How I arrived at my research program

I graduated from the Hebrew University of Jerusalem with a B.Sc. (1969) and M.Sc. (1970) in Agricultural Economics. My specialization was in operations research. I continued my graduate education at MIT, receiving my Ph.D in 1973. Although my original aim had been to continue in operations research, I was drawn into economic theory. My thesis was on the theory of search.

I returned to the Hebrew University in 1973 as a Lecturer in the Department of Agricultural Economics. Because of the severe inflation Israel was undergoing at the time, I became interested in monetary theory and macroeconomics. My dissatisfaction with the existing ways of modeling money led me to work on an alternative theory. Together with others, I helped to develop what came to be known as the cash-in-advance approach to money. In 1978 I left Israel to take up a position at Dartmouth College, where I have remained until the present.

Although the cash-in-advance approach was an improvement over the existing ways of modeling money, I had by the early 1990s come to the conclusion that mathematical modeling was of very limited value in advancing our understanding of the economy. At the time I was writing textbooks on Money and Banking and on Financial Institutions. Reading some financial history, I found it much more illuminating than the mathematical models to which I, and many others, had devoted so much effort. I therefore decided to redirect my efforts in that direction.

My initial goal was to achieve a better theoretical understanding of the workings and function of financial systems through a study of financial history. However, the most important and interesting question about financial systems is what difference they make to overall economic progress. So I was drawn into a more general study of the process of economic development and growth.

I  did not however become a historian. Historians work with primary documentary material and with archeological evidence to determine, as best they can, what actually happened and to understand why it happened. My purpose was different. It was not to establish the facts or to explain a particular event or period. Rather, it was to derive from the historical evidence—as established by historians—a theory of economic development and growth in general. That is, I remained a theorist. But now I intended to derive my theoretical insights not from mathematical models (analogs), but from the historical evidence.

The particular ‘sample’ I have been working with is the economic history of Preindustrial Europe. This sample is particularly well suited to my purpose. First, there is a wealth of excellent material: historians have made great strides in recent decades in accumulating evidence and in advancing our understanding of events and practices. Second, the relative simplicity of the economic and political arrangements of the period make them easier to understand. Third, the extended length of time—about a millennium—makes it possible to observe long-run processes and to see them work themselves out.

I have so far spent roughly a decade on this project, producing the first draft of a monograph that reports my findings: The Origins of Western Economic Success: Commerce, Finance, and Government in Preindustrial Europe

In my method of deriving theory from historical evidence there is a danger. Given a particular set of facts, it is in a sense too easy to construct a theory that fits those facts. There is no guarantee that such a theory is of more general validity. The way to test this is to conduct an ‘out-of-sample test’—to see whether the theory explains a set of facts not used in its construction. I therefore decided to conduct such a test on the economic history of Preindustrial China. That is, I have been attempting—with some success—to make sense of the Chinese experience in terms of the theory previously derived from the European evidence.

Before I revise and try to publish this manuscript (which has already grown to alarming size!) or to write up my work on China, I have decided to write a shorter book that presents the principal conclusions of my research—How and Why Economies Develop and Grow: Lessons from Preindustrial Europe and China