Journal of Economic Literature, Vol. XXXIX (March 2001), pp. 161-163

Chemicals and Long-Term Economic Growth:

Insights from the Chemical Industry. Edited

by Ashish Arora, Ralph Landau, and Nathan

Rosenberg. New York: John Wiley 1998. Pp.

546. ISBN 0–471–39962–0.

Ralph Landau is an industrial chemist with

a fascination for economics. This book represents

the outcome of this unusual confluence,

and clearly owes its existence to Landau’s energy

and perseverance. It contains fifteen

stand-alone essays on various aspects of the

chemical industry in the context of the economic

history of the past century and a half.

As always happens in projects such as this,

the contributors are a diverse lot, although

economists are in the majority.

Chemistry has always been a science-based

industry. Although from time to time advances

were made by lucky accidents, Fortune

not only favored but usually demanded

prepared minds. Especially in the twentieth

century, advances depended on learned

minds who had mastered the complicated formulas

and diagrams that the rest of us recall

as high school torture. As this book shows,

the chemical industry played a large role in

modern economic history. It is an industry in

which technological progress has become a

normal condition and in which human capital

and the interaction between science and

technology are the driving forces. The main

countries in which this story unfolded in the

past two centuries were Great Britain, Germany,

and the United States, all of which are

amply dealt with in this book. The volume

also contains a fair amount of discussion of

Japan—but little about France and the

smaller European economies in which chemicals

played a major role, such as Switzerland

and Belgium.

Of the various chapters, three are outstanding

essays that alone justify the purchase

of this book. One is the comparative

historical survey by Murmann and Landau on

the development of the chemical industries

in Britain and Germany after 1850. It is as

suspenseful a tale of an industrial rat-race as

one is likely to get in economic history: In

1850 Britain was the workshop of the world,

not only in textiles and machinery but even in

inorganic chemicals. Yet in the following decades,

human capital and superior institutions

demonstrated why they play such an important

role in the new growth theory:

Germany by 1914 had overtaken Britain (and

the rest of the world) and become a powerhouse

in the production of organic chemicals.

The Germans did this by investing heavily in

scientific education and research, and by a

set of wise or lucky government policies including

the patent law of 1877. German dye

manufacturers virtually invented the idea of

the corporate R&D lab. Their superiority in

chemistry came to a climax with the invention

of the Haber-Bosch process in about 1910,

one of the most important and fateful inventions

of all time. After the horrible war that

this invention helped prolong, Germany lost

much of its leadership. Britain was able to

catch up in the interwar period not only by

confiscating Germany’s patents but also by

creating ICI with the active help of the government.

The British realized belatedly that,

in this game at least, its cherished laissez

faire policies did not work well. What this

tale demonstrates above all is that nothing is

as ephemeral as a comparative advantage

based on better institutions: today Germany’s

once-glorious universities have fallen far

behind the competition.

The essay by Arora and Rosenberg on the

U.S. success story is also well done. It tells

the tale of the rise of the United States from

an imitator and follower to a leader in a wide

range of industries. Great imitators make

great innovators, and over time the Americans

learned chemistry from others and eventually

established a position of clear leadership

in petrochemicals. The combination of

natural resources, market size, and institutional

advantages made America inevitably a

big player in this industry. The exact institutional

circumstances that led to the U.S. success

in this industry are explored masterfully by

Nathan Rosenberg in an essay on universityindustry

relations, which, its unassuming title

notwithstanding, is a virtuoso piece of historical

analysis. Rosenberg shows how the Americans

invented the concept of “chemical engineering”

pioneered at MIT, and how these

engineers played a pivotal role in bringing

about American success in this industry.

There is much more to learn about the industry

from these pages that would be of interest

to economists. The chemical industry is

one in which intellectual property rights markets

worked relatively well, so that the standard

arguments of underproduction of R&D

may not hold (although the confiscation of

German patents during wartime shows that

these rights are not all that secure). One consequence

of this is the amazing persistence of

chemical firms. A quick calculation shows

that the twenty largest chemical firms in the

world today are on average 106 years old (120

without Japanese firms). Clearly this persistence

is related to these firms’ capability to

manage large plants and market diverse products,

and their ability to purchase and absorb

new techniques from younger and innovative

firms, either by licensing or acquisition—as

in effect happened to Mr. Landau’s own firm.

The chemical industry by its very nature has

had a serious environmental impact, and in the

chapter on regulation by Kian Esteghamat

some of these disasters are recounted. Public

policy has to strike a balance between the

need to encourage and protect innovative enterprises

and the need to protect the public

from being poisoned and the atmosphere

from being wrecked. The public policy issues

in chemicals are quite subtle, and most of the

contributions in this volume are appropriately

cautious about the best balance between free

enterprise and regulation.

It would be ungracious to mention the

weak or irrelevant pieces in this volume. In

collaborative works like this, the trick is to

find the raisins in the cake early. What counts

is not the average quality but the quality of

the best essays. Any economist interested in

how technological progress affects economic

performance on the macro level and industrial

structure on the micro level will find in

this volume plenty of raisins.

JOEL MOKYR

Northwestern University