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?" Copyright (c) 2002 by EH.Net. All rights reserved. This work may be copied for non-profit educational uses if proper credit is given to the author and the list. For other permission, please contact the EH.Net Administrator ([log in to unmask]; Telephone: 513-529-2850; Fax: 513-529-3308). Published by EH.Net (February 2002). All EH.Net reviews are archived at http://www.eh.net/BookReview ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]