Education
Americans are possessed by the spirit of education. If only we could force enough people to go to school long enough we can educate away all of our problems. Yet economic historians and modern development experts have shown that education is a result, not a cause of economic development: as people grow richer they enhance their quality of life through education.
Yet education without the new bourgeois rhetoric is merely a desirable human ornament, not the way to human riches. It makes for a clerisy that may in fact be hostile to bourgeois values, and very willing to be of professional service to the antieconomic projects of the emperor or the lord bishop...Education proved to be of little use without the liberal political rhetoric, as in Holland and then in England and Scotland, that made economic and intellectual innovation dignified and free.
Again, other places (Ancient Greece, Rome, China and Japan) were well-educated and did not enjoy an industrial revolution.
Commercialization
Some historians and economists attribute the increase in trade and the money supply in Europe, partly as a result of the Spanish looting of the Americas and partly as a result of the common practice by kings of debasing their coinage. However, China used paper money long before the West and expanded the supply to a far greater degree than any nation in the West. England had used money extensively millennia before the Industrial Revolution.
Contrary to what most educated people believe, Europe and certainly England was from the earliest times thoroughly “monetized” and was nothing like a “subsistence” or “barter” economy. It would be difficult otherwise to explain, to take an early sort of evidence, the English danegelt beginning in 991, assessed in silver and paid to the Vikings, or the hoards of precious metals found in England at every chronological level from the pre-Roman era on, or the ubiquity of money measures in the earliest records, such as the Domesday Book of 1086.
If increasing trade caused Europe to develop in the seventeenth century, then why did not the vast trade in the Roman Empire bend the per capita G.D.P. graph into a hockey stick? Why did China, India and the Ottoman Empire not grow rich as well? After all, the trade between the three empires extended from Morocco to Shanghai and dwarfed European commerce before the West was launched. Muslim Ottomans desired as little contact with Christian Europe as possible because they viewed Europeans as dirty savages with nothing to offer in trade but slaves, while Muslim nations, China and India offered everything the Ottoman’s wanted to purchase. As for cities, the Ottoman Empire could boast of thirteen cities with populations greater than 50,000 as early as 800 AD, while Europe could point only to Rome.
Genetics
This argument simply asserts that the richest families out bred the poor and spread bourgeois values by procreation. One author claims that the wealthy of China and Japan did not have as many children and that explains why the East did not develop as did the West. Marxist materialism buttresses the argument and admits no place for ideas to launch change. Of course, socialists could have it no other way. Their ideology requires an irrational faith in the natural goodness of mankind. Material circumstances must cause bad behavior, otherwise socialism could not save mankind from private property and restore humanity to its princely natural state.
As McCloskey points out, the genetics argument does not explain how the bourgeois out bred the rest of society when the towns they lived in were so unhealthy that until the late nineteenth century more people died than lived in them. Also, it does not explain why the nobility when they were the richest people (through most of humanity’s existence) failed to out breed the bourgeois and pass on their anti-bourgeois values.
Institutions
While the institutions of the rule of law and protection for private property are necessary for development, and do not exist in most of the poorest nations, they are not enough to launch explosive growth:
I gradually realized that the timing of institutional change in England fits poorly with its economic change. The curves moved out violently, by a factor of two and then sixteen and more, far too much to be explained by routine changes in institutions, even educational institutions, which after all had come and gone many times before in human history. There was by contrast, I realized decades later, an obvious and historically unique improvement in the dignity and liberty of the bourgeoisie, apparent for example in the invention of the science of political economy itself. The surrounding institutions of the economy were old.
Science
Modern science is another popular stud nominated for the fatherhood of Western economic growth. But Baumol points out that while medieval China, ancient Rome, and other civilizations produced an “astonishing profusion of inventions, virtually none of them possessed a mechanism that induced, let alone rendered mandatory, the cascade of innovation that has characterized free enterprise.”
The ancient Romans built roads, aqueducts, baths, dams, and coliseums admired today, and in some cases, still used. They constructed sophisticated water wheels and a working steam engine. Medieval Chinese invented paper, movable type, water wheels, clocks, gunpowder, spinning wheels, cotton gins, hydraulic trip hammers, porcelain, umbrellas, matches, toothbrushes and many more clever items. They built ships that were larger and more seaworthy than those of Europeans and with much better maneuverability due to superior sail design.
Arabs remind the West that they introduced us to science, medicine, mathematics, astronomy and navigation. For centuries, Arabs, Persians and Turks dominated the world in the sciences. But science sat on the bench throughout most of the Industrial Revolution, Cameron informs us.
In the eighteenth century dawn of modern industry the body of scientific knowledge was too slender and weak to be applied directly to industrial processes, whatever the intentions of its advocates. In fact, it was not until the second half of the nineteenth century, with the flowering of chemical and electrical sciences, that scientific theories provided the foundations for new processes and new industries… Indeed, one of the most remarkable features of technical advance in the eighteenth and early nineteenth centuries was the large proportion of major innovations made by ingenious tinkers, self-taught mechanics and engineers.…
McCloskey emphasizes the point that modern science was a product of economic development, not the cause, especially in the earliest years:
But of course one problem that has to be faced by advocates of science as a cause, and to some degree even by the advocates of the Enlightenment as a cause, is that Chinese, and at one point Islamic, science and technology, separately and together, and their humanistic scholarship, were until very lately superior to Western science and enlightenment in most ways, and yet resulted in no industrial revolution...The historian of technology Nathan Rosenberg noted that “before the twentieth century there was no very close correspondence between scientific leadership and industrial leadership,” instancing the United States, which had negligible scientific achievement by 1890 and yet industrial might, and Japan, ditto, by 1970.
Like imperialism and trade, science was more a result of economic growth than a cause.
The former Soviet Union stands out as the most fascinating example in modern times of the impotence of pure science to generate wealth. The Soviets put the first man in space and matched the scientific advances of the free world until the atomization of the USSR. At the same time, the Asian Tiger nations impressed no one with a reputation for world leadership in scientific research, but they have surpassed Russia many times over in per capita income. In the twentieth century, the defunct USSR had among the best scientists in the world, but disintegrated because the state could not feed its people without massive loans from the West guaranteed by the U.S.
Any effort to expose the roots of capitalism must account for the differences between the ways in which people gained wealth in traditional societies and the methods used in capitalist societies. In medieval and early modern Europe, favoritism by the king provided the key to wealth accumulation. For ex
ample, the Spanish king provided armies to conquer the natives of the Americas and steal their gold. A king could grant a merchant a monopoly on the importation of goods in high demand. But the easiest way to wealth was simply to do a favor for the king and get appointed to a government office where holders could earn a high salary, take bribes, bribe judges, extort money from merchants, and siphon off funds from the public treasury. However, the wealthy never achieved respectability until they owned land; so many people who achieved wealth through these means invested it in land and bought titles of nobility. This pattern of wealth accumulation persisted in much of Europe and most of the world until the end of the nineteenth century.
Capitalist societies, on the other hand, outlawed these traditional methods of wealth accumulation. The only acceptable methods became trade, rent (either from land or interest on loans) and innovation. Those methods achieved respectability only under capitalism.
A definition of capitalism
Yes, capitalism requires institutions, investment, capital accumulation and all of the other variables of routine economics, but none of them will engender the explosive growth of the past 300 years without a change in attitude toward business. Therefore, any honest definition of capitalism must include the institutions and bourgeois values that account for the hockey stick effect in per capita G.D.P. growth. But I must add one more element – mass production.
Many scholars date the rise of capitalism with the city-states of northern Italy, such as Venice. While those states embraced commerce, manufacturing followed the ancient model of small scale craft production for the wealthy. Capitalist production is different. The great Austrian economist Ludwig von Mises wrote in Human Action, “Modern capitalism is essentially mass production for the needs of the masses.”
In the Italian states, the masses made their own goods at home for the most part. Capitalism was born when the Dutch began using mass production methods to lower the costs of the goods that only the wealthy could afford under the old system of craft production. Not only did large scale mass production increase wages for laborers, it reduced the prices of goods so that the same laborers could afford to buy them. Mass production requires investment of money capital in capital equipment, which demonstrates the appropriateness of the name, “capitalism.” Capitalist modes of production are distinct from traditional craftsmanship. In addition, capital intensive production requires larger firms and greater amounts of investment, which forced many investors to pool their resources. That inspired new ways of financing larger firms that spreads the risks over more investors.
Finally, capitalism requires individualism. That topic is too vast to deal with in this chapter so I have reserved the next one for it. But without the rise of Western individualism, none of the other aspects of capitalism could have developed or produced economic growth.
So here is my attempt at an honest definition of capitalism: capitalism is that set of values and institutions, including individualism, that encourage innovation and private investment in capital intensive modes of production, that is, mass production for the masses, and explains the rapid increase in per capita G.D.P. in Western Europe beginning in the seventeenth century.
Chapter 2 – How individualism broke the envy barrier
Economists and historians have fabricated as many theories to explain the economic divergence of the West from the rest of the world as there are economists and historians. There seems to be little consensus on what happened. The previous chapter summarized Deirdre McCloskey’s dismissal of most of them in his books The Bourgeois Virtues (2006) and Bourgeois Dignity (2010). McCloskey teaches that the bending of the hockey stick of per capita G.D.P. could never have happened without a change in values. Pre-capitalist Europe held nothing but contempt for commerce, even manufacturing, and instead admired war, plunder, bribing government officials and accepting bribes as officials as the “honorable” means of acquiring wealth. Around 1600, the Dutch and then the British began to change toward what he calls the “bourgeois virtues,” which include hard work, thrift, commerce, trade, etc. What caused such revolutionary change in the thinking of so many people?
Many streams had to converge to generate the powerful river of economic growth that lifted Europe out of regular assaults of famine and starvation, but chief among them was the tributary that overflowed the envy barrier and allowed differences in wealth among social equals. The medieval world saw little problem with extremes of wealth as long as the disparity existed between the nobility and peasants. Theologians justified the extreme inequality on grounds that the different roles assigned by God required different levels of wealth. But within the nobility or between peasants envy reigned and inequality was anathema.
Helmut Schoeck introduced the envy barrier back in the 1960’s with his book Envy: A Theory of Social Behavior. Schoeck’s masterpiece impressed many economists in the Austrian school, but because he did not include a single equation, the rest of the economics world dismissed it. The rebirth of institutional economics[1] offers the opportunity to resurrect Schoeck’s work. For while the revolution in values was necessary for the launch of capitalism and the growth of per capita incomes, the unmovable object against which all efforts at development had broken was human nature, especially the natural inclination to envy others. When institutions had reduced the envy barrier to scalable proportions then society liberated the bourgeois virtues to perform their miracles. Envy derails economic development by destroying three essentials to growth – coordination of plans, incentives to innovate, and capital accumulation.
While mainstream economists fixate on equilibrium analysis, Hayek insisted that any state of affairs resembling equilibrium can exist only if producers and consumers can coordinate their plans, which refer to the future. Hayek won the Nobel Prize in economics partly for his work on the “knowledge” problem that makes coordination possible or hinders it. Producers must coordinate with suppliers and buyers of their goods while the producers of final goods must coordinate with the desires of consumers. Business failure is nothing but the collapse of coordination. Coordination requires knowledge about the plans of others upon whom producers and consumers depend Hayek wrote in “Economics and Knowledge.”
In the first instance, in order that all these plans can be carried out, it is necessary for them to be based on the expectation of the same set of external events, since, if different people were to base their plans on conflicting expectations, no set of external events could make the execution of all these plans possible. And, second, in a society based on exchange their plans will to a considerable extent provide for actions which require corresponding actions on the part of other individuals. This means that the plans of different individuals must in a special sense be compatible if it is to be even conceivable that they should be able to carry all of them out. Or, to put the same thing in different words, since some of the data on which any one person will base his plans will be the expectation that other people will act in a particular way, it is essential for the compatibility of the different plans that the plans of the one contain exactly those actions which form the data for the plans of the other.
A short video on the internet with the title “I, Smartphone” makes the point well. The phone talks to two beautiful little girls and explains how it came into existence. The raw materials were mined in many different countries. Workers in still other nations fabricated the parts from the raw materials, and employees who assembled the parts lived in different countries from most of the people who bought the phones. Yet no government agency coordinated the whole process. Coordination happened as a result of entrepreneurs creating and observing prices.
A failure of coordination results in waste, which is the destruction of wealth. Often, producers make too much of some goods because other producers they depended on created too few complementary goods. The modern structure of production is vast and complex, requiring the knowledge of the plans for the future of others. Schoeck demonstrated that envy silences knowledge and pois
ons any attempts at coordination:
The future, the only field where the fruits of any development are to be reaped, lends itself to a co-operative approach, to exploitation by men able to exchange and co-ordinate their ideas, knowledge and desires. But this is conceivable only when fear of the other’s envy, of his possible sabotage or malicious sorcery, has to some extent been overcome. No one can even begin to have rational aspirations for the future unless he has a realistic view of what that future may be; but no such prognosis can be made as long as each member of the group carefully keeps hidden his view of the future. Nor can a view that is conducive to social and economic development be formed within a group until its individual members are able, in frank discussion, to compare, weigh and synchronize all their different pictures of the future. It is precisely this, however, which more than anything else is impeded by the ever-present fear that basically everyone, more especially our near neighbor, is potentially envious and that the best defense against him is to pretend complete indifference about the future.
In our distant past, envy ranked as one of the seven deadly sins and inspired volumes of poetry. Today, the social sciences and humanities have neglected it to the point that it has become a joke. People have no shame in claiming to envy someone, meaning nothing more than a complement to the other’s accomplishments, good luck or advantages. Schoeck scoured major academic journals of sociology and anthropology covering three decades and found “not a single instance of ‘envy,’ ‘jealousy’ or ‘resentment’ in the subject indexes...” Americans have defined envy into oblivion.
God is a Capitalist Page 5
