Wednesday, May 18, 2011

How Historians Can Benefit from Economics

I’ve noticed over the years that many historians, including legal historians, are hostile to economics. Indeed, I’ve experienced this hostility personally, as a couple of times my “George Mason University School of Law” i.d. tag has attracted venomous comments from ASLH attendees (GMUSL is known for its focus on law and economics).

[UPDATE: For example, at my first ASLH meeting as a GMUSL professor, an attendee looked at my name tag, saw George Mason, and said, in a disgusted voice, something like: "GEORGE MASON! I hope you law and economics people are not going to try to do legal history what you've done to other fields! The last thing legal history needs is economics." I politely responded that I while I'm not an economist, I don't see why economics should be considered a threat to legal history. The individual in question then just walked away.

Also, it's been suggested in the comments that I'm "characterizing an entire field." I apologize if it came off that way, but I didn't say that "all" or even "most" historians are hostile to economics, I said "many." On reflection, perhaps a bigger problem is that even among historians who aren't actively hostile to economics, there is a widespread perception that engaging with economic thought is not useful for historians. And if you don't think it's economics is likely to be useful, and "many" of your colleagues will look unkindly at it, it's obviously unlikely that you will pursue it.

And let me reiterate that, as suggested immediately below, economists have their own issues with history, so the problem goes both ways.]

I can understand why historians are suspicious of economics. First, economists sometimes decide to interpret history to ensure that it coincides with their preexisted understanding of what economics says “must have” occurred, without engaging in objective historical research. Second, economists with an empirical bent are too prone to attributing causation (1) based on necessarily incomplete data sets, so long as they can get a “statistically significant” result, while (2) sometimes forgetting that in any event, statistically significant correlation does not necessarily equal causation. And, third, it doesn’t help that economics is perceived as “conservative” by the more lefty historical community.

Nevertheless, I think historians could benefit from economics in two ways. First, economists are very good at defining their terms, something that seems to me to be a weakness among many historians. I could give numerous examples, but one that I’ve noticed over the years from attending ASLH is that historians will casually refer to certain groups (especially nineteenth century workers) as “exploited”, without defining what “exploited” means. These, in my experience, are almost always historians from history departments, not law schools; at most law schools, one wouldn’t get past 5 minutes of the q & a without someone asking what the author means by “exploited.” A lack of precision isn’t conducive to good history writing.

Second, economics can help historians find interesting topics to research. Consider “company towns.” Standard histories assert that large mining and other companies exploited (there’s that word again) workers by forcing them to live in company housing and buy from company stores. But when an economist reads about company towns, an obvious question arises: if the companies were simply out to exploit their workers, who lacked the bargaining power to resist, why not just pay them less? A mining company has no particular expertise in running a housing market, or a store; it would be much easier, and more profitable, to simply offer lower wages and let the workers fend for themselves.

But economics teaches us that companies aren’t likely to do something that’s contrary to self-interest, so that leaves several possibilities to be investigated by historians: For example, (1) The companies were pulling a bait and switch. They advertised high wages, but only when the employees reached the town, and became dependent on employment there, did they realize that the wages were only high because the company extracted profit from monopoly housing and grocery fees; (2) The companies benefited from controlling housing and shopping because they could control the workers that way. A union leader could not just be fired, but evicted from the town. The company could extract more productivity from its workers by prohibiting the sale or use of alcohol in town; and (3) Perhaps some workers preferred company towns precisely because of the social control the company enforced. If so, the company could actually offer lower total compensation. I once caught a few minutes of a documentary about a company town. The narrator was interviewing and elderly woman who had resided in a company town. She was asked whether she resented the control the company had over every day life. To the contrary, she said, she and her husband specifically sought out this town, because most steel town were full of drunk, rowdy men who made the town unfit for family life. She and her husband wanted to live in a town where “troublemakers” were expelled, and good Christian morality was enforced.

Any or all of these alternatives might explain any given company town, but any such detail is far richer and, if done well, more accurate that simply asserting that company towns existed because of workers' lack of bargaining power (again, why not just pay them less).


Dan said...

I agree that historians should engage with economic incentives in their work, but your post is amazingly condescending in the way you encourage them to do so. Is there really a historian who has looked at company towns and offered no analysis beyond that they were "exploitative?" If anything, a historian would want to place the company town in a larger context of power relations and ethnic tensions among workers and not rest analysis simply on the short-term cost-benefit analysis of building them. If it is ironic that companies spent resources on a seemingly non-profit producing investment like a company town, then, yes, that would cry out for greater investigation. I think historians do that.

Glenn D. Tiffert (谭安) said...

There is a useful book on the topic: Rawski et al, Economics and the Historian (UC Press, 1996). It has a bit of a China focus, but should still be useful for historians of a different stripe.

David Bernstein said...


It's been quite a few years since I looked at the literature on company towns, but I stand by my characterization of what I read at the time, and further note that others who have read this literature reached the same conclusion. See Richard B. McKenzie, Dwight R. Lee, In Defense of Monopoly 135 (2007) (noting that historians see company towns as being exploitative of workers); The Elgar Companion to Transaction Cost Economics 129 (2010) ("Historians and others long argued that such towns, in which a single employer owns all of the housing as well as the only retail store, exploit the workers"). Or just look at the quotes/paraphrases recounted on page one of Crandall Shiffreet, Coal Towns: Life, Work, and Culture in Company Towns of Southern Appalachia (1991).

Your comment inspired me to do a bit of additional research, and it looks like there's been a relative explosion of work on company towns in the last decade or so, and it seems much more sophisticated than the old "exploited workers" trope. (This may, however, be in part due to the work of such economists as Oliver Williamson and Price Fishback in the 1980s and early challenging the traditional characterization.)

So that's great. But I'd venture that if historians had been more economically oriented, the simplistic exploited workers explanation would never have gained as much currency as it has/had. The real problem, in other words, is not how the historians go about doing their work once they choose a topic, but which topics they choose to pursue.

Another good example is the absence of attention paid by historians to fraternal societies, even though they had millions of members, far more than labor unions through the 1930s. See David Beito, From Mutual Aid to the Welfare State: Fraternal Societies and Social Services, University of North Carolina Press (1992). It simply has not interested many historians to inquire about how workers tried to provide health insurance, burial insurance, etc. outside the context of labor unions.

Finally, my examples may be more of a problem of labor history than of history in general, but I'm not sure that's true.

Mary L. Dudziak said...

There is of course much to say about what history can gain from economics, as there is about what economics (or quantitative work) can gain from history -- a topic of equal importance. Eric Talley and I collaborated on a post on this topic during the blog's first year.

But David, don't you sort of shoot yourself in the foot in your opening paragraph? In the course of making a point that you want blog readers to pay attention to, you begin by letting readers know that you've experienced "hostility personally" and "venomous" comments from them. Without more, this is attributed to hostility to a methodology. What an opener!

David Bernstein said...

See my soon to be posted clarificaton.

Mary L. Dudziak said...

David, thanks for the clarification. You do seem to generalize from this encounter (and I expect you may have had others) to characterize an entire field. So my point still stands -- don't you sort of shoot yourself in the foot in your opening paragraph? Is that best way to make friends and influence people? You have been invited to the party, after all. Perhaps take chip off shoulder and park it at the door for a while. Readers are more likely to stay with you.

David Bernstein said...
This comment has been removed by the author.
David Bernstein said...

See my further update. But really, I don't see where the chip on the shoulder thing comes from. Is what I wrote, that "many" historians are hostile to economics, untrue?

Shag from Brookline said...

I noted Hardy Green's article (11/21/10) at Daily Finance titled: "Welcome to Google, the Company Town" at:

It is too soon for history to judge whether Google is being exploitive of its employees. But one doesn't have to be a historian (legal or otherwise, in or out of a law school), to note the big differences between Google's highly paid employees and the lowly paid immigrant mill workers in Lowell and other company towns of the 19th and early 20th centuries. Google's founders' "Don't be evil" surely was not the mantra of at least some of the employers in those earlier "good old days."

Dan said...

David--I don't think you are wrong that historians don't much like the law and economics approach to history. What took be aback about your post was that historians would not ask deeper questions about company towns without the insight gained from an economic perspective. Those questions seemed like ones that historians would be asking, so I'm surprised that, as you point out, historians had not been asking those questions.

The basic point of your post is well taken, though. An insight provided through a law and economics view can definitely spur on new investigations. If anything, historians should take some of those challenges of economic-oriented scholars because, to be honest, I think those conclusions are often misleading without greater attention to historical context and complexity.

sara said...

Is it really true that "it simply has not interested historians" to study fraternal societies, burial insurance, etc.? Those types of organizations occupy much of Lizabeth Cohen's Making a New Deal, for instance.

Patrick S. O'Donnell said...

Economists have not always been good about perspicaciously or persuasively defining their terms, be it the meaning of “markets,” “preferences,” “self-interest,” “utility” and “value,” “rationality,” “risk,” “poverty,” or “freedom,” to cite concepts that quickly come to mind. They’ve also often unjustiably separated positive and normative conceptions of their enterprise, often as a result of an inadequate conception of the meaning of what’s positive and what’s normative. In addition, economists have frequently relied on a default psychological portrait of man long abandoned in psychology itself. In short, one needs to be extremely careful when drawing upon economics, be it for history or political science or anthropology….

There are some excellent historians neither suspicious nor hostile to economics, to wit: Maurice Dobb, Christopher Hill, Eric Hobsbawm, Victor Kiernan, George Rudé, Dorothy Thompson, and E. P. Thompson. Not surprisingly, perhaps, these individuals are of a Marxist or Leftist suasion generally, Marxists having a keen appreciation of history. Conventional economics, to the extent that it has been dominated by a neo-classical approach and and rational choice models, has itself been notoriously anti-historical and often “scientistic” in the most pejorative sense (i.e., crudely positivistic, with undue deference to mathematical formalism), its other-worldly models abstract and untouched by history (this should not be construed as an argument against mathematical modelling in economics, as McCloskey herself has explained but rather as as a warning against the hazards of what Hilary Putnam calls ‘method fetishism,’ which in this instance involves constricting the notion of rationality to that which can be circrumscribed by mathematics and formal logic of a kind). This is a critique made from within the dominant neo-classical orientation itself by no less than Deirdre McCloskey in several excellent studies of the prevailing “rhetoric” of the dominant form of economics. The extreme abstract and formal mathematical character of the preferred models of the profession do not lend themselves to appropriation by historians, legal or otherwise. Indeed, their distance from the “real world” makes them utterly useless. What we need, it seems, are more histories of this sort of economics, along the lines of works written by, say, Philip Mirowski or S.M. Amadae. To be sure, some economists are at the same time, like McCloskey herself, historians, and some non-Marxist economists, like Amartya Sen, are adept at history, but they exemplify exceptions to the rule.

Historians, if they are to draw upon economics, should have a broad understanding of same such that it encompasses not only the dominant neo-classical model but considers other sorts of economics as well: institutional, Marxist, and other heterodox forms (e.g., some species of ‘ecological economis’). The many critiques of the the genre of “law and economics” (that for some time enchanted so many legal theorists), should alert us to the pitfalls of uncritically appropriating the findings or methods of most economists to illuminate history. Historians should at the very least be cognizant of the literature on the philosophy of the social sciences and from within specific disciplines (e.g., political science and anthropology) which examines the virtues and vices of various methodologies, including rational choice models of explanation. Histories of slavery, for example, testify to both the virtues and vices associated with the application economic approaches and models. Reductionism of some sort is commonplace, but economistic reductionism if often quite crude, assuming a rather simplistic model of human motivation. This is especially important in a time and place where virtually everything in our social world is commodified and we fall back on self-fufilling and niggardly conceptions of what constitute human “interests.”

Chris said...

Economics and economic methods have an enormous amount to offer historians; I know my own work has benefited greatly from the insights of that discipline.

That said, I had to cringe at the line "economics teaches us that companies aren’t likely to do something that’s contrary to self-interest." Eek! Treating useful modeling assumptions as safe empirical premises is precisely what gets economics-first approaches a bad reputation among historians. Businesses fail. Ruinous investments, cockeyed governance, worthless empire-building mergers, market manias, counterproductive labor fights, complacency, uncertainty, incompetence, and ego-driven management are not only possible; they're what makes the history of business organizations so much fun to study. I suppose what I'm saying is this: by all means, question interpretations that diverge from economic theory - but do the reverse as well, or risk undermining your point.

Anonymous said...

The company towns example raises a concern I have about an economic approach being applied too readily. The difficulty with economic analysis as it is often (not always) applied is that it omits the non-financial issues which clearly were important to people - it's like people who rely on Adam Smith but have read the Wealth of Nations, but never the Theory of Moral Sentiments. One needs to read both to understand Adam Smith's ideas fully.

Taking a British example, a number of nineteenth century industrialists set out to provide effective company towns for their workers. However, others did not. One distinction was that the owners of companies who created company towns were often methodist or otherwise "evangelical" low-churchmen and thought they had a moral (not financial) obligation to their workers.

Good economic analysis can incorporate such ideas as and motivations within it, but often the only way one realises that one needs to incorporate the ideas is by doing good history in the first place - starting from the economic perspective alone won't do it.

Shag from Brookline said...

Is it a significant role of economists to use past economic events to be predictive of situations currently developing? As I understand historians, their role is not to be predictive based upon past historical events (although "popular" historians pop up as experts on TV - often too quickly and too often - to make comparisons of past events with current events, with appropriate caveats of course). Mixing historians and economists may be like mixing water and oil.