Published by EH.NET (February 2002)
Geoffrey Poitras, _The Early History of Financial Economics, 1478-1776 -
From Commercial Arithmetic to Life Annuities and Joint Stocks_. Cheltenham -
Edward Elgar, 2000. x + 522 pp. $120 (cloth), ISBN: 1-84064-455-9.
Reviewed for EH.NET by Salim Rashid, Department of Economics, University of
Illinois. <[log in to unmask]>
This book aims at providing an introduction to the history of finance, more
properly financial mechanisms, from the fifteenth through the eighteenth
centuries. Poitras makes no claim to be presenting original research;
rather he is concerned with a synthesis of the historical literature on
finance and economics. Beginning with the nature of Scholastic and
'Mercantilistic' economic thought, the text takes us through the
institutional changes and the conceptual developments they fostered over
the next four centuries. The expository plan is easy to follow, since it
follows the historical timeline and stops to describe various institutional
changes brought on by the growth of the European economies.
This book should have a ready market. Many who begin with economics,
gravitate silently to finance and many others have no need of the
transition. The easy exposition and the portrayal of the historical
developments make this useful supplementary reading; with a text of
original writings, it could serve as a good introductory text in the
history of finance. The reproductions of several pages of original text
provide the text with an authentic flavor. In most places, the book has
much 'fun' stuff to read.
Unfortunately, the author has not written with one audience consistently in
mind. Some aspects of the presentation will lose many potential readers. On
many occasions, the concepts are not introduced clearly. For example, while
there is much dicussion of bills of exchange, there is no benchmark
definition. There are two major difficulties with the expository method
chosen; the reader will silently assume that bills of exchange were the
same across Europe at any point in time, and that they remained the same
over time. (If indeed there were no such locational differences or changes
over the centuries, this is a remarkable fact and needs prominence.) In
keeping with the purpose of the book, there should have been actual
photographic reproductions of bills of exchange through the ages. A short
numerical example should precede the definition. Thus: "Here is a problem
faced by Merchant X in Bruges... In order to solve this problem, the
following piece of paper is drafted as a legally enforceable document....
This is how the above document solves the problem.... The analytical
concepts needed to understand this solution are...." Students, and readers
like myself, would be much benefited by such pages. To make room for them,
items such as debates about the self-seeking behavior of the Church could
be made into footnotes or appendices. As it stands, the text gives the
impression of someone who began by wanting to write a text on finance, but
found the topic so closely related to the history of economics that he felt
compelled to give equal time to both subjects. This is not fair because
finance has a narrower scope and clearer analytical structure than
economics. One does not have to sacrifice historical detail to achieve
analytical clarity. Take the case of "fixed Income Valuation" on p 146. The
first paragraph will not be necessary for those who know what this
involves, while the novice will find it abrupt and unhelpful. In the middle
of the next paragraph there is a clear definition of the analytical
essentials: "Valuation requires knowledge of: the price, the size of the
payment, the time period (term to maturity); and the interest (discount)."
If this sentence were followed by the ponts made in the first paragraph on
the need to use present values, we would have all the essentials described.
Next, the historical treatment could show us which of these concepts were
known and how they were utilized; finally, we could appreciate which
problems were fully solved and which needed to await further theoretical
development. Such a method would be helpful in many places throughout the
book as, say, the description of "dry exchange" (p. 245).
Models for the general reader do exist. Consider Poitras' treatment of the
Triple or German contract (pp. 38-40) with that in _The Abuse of Casuistry_
(Albert Jonsen and Stephen Toulmin, Berkeley, University of California
Press, 1988) -- a book whose intended audience is the general reader. The
first move toward a new paradigm was the introduction of a theory of
interest popularly referred to as the "triple contract," the "German
contract," or the "5% contract." It marked a notable departure from the
medieval thesis and opened the way for a modern theory of profit from
loans." The name "triple contract" expressed the essence of the arrangement
that Eck popularized. Partners entered into three distinct contracts with
each other. First there was a contract of partnership, which was considered
legitimate by all commentators. Second, a contract of insurance was signed;
under this the investor was insured against a loss of his capital and,
instead of paying a premium, agreed to accept a lesser percentage of the
total profits than would otherwise come to him. Third, a contract was
signed that guaranteed the investor was a "sort of debenture holder without
industry or danger of losing capital." This was an attractive form of
investment, which provided the active partner with considerable working
capital. Commentators conceded that, if made with different parties, each
of these three contracts would be legitimate, but most of them doubted the
morality of the triple contract between two parties. (pp. 188-89)
If the author plans a second edition, I hope he will look more at the
financial instruments devised by Islamic finance in the period 800-1400 AD.
The growth of world trade in this period is well covered in books such as
those of Janet Abu-Lughod. The fact that the Italians devised the earliest
financial instruments for Europe may not be unconnected with their close
trading relations with the world of Islam. In looking at financial history,
Adam Smith is less instructive than individuals like Lewes Roberts in the
1640's and Malachy Postlethwayt in the 1760's.
The current "Conclusion" has interesting speculations on what leads to fame
in this area and why the contributions of "Anonymous" should figure largely
in a history of finance. The book should perhaps end with a list of
potential topics for future research. We know that the best mathematicians
of this period were limited to using polynomials, and low order polynomials
at that. How accurate were speculations with low order polynomials? If the
speculations were more successful than we can expect on the basis of the
explicit mathematical knowledge, does this then suggest that humans have
much implicit or tacit knowledge, which they can use but cannot necessarily
articulate?
Salim Rashid is author of _Economic Policy for Growth: Economic Development
Is Human Development_ (Kluwer 2000). His recent research asks "Can there be
theory of money?"
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