Naomi Lamoreaux on her wide-ranging career and what economists can learn from economic history

Another line of connection is the relationship between capitalism and democracy. While working on a project about banking and finance in New England in the early nineteenth century, I looked at bank records and noticed something surprising: during this period of great growth in the US, New England’s banks were disproportionately lending their funds to the people who ran the banks. I thought, wait a minute – that’s crony capitalism! It got me thinking about why it worked well in the US case and not elsewhere in the world. The answer, I concluded, was that there were low barriers to entry into banking in these New England states, but elsewhere the ability to form a bank was strictly limited. Later, in collaboration with John Wallis, I explored why barriers to entry were so low in the US. We found that state legislatures in the early nineteenth century mostly passed bills that granted privileges to specific individuals – allowing certain people to start a bank or have a corporation. But this started to change in the mid-nineteenth century, with states rewriting their constitutions to prohibit these private bills. Laws thereafter had to be general and apply uniformly. That was a big change in the way democracy worked, and how it affected the economy.

You’ve also looked at the relationship between capitalism and democracy at the global level. Can you talk about that line of research? 

When you look only at countries like the US, Canada, Japan, and high-income European countries, there seems to be a really strong relationship between democracy and capitalism. But the relationship falls apart when you look across all countries – and, in fact, there are many cases where countries start becoming more democratic by introducing things like elections, but things get a lot worse in terms of instability, which is associated with higher poverty. 

It is important to understand other societies, other economies, on their own terms and only then think about how to generalize from what you are learning and how to situate these societies in a comparative policy context." – Naomi Lamoreaux

John and I have been trying to understand why this is the case, and we think it has a lot to do with the fact that these high-income countries have made the transition from private laws to general laws. In many parts of the world, the political and economic structures are still intertwined – the people in power stay in power by doing favors for elites. That is an economically pernicious system, and it's not what we would call democratic, even if there are elections. 

How has your research changed the way you think about contemporary challenges?
    
Well, take the rise of big business as just one example. Back in the late nineteenth and early twentieth century, people generally agreed that the brutal and unfair competition represented by firms like Standard Oil was egregious. The question was, what should we do about it? This was a difficult question because, at the same time, a lot of really innovative firms were springing up, becoming large, and gaining dominant market shares. Officials during that period thought hard about how to stop nefarious and monopolistic behavior while also encouraging innovation.  
 

We’ve seen this repeatedly, of course, and anti-trust officials have asked the same questions again and again. But here’s what I’ve learned from the context of history: all firms want to escape competition. And they will do anything to escape it. If they think it will increase their advantage, even really innovative firms will behave badly. So you can't really “separate the good trusts from the bad trusts,” as Teddy Roosevelt said. You have to realize that all firms will unfairly take advantage of their competitors if they can.

Today, large tech firms have created enormous benefits for consumers and the economy – but that doesn't mean that they're not also doing some nefarious things. The goal of policy should be to try to stop the nefarious stuff – we shouldn’t worry so much about whether a firm is large, per se, but whether it is doing bad things. 

Does your research find a historical relationship between big firms with market power and social challenges like inequality? 

There's no question that there's a high level of inequality in American society, but the connection to market power is a complicated story. The period with the lowest levels of inequality in the US – as measured by Piketty and others – is in the middle of the twentieth century. But that was also the period when large firms had the most sustained market power. If you read the literature from that period, economists like Averitt talked about the center part of the economy being dominated by a small number of large firms, with more competitive firms on the periphery. But in addition to the large firms, you also had some countervailing power with large unions in the same sector. So the big firms paid better, offered job security for their workers, provided pensions and health benefits – because the rents from their market power were, to some extent, shared with the people who worked for those firms. 

Then, in the late twentieth century, as the economy becomes a lot more competitive we see inequality rise. When we talk about large firms today, it's not so clear that they're large in the same sense as earlier periods. US Steel, for instance, was formed in 1901 and was the dominant firm in the steel industry until the 1970s. In recent years, by comparison, there’s been tremendous turnover at the top. Some years ago, all anyone talked about was Walmart – but now all anyone talks about is Amazon. We once worried about IBM, but then it was Microsoft, and now it's Google. People have worried about Facebook, but increasingly it’s about TikTok. And with AI, we're going to be in an entirely different world and we don’t yet know who the big players will be. All this is very different from a firm like US Steel – which was dominant for about three quarters of a century. 

With your historical lens, what about today’s economic and political structures cause you the most concern?

One thing I would worry about is the amount of resources large firms can devote to influencing policy and tilting the playing field in their direction. Because that sort of influence prevents government officials from being vigilant in the ways I think they need to be. One really bad thing, I think, was the undoing of our campaign finance laws by the courts. I think we probably need much, much better laws limiting lobbying expenditures and funds for lobbying.     

How do you think economic history can help us think about today’s economic challenges?

There are a lot of cliches, like people being doomed to repeat history if they don’t learn from it. My view is that you shouldn’t look to history if your only goal is to find problems that are similar to today’s problems. Because that imposes a present-day view on the past, and it assumes that people then actually faced the same problems or had the same goals. 

Instead, what I think you should do is just study the past and think hard about what you're learning. Once you understand it, then you can come back and ask: how does this change the way I think about the present? I have mainly worked on the US historically, but the same is true about studying the rest of the world today. It is important to understand other societies, other economies, on their own terms and only then think about how to generalize from what you are learning and how to situate these societies in a comparative policy context.