Seeing the Bigger Picture: The Value of Economic History
Andrew Norton speaks to Eric Jones
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Eric Jones is one of the world's most prominent economic historians. His book, The European Miracle has now been in print for 20 years, and is available in six languages. His 14 books and numerous articles are notable for their very wide range, both in time and geography.

Originally educated in England, he has spent a long period in Australia as Professor of Economic History at La Trobe University and as a Professorial Fellow at the Melbourne Business School. He is also Professor of Economics in the Graduate Centre of International Business at the University of Reading, UK. He has been a visiting professor at Yale, Princeton, and other universities overseas.

Andrew Norton: Professor Jones, probably your best known book is The European Miracle, which explains why Europe entered into self-sustained economic growth. What was the role of European rulers in establishing the conditions that sustained economic growth?

Eric Jones: They did centralise railway networks, establish national languages, introduce national coinage, and engage in that sort of state building operation. But I donÕt want to give the impression that I think the rulers led the process. I think the competitive pressures on them from the other states inclined them to see first that driving away mobile capital and skills was a bad idea, and only secondly that economy-building was a good idea.

AN: At what point did people start theorising what was going on?

EJ: In a number of countires in the 17th century and more particularly in the 18th century there were writings, which I call growth programs, where some intellectuals tried to advise the ruler or advise the government on things that it would be suitable to do. An interesting point is that in Japan one of these writings could never be published and one in Russia wound its author up in jail, whereas in Central and Western Europe these works were published and read.

AN: Were they read just by rulers or was this material for more general consumption? Were there intellectual and political movements?

EJ: There was a groundswell of opinion. As to the rulers themselves, I donÕt think the crowned heads usually played a very active role in the process. It was more their first ministers and other advisers who paid attention to academic or abstract reasoning. AN: You spoke about competition between European states; at the same time there was a process of consolidation into larger states. What is the dynamic between these two processes?

EJ: If one wants to put it in abstract competition theory, some states out-competed others, and others were melded into them by conquest or by forms of voluntary or semi-voluntary assimilation. The decrease in the number of Growth was not the result of ÔAsian valuesÕ or any purely internal merit on the part of those populations. states was not sufficiently severe to do away with the whole competitive process, even though it was a marked part of what happened historically.

AN: Did that competitive process decline over time?

EJ: No, not really. I think the states still learn from one another. TheyÕre in instant rather than merely regular contact nowadays. The danger as I see it is that we will get a unitary kind of state disguised as the European Federation or European Union, and that may go a long way to suppressing individual experiments. On the other hand, in the modern world one may rest oneÕs hopes on competition continuing among major systems such as East Asia and North America as well as Europe. Of course economists arenÕt very impressed by this. Economists are much more interested in the fact that real competition takes place at the level of the firm. However firmsÕ costs are affected by the states they inhabit.

AN: You mentioned North AmericaÑdoes the combination of a national market but still having a large number of separate states capture the best of both worlds, that is, economies of scale and competition?

EJ: Yes, I think in principle it does, although the competition among the states includes a great deal of rent-seeking because unlike the European historical case there is after all an overarching ruling body, Washington, with patronage to dispense. In historic Europe there was only an informal arrangement of states that happened to compete with one another. But youÕre right, the United States gains a lot from being federated the way it is.

AN: You also mentioned Asia. Why didnÕt similar kinds of institutions develop in Asia, and why didnÕt Asia replicate EuropeÕs success?

EJ: The questionÕs difficult to answer with respect to Southeast Asia, where there was a number of small states. However in past periods their populations were very low, they were not in a great deal of contact, and the environment hadnÕt been tamed in the way that the European environment had been tamed. But with respect to the larger states in Asia, or at any rate in East Asia, what one often sees are conquest states, which were not closely affected by competition. They were very large, they thought they were the whole universe, like the ÔMiddle KingdomÕ of China, and there werenÕt enough separate units to replicate the process seen in Europe, where there were still two dozen independent sovereignties in 1900.

AN: What about Japan? That seems to be a different case. What was the difference with Japan?

EJ: Japan is a different case. Culturally it was like China, a great borrower from China, but in some curious sociological ways it was more like Europe. It was nevertheless a prisoner of its isolation and of the fact that it was taken over by the Tokugawa shogunate and then by the Imperial line again under Meiji, so that it didnÕt have the internal competition there was among the states in Europe. Admittedly, it did have competition among the various han, so it was a sort of halfway house.

AN: The more recent history of East Asia has been rapid economic growth followed by a downturn in the late 1990s. Does this development fit with your hypothesis about the forces of economic growth in Europe? What was different in the post-war period?

EJ: In the post-war period, a lot of East Asian growth was a side-effect of the Cold War. Leaving aside the unanswered question of why so many of the rulers in that part of the world chose growth-promoting policies, it was easier because the US made available not only technology and capital, but also opened its markets to them. That offered such favourable conditions for growth that once the process started the results were not terribly surprising.

AN: So youÕre really saying that this growth was externally induced?

EJ: I donÕt think many phenomena are induced wholly internally or wholly externally. I think there was a combination of internal choices and external opportunities that fused in a tremendously growth-promoting way.

AN: Did the economic setbacks of the late 1990s in East Asia come as a surprise, and what should they do to resume strong growth?

EJ: The timing was a surprise to everybody. The actual setbacks were not a surprise to me! I consider the crisis to have been triggered by the dollar peg and so on, but the institutions in that region and particularly the corruption, by producing such massive misallocation of investment funds, made it a moral certainty that they would have trouble eventuallyÑas I fear they will again, if they donÕt attend to these matters. That perhaps answers, in very summary form, the second part of the question too, what do they have to do to resume full-bodied growth? There are many policies they need to adopt, but fundamentally I would say they have to get rid of inward-looking, relationship-based business dealings and modernise their institutions. This is already happening because of external pressure as foreign capital is not prepared to put up with the old ways.

AN: Did Europe also go through a phase where it moved away from personal relationship-based rule to more impersonal rule of law? EJ: Yes. ItÕs quite difficult to separate these things because business people in the West still seem to spend an inordinate amount of time doing what they would call networking. I think however that what theyÕre doing is seeking business opportunities, or even possibly early warnings of things to avoid, and not really choosing their business partners on a basis of mateship. They got rid of full ÔmateshipÕÑexcessive concern for personal relationships because you canÕt trust strangersÑwith the development of reliable contract law quite a long time ago.

AN: So reliable contract law is essential to people moving away from relationship-based business?

EJ: Yes, with the very important advantage that you can then willingly do business with strangers because you can take them to court if they donÕt perform. That expands the size of the market in a way that the relationship system of the overseas Chinese and the Chinese themselves doesnÕt really permit. There you have to get to know people because you have to learn whether you can trust them, because if you canÕt trust them, you have little legal recourse.

AN: Some writers have described Europe as in the grip of a terminal government-caused sclerosis. Does this ring true to you, or are there signs of institutional, cultural and economic rejuvenation in Europe?

EJ: Culturally, I do think there are signs of big developments in Europe, certainly in Britain, itÕs culturally a very exciting place to be. Economically there seems to be a great difference between Britain and Continental Europe. I donÕt see the overall economic situation getting much better because it seems impossible to get rid of the rent seeking and corporatism of mainland Europe. One could be a little sceptical of the long term viability of the EU, except insofar as it is competing with North America and East Asia and will therefore perhaps be forced to clean up some of the corruption to which it is so disposed. AN: There is a fairly passionate debate in Britain about how involved it should be in the EU. What comments would you make about that debate?

EJ: The debate itself is a feeble one. It consists of a conflict between people, on the one hand, who are ideologically disposed to go in with Europe, people who like the corporatism, or donÕt see its dangers, and on the other hand people who tend to be Ôknow nothingsÕ, who for sentimental reasons want to retain trivialities like Anglo-Saxon measures. ThatÕs why it is not a very deep debate. No one is articulating, at least in the press that I see, the deep underlying merits of the ÔAnglo-SaxonÕ system of governance. AN: Why is this not a more powerful intellectual force?

EJ: Anti-Europe is a cause of the conservative wing of the Conservative Party. The people that engage in the debate from that side are people who believe that fox hunting is more important than ideas.

AN: Other parts of the world, notably Africa and the former Soviet states, have not developed economically as East Asia did. What are their main obstacles to growth, and if there are major obstacles can we be optimistic about general worldwide economic growth?

EJ: Africa is a basket case region, but these things can change pretty fast. There are some signs at the moment of Africans themselves beginning to be highly critical of their own societiesÕ competence. It may take half a generation or a generation to build the governing institutions and the impartial law that would be the foundation of better resource allocation and induce more effort from people. IÕm not desperately optimistic about this happening, but I donÕt think it is impossible.

AN: Previous generations of African leaders seemed to come back from Western education with all the wrong ideas. Is it a realistic hope that the next generation will be better?

EJ: The previous generations went to the LSE and became economists and lawyers. They went at a time when the Soviet Union appeared to be an acceptable model for developing regimes. What is the present, or more to the point, whatÕs the next generation of African leaders imbibing in the West? I suspect at the moment theyÕre not imbibing very much. There isnÕt a strongly taught, consensus view of what would be appropriate because the universities are and will for another ten years be stuffed full of the baby boom generation, which leans so far to the left that it is quite surprising it hasnÕt fallen over.

AN: So where should they study in the West?

EJ: They should keep away from development studies, which still tends to be populated with people with collectivist ideas, and redistributionist ideas, or merely technical sorts of ideas. However there are economics departments in the US and Britain where they would be well trained. They should go to the toughest departments they can find, which probably means the top 20, maybe 50, of the American and British, economics departments, and maybe business schools. Business schools teach a degree that offers a number of techniques of great use to future managers of all kinds, including public sector managers, and are not contaminated by the postmodernism and political correctness that has swamped so many of the main campuses.

AN: What about the ex-Soviet states? Culturally, theyÕre very different from Africa, but having severe economic problems as well.

EJ: IÕm not very optimistic about them at the moment. It is possible Russia will manage to pull itself together again, in some nationalistic and centralist kind of state. But if you look at the real indicators, the population is falling, the disease levels are enormous, and life expectancy has dropped like a stone. Russia will have to perform a miracle in order to get back on track. As for the other states of the FSU, many of them are even more corrupt, and some of them are in conflict with Muslim populations on their borders, or Muslim minorities inside, thus diverting resources away from growth-promoting policies.

AN: Do other episodes in history demonstrate that growth is a tenuous process that can be easily choked off?

EJ: I think there are probably enormous numbers of such episodes, several in the Islamic world, that havenÕt led anywhere. Perhaps the most interesting is the case of central Europe and the innumerable German states, where the privileges sold by rulers to special interest groups, guilds and merchants eventually halted the expansion of the high middle ages. You donÕt get growth again, and universal abstract rules and so on in Germany until the late 18th century.

AN: How were the guilds broken?

EJ: Because the rulers saw that they could do better from raising general tax revenues than from selling privileges to interest groups like the guilds. They ceased to find the guilds profitable, and seemed to find that foreign skills and foreign capital would be of greater benefit than preserving the privileges granted to existing producer groups.

AN: Some Marxist and third world theorists argue that the wealth of Europe was due to, in a significant degree, the exploitation of their colonies in what we now call the third world. What evidence do they have for this thesis?

EJ: Well they join up the dots and get a picture which isnÕt one you would get from looking at the evidence properly. What they do is make a series of linked and, on the face of it, plausible assertions, but itÕs nothing more than a barrage of assertions, sheltering an unwillingness to look at the evidence. We have to consider the counterfactualÑI donÕt find the anti-colonialists ever willing to do this. The counterfactual is: where would these countries be if they had had zero contact with the West since 1800? They would not have gained access to Western markets, they would not have learnt about good governing institutions, they would not have learnt about Western technology.

AN: How important are basic world views and variations of religious beliefs to economic development? For example, are Hindus more or less likely to develop a growth economy than Calvinists or Roman Catholics?

EJ: The second part of the question hints that the impetus for growth may come from Calvinism, or Roman Catholicism, but perhaps not from Hinduism. I think that growth comes from other sources and religious systems adapt. In India we have a very interesting case because we assume that Hinduism is inimical to growth just as Confucianism was assumed to be inimical to growth until the 1960s. We are just beginning to see growth rates of 6- 7% per year in India as opposed to 2% until about 1992. And we are also beginning to see people picking on ancient features of Hindu society as explanations of this new growth! I promise you that if India does grow rapidly we will get cultural explanations and they will be in terms of the intrinsic benefits of Hinduism.

AN: Do you think the Protestant work ethic was ever significant, or it is a case of the religion reacting to the opportunities that were present?

EJ: In the short run, yes, I think culture and religion are influential in motivating people, but in the medium or long term these things partly (though not entirely) adapt to the economy. All this cultural stuff fails to recognise the great extent to which cultures do adapt to the economy. I think the Protestant work ethic was a theological and ideological elaboration on virtues that the markets were rewarding anyhow, so that it made a lot of sense to espouse it. ItÕs not so clear that espousing the Protestant ethic does one a lot of good in a collectivist society, or where extended families take a large share of what an individual produces.

AN: Leaving aside the precise religions, do you think there are certain attitudes, such as working hard, future orientation, being honest and so on which are important? Does religion find ways to give some added legitimacy to these particular attitudes?

EJ: Some religions do at some times, but not at others. Remember we telescope these things. It is almost impossible to find real evidence from which to show that religions induced people to do something they werenÕt otherwise going to do. AN: So you are very sceptical of the independent role of culture and religion in explaining economic growth?

EJ: Yes.

AN: In recent times there has been a fair amount written about the importance of trust in making economies function. Do you think trust affects economic growth? Is it part of lowering the risk and the transaction costs of being enterprising which you discussed in The European Miracle?

EJ: I think that trust is important, although I find it amusing that economists have rediscovered trust; my grandmother taught me about trust. The point about it is that it is bound to help, it is important for enlarging the market. But I think a lot of it comes out of a situation where the economy is already growing, which makes it less valuable for people to cheat on the systemÑbetter to go in for repeated business dealings rather than one-off thefts.

AN: So again youÕre saying this is partly generated by the economy, rather than something that exists prior?

EJ: Partly, but donÕt write me off as an economic determinist. ItÕs just that I feel that the non-economic explanations typically donÕt take enough cognisance of the feedback influence of economics. Often they take none. Certainly economists are equally guilty of writing culture off completely.

AN: Do you have any view of the interaction between democratic politics and economic growth, if any?

EJ: Well again thereÕs a two-way causation. Once incomes are fairly high, democratic politics are taken up as a consumption good. From the other direction, democratic politics are of practical value for the economy because they permit much more self correction in the systemÑtheyÕre noisy, theyÕre abusive, theyÕre unpleasant. Think of the Keating parliaments. But even so there is some utility of having a situation where bad policies can be condemnedÑ of course most policies are going to be condemned by the opposition, thatÕs its job. But if you take a long enough periodÑ10 or 20 yearsÑdemocracy, or at any rate pluralism, does lead the system to try new things and also, where appropriate, to back off from patent mistakes.

AN: What do you make of the arguments about authoritarian politics in some countries being necessary to set the foundations for economic growth?

EJ: IÕd be very reluctant to concede that, although I admit the need for political stability, which is sometimes hard to get out of large numbers of competing interest groups. Look at the fistfight in the Serbian parliament. But the trouble with authori-tarianism is that the public doesnÕt have a good way of getting mistakes corrected. Also itÕs usually associated with appalling human rights records.

AN: Some observers see population growth as a threat to prosperity, others as a condition for it. Can population growth cause economic growth through learning from others, scale economies and a chance to move some people from subsistence activities?

EJ: Very large populations in India and China did not generate much economic growth, and I donÕt see any theorem that shows how population growth can be connected to or held responsible for prosperity, unless something else is happening.

AN: Can population shrinkage actually be useful in increasing per capita economic welfare?

EJ: Oh no, thatÕs just a statistical trick. Rather like the debate about reducing AustraliaÕs population. ThereÕs no reason to suppose that reducing populations will do anything but cramp opportunities and reduce the number of bright people, and generally restrict things. Large populations are beneficial, other fairly simple and reasonable things being taken for granted.

AN: What do you think of population policies? Are they worthwhile, or are these things better left to the individual decisions of potential parents?

EJ: I think governments can choose policies that affect population growth. They can choose to adopt immigration policies, for instance. What can be done is to change the incentive structure so that people actively select a different completed family size, if you think that will give socially desirable results. But in general I doubt that most such policies have the intended effects, and no undesirable side-effects, and IÕm sceptical about the motives of people who specify target populations.

AN: Of the many factors that might explain a nationÕs economic conditionsÑgeography, politics, climate, culture and so onÑhow can economic historians work out which were the most significant?

EJ: They canÕt really. What we can do is take one or the other of these factors as it interests us, and show its effects in some sort of partial equilibrium analysis. What we can do much better is show, not what promotes prosperity, but what stops it. We can usefully warn that the absence of secure property rights, independent law and good governance will stop the most heartening episode of growth. I would rather look at it that way than suggest that we can put our finger on one or the other highly interrelated factor as the ultimate key to growth.

Andrew Norton is Director of The Centre for Independent Studies's Liberalising Learning programme.

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