandk= ratioofmaterial capital to labor.Thisstates that the rateofgrowthofoutputperman-hour is the sumof the rateofgrowthoftotalinputproductivityandtheweightedrateofgrowthofthematerialcapitalintensity,wheretheweightisthepropertyshareofincome.

From data given in JohnW. Kendrick, Productivity Trends in the UnitedStates (Princeton,N. J.: PrincetonUniversity, 1961), pp. 298–99, 311–12, and

320–21,weobtainthefollowinggrowthratesfortheperiod1869–1914:Y’=4.2percentperyear;L’=2.5percentperyear;andK’=3.9percentperyear.FromdatagiveninEdwardC.Budd,“FactorShares,1850–1910,”inNationalBureauofEconomicResearch,ConferenceonResearchinIncomeandWealth,TrendsintheAmericanEconomyintheNineteenthCentury(Princeton,N.J.:PrincetonUniversity, 1960), p. 387, it appears that the relative income shares wereapproximatelyconstantduring theperiodatα=1/3.Substituting thesedata in(2),A’canbecalculated,andthereforetheproportionalinfluenceofthreebroadsourcesofgrowthintotaloutputobtainedasfollows:theincreaseinman-hoursaccountsfor1.67/4.20=40percent;thegrowthofmaterialcapitalaccountsfor1.30/4.20 = 31 percent: and all other sources explain 1.23/4.20 = 29 percent.Substitutingthedatainto(3),wefindthat0.46/1.70=27percentofthegrowthin output per man-hour is explained by the increase in the ratio of materialcapitaltolabor,and1.24/1.70=73percentisattributabletoallothersources.

Thesecalculationsare,atbest,suitableonlyforestablishingrelativeordersofmagnitude.Forfulldiscussionsofimperfectionsinthedata,seetheworksbyKendrick and Budd cited above. For a penetrating survey of the theoreticalreservationstowhichsuchcalculationsaresubject,seeM.IshaqNadiri,“SomeApproaches to the Theory and Measurement of Total Factor Productivity: ASurvey,”JournalofEconomicLiterature,VIII(Dec.1970).

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M.Blaug,Ed.,EconomicsofEducation1:SelectedReadings(Baltimore;PenguinBooks,1968).Kuhn,ThomasS.,TheStructureofScientificRevolutions,2ded.(Chicago:UniversityofChicago,1970).Lipsey,RichardG.,andPeterO.Steiner,Economics,2ded.(Newyork:HarperandRow,1969).Machlup, Fritz, “Patents,” in International Encyclopedia of the Social Sciences (NewYork:Macmillan,

1968).Meyer,JohnH.,andAlfredH.Conrad,“EconomicTheory,Statistical Inference,andEconomicHistory,”

JournalofEconomicHistory,XVII(Dec.1957).Morgenstern, Oskar, On the Accuracy of Economic Observations, 2d ed. (Princeton, N. J.: Princeton

University,1963).Mortensen, Dale T., “Job Search, the Duration of Unemployment, and the Phillips Curve.” American

EconomicReview,LX(Dec.1970).Nelson,RichardR.,“TheEconomicsofInvention:ASurveyoftheLiterature,”JournalofBusiness,XXXII

(April1959).———,Ed.,TheRateandDirectionofInventiveActivity(Princeton,N.J.:PrincetonUniversity,1962).Popper,KarlR.,ThePovertyofHistoricism(NewYork:HarperTorchbooks,1964).

———,TheLogicofScientificDiscovery(NewYork:HarperTorchbooks,1965).Rosenberg,Nathan, “CapitalGoods,Technology, andEconomicGrowth,”OxfordEconomicPapers,XV

(Nov.1963).Solow,RobertM.,CapitalTheoryandtheRateofReturn(Chicago:RandMcNally,1965).———,GrowthTheory(NewYork:OxfordUniversity,1970).Stigler,GeorgeJ.,“TheEconomicsofInformation,”JournalofPoliticalEconomy,LXIX(June1961).———,“InformationintheLaborMarket,”JournalofPoliticalEconomy,LXX(Supplement;Oct.1962).Young.Allyn,“IncreasingReturnsandEconomicProgress,”EconomicJournal,XXXVIII(Dec.1928).

CHAPTERII

Andreano,Ralph,Ed.,NewViewsonAmericanEconomicDevelopment (Cambridge,Mass.:Schenkman,1965).

Barnett, Harold J., and Chandler Morse, Scarcity and Growth: The Economics of Natural ResourceAvailability(Baltimore:JohnsHopkins,1963).

Becker, Gary S., “An Economic Analysis of Fertility,” in National Bureau of Economic Research,DemographicandEconomicChangeinDevelopedCountries (Princeton,N.J.:PrincetonUniversity,1960).

Brady,Dorothy, “RelativePrices in theNineteenthCentury,”JournalofEconomicHistory,XXIV (June1964).

Camp,L.Spraguede,TheHeroicAgeofAmericanInvention(GardenCity,N.Y.:Doubleday,1961).Chandler, Alfred D., Jr., “The Beginnings of ‘Big Business’ in American Industry,” Business History

Review,XXXIII(Spring1959).———,StrategyandStructure:ChaptersintheHistoryofIndustrialEnterprise(Cambridge,Mass.:M.I.T.

Press,1962).Davis.LanceE., “The InvestmentMarket, 1870–1914:TheEvolutionof aNationalMarket,”Journal of

Economic History, XXV (Sept, 1965), Denison. Edward F., “Some Major Issues in ProductivityAnalysis,”SurveyofCurrentBusiness(May1969),Pt.II.

Evans,GeorgeHeberton,Jr.,BusinessIncorporationsintheUnitedStates,1800–1913(NewYork:NationalBureauofEconomicResearch,1948).

Fishlow,Albert, “Levels ofNineteenth-Century Investment inEducation,”Journal ofEconomicHistory,XXVI(Dec.1966).

———,“ProductivityandTechnologicalChangeintheRailroadSector,”inNationalBureauofEconomicResearch,ConferenceonResearch in IncomeandWealth,Output,Employment,andProductivity intheUnitedStatesafter1800(NewYork:ColumbiaUniversity,1966).

Fogel,RobertWilliam,TheUnionPacificRailroad(Baltimore:JohnsHopkins,1960).———,RailroadsandAmericanEconomicGrowth(Baltimore:JohnsHopkins,1964).———, and Stanley L. Engerman, “A Model for the Explanation of Industrial Expansion during the

Nineteenth Century: With an Application to the American Iron Industry.” Journal of PoliticalEconomy,LXXVII(May/June1969).

Friedman,Milton,andAnnaJ.Schwartz,AMonetaryHistoryoftheUnitedStates,1867–1960(Princeton,N.J.:PrincetonUniversity,1963).

Gallman, Robert E., “Commodity Output, 1839–1899,” in National Bureau of Economic Research,ConferenceonResearch in IncomeandWealth.Trends in theAmericanEconomy in theNineteenthCentury(Princeton,N.J.:PrincetonUniversity,1960).

———, “Gross National Product in the United States, 1834–1909,” in National Bureau of EconomicResearch,ConferenceonResearch in IncomeandWealth,Output,Employment,andProductivity intheUnitedStatesafter1800(NewYork:ColumbiaUniversity,1966).

Hill, Peter J., The Economic Impact of Immigration into the United States (Unpublished doctoraldissertation,UniversityofChicago,1970).

Hoover, EthelD., “Retail Prices after 1850,” inNationalBureau ofEconomicResearch,Conference onResearch in Income and Wealth, Trends in the American Economy in the Nineteenth Century(Princeton,N.J.:PrincetonUniversity,1960).

Jewkes,John,DavidSawers,andRichardStillerman,TheSourcesofInvention,2ded.(NewYork:W.W.

Norton,1969).Jorgenson, Dale, and Zvi Griliches, “The Explanation of Productivity Change.” Review of Economic

Studies,XXXIV(July1967).Kendrick,JohnW.,ProductivityTrendsintheUnitedStates(Princeton,N.J.:PrincetonUniversity,1961).Kuznets,Simon,CapitalintheAmericanEconomy(Princeton,N.J.:PrincetonUniversity,1961).———,andErnestRubin,Immigrationand theForeignBorn (NewYork:NationalBureauofEconomic

Research,1954).———, et al., Population Redistribution and Economic Growth, United States, 1870–1950, 3 vols.

(Philadelphia:AmericanPhilosophicalSociety,1957–64).Lebergott,Stanley,ManpowerinEconomicGrowth(NewYork:McGraw-Hill,1964).———, “Labor Force and Employment, 1800–1900,” in National Bureau of Economic Research,

ConferenceonResearchinIncomeandWealth,Output,Employment,andProductivity intheUnitedStatesafter1800(NewYork:ColumbiaUniversity,1966).

———,“UnitedStatesTransportAdvanceandExternalities,”JournalofEconomicHistory,XXVI(Dec.1966).

MacAvoy, Paul W., The Economic Effects of Regulation: The Trunk-Line Railroad Cartels and theInterstateCommerceCommissionbefore1900(Cambridge.Mass.:M.I.T.Press,1965).

Martin,EdgarW.,TheStandardofLivingin1860(Chicago:UniversityofChicago,1942).McGee,JohnS.,“PredatoryPriceCutting:TheStandardOil(N.J.)Case,”JournalofLawandEconomics,

I(Oct,1958).Nadiri, M. Ishaq, “Some Approaches to the Theory and Measurement of Total Factor Productivity: A

Survey,”JournalofEconomicLiterature,VIII(Dec.1970).North, Douglass C.,Growth andWelfare in the American Past (Englewood Cliffs, N. J.: Prentice-Hall,

1966).Rosenberg, Nathan, “Technological Change in the Machine Tool Industry, 1840–1910,” Journal of

EconomicHistory,XXIII(Dec.1963).———, “Economic Development and the Transfer of Technology: Some Historical Perspectives,”

TechnologyandCulture,XI(Oct.1970).———, “The Direction of Technological Change: Inducement Mechanisms and Focusing Devices,”

EconomicDevelopmentandCulturalChange,XVII(Oct.1969).Salter,W.E.G,ProductivityandTechnicalChange,2ded. (Cambridge,England:CambridgeUniversity,

1966).Schmookler,Jacob,InventionandEconomicGrowth(Cambridge,Mass.:HarvardUniversity,1966).Spann, Robert M., and Edward W. Erickson, “The Economics of Railroading: The Beginning of

CartelizationandRegulation,”BellJournalofEconomicsandManagementScience,I(Autumn1970).Stigler,George J., “TheDivisionofLabor IsLimitedby theExtentof theMarket,”Journal ofPolitical

Economy,LXI(June1951).———,“TheEconomiesofScale,”JournalofLawandEconomics,I(Oct.1958).Strassman, W. Paul, Risk and Technological Innovation: American Manufacturing Methods during the

NineteenthCentury(Ithaca;CornellUniversity,1959).Sylla,Richard,“FederalPolicy,BankingMarketStructure,andCapitalMobilizationintheUnitedStates,

1863–1913,”JournalofEconomicHistory,XXIX(Dec.1969).Temin,Peter,IronandSteelinNineteenthCenturyAmerica(Cambridge,Mass.:M.I.T.Press,1964).Thomas,RobertPaul,“TheAutomobileIndustryandItsTycoon,”ExplorationsinEntrepreneurialHistory,

VI(Winter,1969).U.S.BureauoftheCensus,HistoricalStatisticsoftheUnitedStates,ColonialTimesto1957(Washington:

GovernmentPrintingOffice,1960).———,LongTermEconomicGrowth,1860–1965(Washington:GovernmentPrintingOffice,1966).Williamson,JeffreyG.,“ConsumerBehaviorintheNineteenthCentury:CarrollD.Wright’sMassachusetts

Workersin1875,”ExplorationsinEntrepreneurialHistory,IV(Winter1967).

Wrigley,E.A.,PopulationandHistory(NewYork:McGraw-Hill,1969).

DIGRESSION

Andreano, Ralph, Ed., The Economic Impact of the American Civil War, 2d ed. (Cambridge, Mass.:Schenkman,1967).

Barzel, Yoram, “Investment, Scale, and Growth,” Journal of Political Economy, LXXIX (March/April1971).

Cheung,StevenN.S.,“TheStructureofaContractandtheTheoryofaNonexclusiveResource,”JournalofLawandEconomics,XIII(April1970).

Commons,JohnR.,LegalfoundationsofCapitalism(NewYork:Macmillan,1924).David,PaulA.,“TheGrowthofRealProductintheUnitedStatesBefore1840:NewEvidence,Controlled

Conjectures,”JournalofEconomicHistory,XXVII(June1967).Davis,Lance, andDouglassNorth. “InstitutionalChange andAmericanEconomicGrowth:AFirst Step

TowardsaTheoryofInstitutionalInnovation,”JournalofEconomicHistory,XXX(Jan.1970).Demsetz,Harold, “TheExchangeandEnforcementofPropertyRights,”JournalofLawandEconomics,

VII(Oct.1964),———,“SomeAspectsofPropertyRights,”JournalofLawandEconomics,IX(Oct.1966).———,“TowardaTheoryofPropertyRights,”AmericanEconomicReview,LVII(May1967).Fei, John C. H., and Gustav Ranis, “Economic Development in Historical Perspective,” American

EconomicReview,LIX(May1969).Hamilton,Alexander,JohnJay,andJamesMadison,TheFederalist(NewYork:ModernLibrary,n.d.).Hicks,J.R.,ATheoryofEconomicHistory(London:OxfordUniversity,1969).Hurst, James Willard, Law and the Conditions of Freedom in the Nineteenth-Century United States

(Madison,Wis.:UniversityofWisconsin,1956).———,Law and Social Process in United States History (Ann Arbor, Mich.: University ofMichigan,

1960).———, The Legitimacy of the Business Corporation in the Law of the United States, 1780–1970

(Charlottesville,Va.:UniversityofVirginia,1970).Kempin,FrederickG.,Jr.,LegalHistory:LawandSocialChange(EnglewoodCliffs,N.J.:Prentice-Hall,

1963).Lewis,W.Arthur,TheTheoryofEconomicGrowth(London:GeorgeAllenandUnwin,1955).North, Douglass C., The Economic Growth of the United States, 1790–1860 (Englewood Cliffs, N. J.:

Prentice-Hall,1961).———,“InstitutionalChangeandEconomicGrowth,”JournalofEconomicHistory,XXXI(March1971).———,andRobertPaulThomas,“AnEconomicTheoryoftheGrowthoftheWesternWorld,”Economic

HistoryReview,XXIII(April1970).Parker,WilliamN.,andFrankleeWhartenby,“TheGrowthofOutputbefore1840,”inNationalBureauof

EconomicResearch,ConferenceonResearchinIncomeandWealth,TrendsintheAmericanEconomyintheNineteenthCentury(Princeton,N.J.:PrincetonUniversity,1960).

Weber,Max,OnLawinEconomyandSociety(Cambridge,Mass.:HarvardUniversity,1954).Weissman,Jacob,LawinaBusinessSociety(EnglewoodCliffs,N.J.:Prentice-Hall,1964).

CHAPTERIII

Berry,Brian J. L., andChauncyD.Harris, “Central Place,” in International Encyclopedia of the SocialSciences(NewYork:Macmillan,1968).

Buchanan,JamesM.,andWilliamCraigStubblebine,“Externality,”Economica,XXIX(Nov.1962).Coase,Ronald,“TheProblemofSocialCost,”JournalofLawandEconomics,III(Oct.1960).Feller. Irwin, “The Urban Location of United States Invention 1860–1910,” Explorations in Economic

History,VIII(Spring1971).Fisher.Irving,ReportonNationalVitality:ItsWastesandConservation(Washington:GovernmentPrinting

Office,1909).Higgs,Robert.“TheGrowthofCitiesinaMidwesternRegion,1870–1900,”JournalofRegionalScience,

IX(Dec.1969).———,“CentralPlaceTheoryandRegionalUrbanHierarchies:AnEmpiricalNote,”JournalofRegional

Science,X(Aug.1970).———,“AmericanInventiveness,1870–1920,”JournalofPoliticalEconomy,LXXIX(May/June1971).———,“CitiesandYankeeIngenuity.1870–1920,”inKennethT.JacksonandStanleySchultz,Eds.,From

VillagetoMetropolis;EssaysontheCityinAmerica(NewYork:Knopf,1972).Hoover,EdgarM.,TheLocationofEconomicActivity(NewYork:McGraw-Hill,1948).Hoyt,Homer,OneHundredYearsofLandValuesinChicago(Chicago:UniversityofChicago,1933).Isard,Walter,LocationandSpace-Economy(Cambridge,Mass.:M.I.T.Press,1956).Lampard, Eric E., “The Evolving System of Cities in the United States: Urbanization and Economic

Development,”inH.S.PerloffandL.W.Wingo,Eds.,IssuesinUrbanEconomics(Baltimore:JohnsHopkins.1968).

Losch,August.TheEconomicsofLocation(NewHaven:YaleUniversity.1954).Meeker,EdwardF.,TheEconomics of ImprovingHealth, 1850–1915 (Unpublished doctoral dissertation,

UniversityofWashington,1970).Pred,AllanR.,TheSpatialDynamicsofU.S.Urban-IndustrialGrowth,1800–1914(Cambridge,Mass.:M.

I.T.Press,1966).Ravenel.MazyckP.,Ed.,AHalfCenturyofPublicHealth(NewYork:AmericanPublicHealthAssociation,

1921).Simon, Herbert A., “Effects of Increased Productivity upon the Ratio of Urban to Rural Population.”

Econometrica.XV(Jan.1947).Smith,Stephen,TheCityThatWas(NewYork:FrankAllaben,1911).Smolensky,Eugene, andDonaldRatajczak, “TheConceptionofCities,”Explorations inEntrepreneurial

History,II(Winter1965).Sydenstricker,Edgar,HealthandEnvironment(NewYork:McGraw-Hill,1933).Winslow,C.-E.A.,TheEvolutionandSignificanceoftheModernPublicHealthCampaign (NewHaven:

YaleUniversity.1923).

CHAPTERIV

Agelasto, A. M., et al., “The Cotton Situation,” in U. S. Department of Agriculture, Yearbook, 1921(Washington:GovernmentPrintingOffice,1922).

Ball,C.R.,etal.,“WheatProductionandMarketing,”inU.S.DepartmentofAgriculture,Yearbook,1921(Washington:GovernmentPrintingOffice,1922).

Bateman,Fred,“ImprovementinAmericanDairyFarming.1850–1910:AQuantitativeAnalysis,”JournalofEconomicHistory,XXVIII(June1968).

———,“LaborInputsandProductivityinAmericanDairyAgriculture,1850–1910,”JournalofEconomicHistory,XXIX(June1969).

Bogue, AllanG.,Money at Interest: The FarmMortgage on theMiddle Border (Ithaca, N. Y.: CornellUniversity,1955).

———,FromPrairietoCornBelt:FarmingontheIllinoisandIowaPrairiesintheNineteenthCentury(Chicago:UniversityofChicago,1963).

Bowman,JohnD.,“AnEconomicAnalysisofMidwesternFarmLandValuesandFarmLandIncome,1860to1900,”YaleEconomicEssays,V(Fall1965).

Cheung,StevenN.S.,“PrivatePropertyRightsandSharecropping,”JournalofPoliticalEconomy,LXXVI(Nov./Dec.1968).

———,“TransactionCosts,RiskAversion,andtheChoiceofContractualArrangements,”JournalofLawandEconomics,XII(April1969).

Fite, Gilbert C., “Daydreams and Nightmares: The Late Nineteenth-Century Agricultural Frontiers,”AgriculturalHistory,XL(Oct.1966).

Fogel,RobertWilliam, and JackRutner, “TheEfficiencyEffects of FederalLandPolicy, 1850–1900:AReport of Some Provisional Findings,” University of Chicago Center for Mathematical Studies inBusinessandEconomics,Report7027(June1970).

Hayami,Yujiro,andV.W.Ruttan,“FactorPricesandTechnicalChangeinAgriculturalDevelopment:TheUnitedStatesandJapan,1880–1960,”JournalofPoliticalEconomy,LXXVIII(Sept./Oct.1970).

Higgs,Robert,“RailroadRatesandthePopulistUprising,”AgriculturalHistory,XLIV(July1970).Leighty,C.E.,et.al.,“TheCornCrop,”inU.S,DepartmentofAgriculture,Yearbook,1921(Washington:

GovernmentPrintingOffice,1922).Lerner,EugeneM.,“SouthernOutputandAgriculturalIncome,1860–1880,”AgriculturalHistory,XXXIII

(July1959).Nugent,WalterT.K.,“SomeParametersofPopulism,”AgriculturalHistory,XL(Oct.1966).Parker,WilliamN.,andJudithL.V.Klein,“ProductivityGrowthinGrainProductionintheUnitedStates,

1840–60and1900–10,”inNationalBureauofEconomicResearch,ConferenceonResearchinIncomeand Wealth, Output, Employment, and Productivity in the United States after 1800 (New York:ColumbiaUniversity.1966).

Parker,WilliamN., “Sources of Agricultural Productivity in the Nineteenth Century,” Journal of FarmEconomies, IL (Dec, 1967), Rasmussen, Wayne D., “The Impact of Technological Change onAmericanAgriculture,1862–1962,”JournalofEconomicHistory,XXII(Dec.1962).

Rogin, Leo, The Introduction of Farm Machinery in its Relation to the Productivity of Labor in theAgricultureof theUnitedStatesDuring theNineteenthCentury (Berkeley:UniversityofCalifornia,1931).

Rothstein,Morton.“AmericaintheInternationalRivalryfortheBritishWheatMarket,”MississippiValleyHistoricalReview,XLVII(Dec.1960).

Russell,E.Zetal.,“HogProductionandMarketing,”inU.S.DepartmentofAgriculture.Yearbook,1922(Washington:GovernmentPrintingOffice,1923).

Sheets,E.W.,etat.,“OurBeefSupply,”inU.S.DepartmentofAgriculture,Yearbook,1921(Washington:GovernmentPrintingOffice,1922).

Strauss,Frederick,andLouisH.Bean,GrossFarmIncomeandIndicesoffarmProductionandPricesintheUnitedStates,1869–1937,U.S.DepartmentofAgriculture,TechnicalBulletin703,1940.

Tostlebe, Alvin S.,Capital in Agriculture: Its Formation and Financing since 1870 (Princeton, N. J.:PrincetonUniversity.1957).

CHAPTERV

Abramovitz,Moses, “TheWelfare Interpretation of Secular Trends inNational Income and Product,” inMoses Abramovitz, et al., The Allocation of Economic Resources (Stanford: Stanford University,1959).

Becker,GaryS.,TheEconomicsofDiscrimination(Chicago:UniversityofChicago,1957).Budd.EdwardC.,“FactorShares,1850–1910,”inNationalBureauofEconomicResearch.Conferenceon

Research in Income and Wealth, Trends in the American Economy in the Nineteenth Century(Princeton,N.J.:PrincetonUniversity,1960).

Davis,Lance,“CapitalImmobilitiesandFinanceCapitalism:AStudyofEconomicEvolutionintheUnitedStates,1820–1920.”ExplorationsinEntrepreneurialHistory,I(Fall1963).

Easterlin, Richard A., “Interregional Differences in Per Capita Income. Population, and Total Income,1840–1950,” in National Bureau of Economic Research. Conference on Research in Income andWealth, Trends in the American Economy in the Nineteenth Century (Princeton, N. J.: PrincetonUniversity,1960).

———,“Regional IncomeTrends,1840–1950,” inSeymourE.Harris,Ed.,AmericanEconomicHistory(NewYork:McGraw-Hill,1961).

Engerman,StanleyL.,“TheEconomicImpactoftheCivilWar,”ExplorationsinEntrepreneurialHistory,III(Spring/Summer1966).

Fels.Rendigs,AmericanBusinessCycles,1865–1897 (ChapelHill,N.C.:University ofNorthCarolina,1959).

Gallman,RobertE.,“TrendsintheSizeDistributionofWealthintheNineteenthCentury: Some Speculations,” in National Bureau of Economic Research, Conference on Research in

IncomeandWealth,SixPapersontheSizeDistributionofWealthandIncome(NewYork:ColumbiaUniversity,1969).

Hayes, Marion, “A Century of Change: Negroes in the U. S. Economy, 1860–1960,”Monthly LaborReview,LXXXV(Dec.1962).

Higgs,Robert.“Race,Skills,andEarnings:AmericanImmigrantsin1909,”JournalofEconomicHistory,XXXI(June1971).

Hourwich,IsaacA.,ImmigrationandLabor:TheEconomicAspectsofEuropeanImmigrationtotheUnitedStates(NewYork:G.P.Putnam’sSons,1912).

Lebergott,Stanley,“WageTrends,1800–1900,”inNationalBureauofEconomicResearch,ConferenceonResearch in Income and Wealth, Trends in the American Economy in the Nineteenth Century(Princeton,N.J.:PrincetonUniversity,1960).

Long, Clarence D.,Wages and Earnings in the United States, 1860–1890 (Princeton, N. J.: PrincetonUniversity,1960).

Mishan, E. J., “The Postwar Literature on Externalities: An Interpretative Essay,” Journal of EconomicLiterature,IX(March1971).

———,TheCostsofEconomicGrowth(NewYork:FrederickA.Praeger,1967).Nourse,HughO.RegionalEconomics(NewYork:McGraw-Hill,1968).Olson,Mancur, Jr.,“RapidGrowthasaDestabilizingForce,”JournalofEconomicHistory.XXIII (Dec.

1963).Perloff,HarveyS.,etal.,Regions,Resources,andEconomicGrowth(Baltimore:JohnsHopkins,1960).Rees,Albert,RealWagesinManufacturing,1890–1914(Princeton,N.J.:PrincetonUniversity,1961).Sjaastad, Larry, “The Costs and Returns of Human Migration,” Journal of Political Economy, LXX

(Supplement;Oct.1962).Solmon, LewisC., “Estimates of theCosts of Schooling in 1880 and 1890,”Explorations in Economic

History,VII(Supplement;1970).———, “Opportunity Costs and Models of Schooling in the Nineteenth Century.” Southern Economic

Journal,XXXVII(July1970).Soltow,LeeC.,“Evidenceon IncomeInequality in theUnitedStates,1866–1965,”JournalofEconomic

History,XXIX(June1969).

INDEX

Agrarianprotest,86–102Agriculture,3–4,16–17,26,32,44–45,48,59,63,79–106Alabama,111Albany,70Alchian,ArmenA.,13,15,19,98Allen,WilliamR.,13,19,98AmericanRevolution,52Assemblyline,41Atlanta,64

Bacteriology,38,67Baltimore,65Becker,GaryS.,22,118,120BillofRights,53Binghamton,70Birthrate,22,24Blacks:economicconditionof,113–114120–123;literacyof,34,122Bogue,Allan,91,94–98,103Bohemians,115Boorstin,DanielJ.,54,55Boston,38,65,69Bridgeport,75Brokers:farmmortgage,97–98;infinancialmarkets,43;informationsupplyand,11,43;inlabormarket,

10Budd,EdwardC,127Burnett,A,G.,76Businessfluctuations,20,23,123–124Businessorganization,11,39–43

California,82,111Capitalgains,99–101Capitalgoods,indivisible,41Capitalstock,seeInvestmentCarnegie,Andrew,2–3,18Carolinas,95Cattle,80,85

Centralplaces,62–65Chandler,AlfredD.,Jr.,41–42Chapman,William,90Cheung,StevenN.S.,94–96Chicago,58,65–67,70–71,82Cities:advantagesoflivingin,77;agriculturalspecializationand,62–63;commercial,61–65;concentration

ofmanufacturinginlarge,65;hierarchiesof,64–65;numberof,58–59;whytheyexist,59–60;seealsoUrbanizationCivilWar:Southernpovertyand,81–82,114;standardsoflivingand,18

Cleveland,66Colleges,land–grant,103–104Colorado,109Commodityoutput,sectoraldistributionof,47Communications,45Competition:amongemployers,118;amongfarmmortgagelenders,97–98;amongmachinery

manufacturers,106;marketsystemand,9Connecticut,40,74–75Constitution,53,56Contract,lawof,53–54,56–57,125Corn,80,84,88,105Corporations:consideredlegalpersons,57;growthofproductivityand,39–42Cotton,51,80,82,83,88,104–105

Dakotas,32,82,89,99Danbury,75Dane,Nathan,55Deathrate,22–23,38–39,68–72Deflation,seePricelevelDemandpatterns,changesin,15–16,47,80Denison,EdwardF.,25Depression,seeBusinessfluctuationsDesMoines,64Detroit,65–66Diffusionoftechnology,43,45,72,105–106Discrimination:ethnic,115–119;racial,121–123Disease:cropandanimal,102;human,36–39,67–72Duell,C.H.,12Duesenberry,JamesS.,22

Easterlin,RichardA.,49,108,113Economicgrowth:beginningof,50–57;changesinpriceleveland,21;decliningbirthrateand,22;defined,

11;distributionofgainsof,16–17,124–125;measuresof,18–20;sourcesof,11–12,24–25,126–127;urbanizationand,59,61–64,67,75–76;seealsoProductivity,growthofEducation,14–15,34–36,109–110

Emancipationofslaves,18,113–114,121Eminentdomain,legaldoctrineof,54Energyconsumption,47Engerman,StanleyL.,113Epidemics,36,38,70;seealsoDisease,humanEvans,GeorgeHeberton,Jr.,40Experimentation,agricultural,103–104Exploitation,112,115–118

Externaleffects,61,66,125

Fabricant,Solomon,25Fairs,106Farmers’Alliances,86Fertilization,95Fishlow,Albert,34–36Fite,GilbertC.,3Fogel,RobertWilliam,98–99Friedman,Milton,7,15,20Frontier,25–32,95

Gallman,RobertE.,19,47Garland,Hamlin,79Gates,PaulWallace,90George,Henry,1,26,77Georgia,95Gold,20–21Government:landpolicyof,90;publichealthinvestmentsof,68–69,71–72;seealsoPrivateproperty

rightsandLawGrangers,86,106Green,ConstanceMcLaughlin,4GreenbackLaborParty,20Griliches,Zvi,25Grossnationalproduct,18–21;seealsoEconomicgrowthGwartney,JamesD.,121

Handlin,Oscar,115Hartford,75HatchAct,103Hayami,Yujiro,95Health:aformofcapital,36–39;incities,67–72;investmentsinimproving,58–39,68,71–72;returnsto

investmentin,38–39,71–72Hiestand,DaleL.,120Higgs,Robert,4,64–65,74–75,87–88,116Historyandtheory,6–7Hoffman,FrederickL.,38,69Hogs,80,84Holmes,GeorgeK.,79Homesteadsystem,90–93Howells,WilliamDean,58Hoyt,Homer,67Hurst,Willard,56–57

Illinois,89,94,97Immigrants,22–24,114–119,123Income:distributionof,17,123–125;farmers’relative,100–101;regionaldifferencesin,107–114;seealso

GrossnationalproductandEconomicgrowthIndianapolis,64IndustrialRevolution,48;seealsoTransformationInformation:businesssupplying,10–11,43,97;costsof,51,73–74;disseminationof,72,105–106;

economicsof,9–11;investmentand,12;searchforinagriculture,94;summarizedbyrelativeprices,8–

9;telegraphandtelephoneand,45Innovation,43;seealsoInventionInstitutions,andeconomicgrowth,57;seealsoPrivatepropertyrightsandLawInterestrates,96–99Invention:economicsof,13–14;importantexamplesof,43–47;incomedistributionand,124;natural

resourceendowmentand,32;urbanizationand,72–76;ofwaterfilters,70Investment;economicgrowthand,11–15;inhumancapital,14–15,34–39,109–110;informationand,12;

inmaterialcapital,25–34,81,111–112;interdependencesamongdifferentkindsof,12,35,68–69Iowa,89,94,97,103

Jefferson,Thomas,26Jorgenson,Dale,25

Kansas,25,32,82,89,97,98KansasCity,4,65Kendrick,JohnW.,80,81,127Kent,James,55Kentucky,109Klein,JudithL.V.,44Koch,Robert,38Koopmans,TjallingC.,60Kuznets,Simon,23,33

Laborforce:growthof,21,24,81;sectoraldistributionof,48Land:agriculturalinputsof,80;diminishingreturnsand,26,32;improved,32;valueof,66–67,100–101

;seealsoTerritoryLaw:ofcontracts,53–54,56–57,125;ofincorporation,40;ofproperty,50–57,125;writerson,54–55

Lawrence,70Learningfromexperience,12,102–106,112,118–119Lebergott,Stanley,21,35,38,48,124Lerner,Eugene,81–82Lewis,W.Arthur,50,57Lifeexpectancy,38–39,72Limitedliability,39–40Lincoln,Abraham,18,114Lipsey,RichardG.,8Literacy:ofwhites,34;ofblacks,34,122;ofimmigrants,116–119LosAngeles,66

Machineryindustry,14–15,42Machinetools:productivityof,47;technologicalprogressand,42Machlup,Fritz,14Madison,James,52–53Manufacturing:concentrationinlargecities,65;growthof,47–49;technologicalprogressin,46–47Markets:growthof,14–15,24,40,51,56;organizationof,7–9Marshall,John,53,55–56Massachusetts,39Meat–packingindustry,41,46Meeker,EdwardF.,72Mencken,H.L.,65Mergermovement,41–42

Meriden,75MexicanCession,25Miasmaticcontagion,37–38Middletown,75Migration,interregional,49,111–112,120,123–124Millingindustry,46Mills,EdwinS.,60Minneapolis,65Minnesota,25,82Missouri,89Moneystock,20–21Monopoly,9,90–91,97MorrillAct,103Mortgages,farmrealestate,96–99

Nadiri,M.Ishaq,25,127NationalBankingAct,114Nebraska,25,32,82,97,99Nevada,107,109NewBritain,75NewHampshire,40NewHaven,75NewLondon,75NewOrleans,38,69NewYork,40NewYorkCity,37–38,58–59,65,69North,DouglassC.,52NorthCarolina,107Norwalk,75Norwich,75Nott,CharlesC.,4Nugent,WalterT.K.,99

Oats,80Ohio,16,82Oklahoma,32,82Okun,Bernard,22Olmstead,FrederickLaw,58Omaha,4,65Opportunitycost,8,13,22,35,92Oregon,25

Parker,WilliamN.,6,44Parsons,Theophilus,54Partnerships,39Pasteur,Louis,38Patents;Commissionerof,12,14;Constitutionalprovisionfor,53;grantedtourbanpeople,74–75;lawof,

54;privatepropertyinideasand,13–14PatronsofHusbandry,seeGrangersPaullin,C.O.,27–31

People’sParty,seePopulistsPerloff,HarveyS.,65,109Philadelphia,38,59,65,69Pittsburgh,65Popper,KarlR.,7Population:growthof,21–24,51;regionaldistributionof,27–31,49Populists,86,89,98–99Pred,AllanR.,66,74Presentvalue,13,111Pricelevel,20–21,87,98–99Prices,relative,8–9,87–90,99–101Printingandpublishingindustry,65–66Privatepropertyrights:developmentof,52–57;distributionofincomeand,125;economicgrowthand,51,

56–57;emancipationand,113–114;inideas,14;insecureforblacks,121;marketsystemand,8Productivity:growthof,16,24–49,81,100,126–127;problemsofmeasuring,24–25,126–127;regional

differencesin,85–86,107–114Proprietorships,39–40

Railroads:freightratesof,87–90;mileageof,34;watertransportationand,43–44Refrigeration,46Regionaldifferences:inagriculture,81–86;ineconomicgrowth,4,107–114;inpopulation,49;in

urbanization,62–63Rentalarrangementsinagriculture,94–95Rentsofurbanland,66Resourceendowment:changesin,16;natural,32;regionalincomedifferencesand,110–112;technological

ingenuityand,32Ricardo,David,26Riis,Jacob,115Risk:agriculturalexperimentationand,104;interestratesand,97;investmentand,24,52,124;migration

and,2;rentalarrangementsand,94;speculationand,91Rosenberg,Nathan,42,104Rubin,Ernest,23Rutner,Jack,98–99Ruttan,V.W.,95

Sacramento,64St.Louis,66Sandburg,Carl,65SanFrancisco,66Scale,economiesof,41–42,60,64Schwartz,AnnaJ.,20Sewingmachine,46Shannon,FredA.,95Sharecropping,93–96Shaw,Lemuel,54Shays’Rebellion,52Silver,20–21Simonds,W.E.,14Sinclair,Upton,41Slavery,113–114,121

Solmon,LewisC.,110South,economicdevelopmentof,81–82,108–114SouthAfrica,21Specialization:amongregionsinagriculture,82;citysizeand,66;economicgrowthand,11;inmeat–

packingindustry,41;intextileindustry,42;populationgrowthand,24;promotedbyConstitution,53Speculation,45,91Spokane,64Stamford,75Staredecisis,legaldoctrineof,54Steamboat,43–44Steelindustry:growthof,2–3,16,46;technologicalprogressin,46–47Steiner,PeterO.,8Story,Joseph,55Sylla,Richard,114

Technologicalprogress:disembodied,45,81;economicsof,12–14;embodiedincapitalgoods,43,45,106;importantexamplesof,43–47;naturalresourceendowmentand,32;urbanizationand,72–76;seealsoProductivity,growthof,andInventionTelegraph,45

Telephone,45Temin,Peter,46Tenure,agriculturalland,93–96Territory,expansionof,25–32Texas,25,32,82,97Textileindustry,42Theoryandhistory,6–7Tostlebe,AlvinS.,86,105Towboat–bargesystem,44Transactioncosts:declinein,42–43,45;transferoflandtitlesand,92Transformation:agricultural,79–106;economicsof,15–17;mainpatternsof,47–49;urban,58–67Troy,70Turner,FrederickJackson,26Twain,Mark,43–44

Unemployment,10,102,124UnitedStatesDepartmentofAgriculture,103–105UnitedStatesImmigrationCommission,117–118,121–122Urbanization:anaspectoftransformation,58–67;declingbirthrateand,22;economicgrowthand,59,75–

76;healthand,67–72;inventionand,72–76;investmentinmaterialcapitaland,33;problemsof,76–78Usurylaws,98

Vermont,4

Washington,D.C.,59Waterbury,75Watersupplies,38,69–71Watertown,70Watkins,J.B.,98Wealth,redistributionof,16–17,92–93,124–125Welch,Rodney,4Welfare:economicgrowthand,17,123–125;healthand,39;urbanizationand,76–78

Wells,DavidA.,17,45,107,124WesternUnion,45WestVirginia,109Wheat,80,82,83,88Whipple,GeorgeC.,38,70–71Wichita,4Wilson,HaroldFisher,4Winslow,C.–E.A.,37,68,71Woodward,C.Vann,112Wrigley,E.A.,22

Yukon,21