Title: Bourgeois Dignity: Why Economics Can’t Explain the Modern World
Author: Deirdre McCloskey
Scope: 4 stars
Readability: 3.5 stars
My personal rating: 5 stars
See more on my book rating system.
Topic of Book
McCloskey seeks to explain why so many nations have dramatically increased in their standard-of-living over the last few centuries.
While I believe the McCloskey overstates the role of beliefs in fostering economic growth, I believe that she makes some interesting points. In particular, she makes the point that economists don’t really understand where economic growth comes from.
Other books by the same author
- Ethics and idea matter in economic growth.
- Traditional societies view innovation, work and trade as unethical and immoral. They prefer military glory and conspicuous consumption.
- A few societies in Northwest Europe began to view such activities as honorable. It is that change in attitude that started rapid economic growth.
- A poor country that does the same can become rich in just two generations. Many have done so.
- Trade does not generate wealth, it just reshuffles it.
- Nor does exploitation generate wealth.
- Wealth come from innovation and respect for innovators encourages it.
Important Quotes from Book
The main point of this book is that the leaps, such as Norway’s from $3 to $137, with its cultural and political accompaniments, did not happen mainly because of the usual economics. That is, they did not happen because of Dutch investments or European trade or British imperialism or the exploitation of sailors on Norwegian ships. Economics did matter in shaping the pattern. It usually does. Exactly who benefited and exactly what was produced, and exactly when and where, was indeed a matter of economics.
But economics can’t explain the rise in the whole world’s (absolute) advantage from $3 to $30 a day. It can’t explain the onset or the continuation, in its magnitude as against its pattern, of the uniquely modern—the coming of elections, computers, tolerance, antibiotics, frozen pizza, central heating, and higher education for the masses, such as for you and me and Hedda… That is, economics of a conventional sort does not account for the great size and egalitarian spread of the benefit from growth, as against the fine details of its pattern.
What then? I argue here, and in complementary ways in the two volumes to follow, that talk and ethics and ideas caused the Industrial Revolution. Ethical talk runs the world. One-quarter of national income is earned from sweet talk in markets and management.9 Rhetoric matters. Perhaps economics and its many good friends should acknowledge the fact. When they don’t they get into trouble, as when they inspire banks to ignore professional talk and fiduciary ethics and to use only silent and monetary incentives (executive compensation, say).
Together the books make one big argument. The argument is: Markets and innovation, which are ancient but recently have grown dignified and free, are consistent with an ethical life. An ethical and rhetorical change in favor of such formerly dishonorable activities of the bourgeoisie — innovating a fulling mill to improve woolens or innovating a bank to pay florins in England easily — happened after 1300 in isolated parts of the European south (Venice, Florence, Barcelona), and after 1400 or so in other towns of the south (such as Lisbon) and the Hansa towns of the north, and after 1600 in larger chunks of the north (Holland, England, Scotland), and after 1750 in northeastern America, southern Belgium, the Rhineland, northern France, and then the world. Such words or conversations or rhetoric mattered to the economy, and still do. The words enabled after 1800 a big fall in poverty and a big rise in spirit.
Yet in the late nineteenth century the artists and the intellectuals — the “clerisy,” as Samuel Coleridge and I call it — turned against liberal innovation. The treason of the clerisy led in the twentieth-century to nationalism and socialism and national socialism. The clerisy provided the “scientific” justifications for such schemes, as in scientific materialism or scientific imperialism or scientific racism or scientific Malthusianism or, lately, scientific neo-eugenics. The scientific schemes reasserted elite control over newly liberated poor people.
A poor country that adopts thorough-going innovation, therefore, can catch up to the West in about two generations. It has happened repeatedly.
Britain was first, though the classical (and many of the neoclassical) economists did not recognize that it’s course was beginning the factor of 16. The slow British growth in the 18th century proposed by Crafts and Harley is unbelievable, but however one assigns growth within the period 1700-1900 it is now plain that something unprecedented was happening. Only non-economists recognized it at the time. The central puzzle is why innovation did not fizzle out, as Mokyr has put it — as it had at other times and places. Productivity in cotton textiles, for example, grew at computer-industry rates, and continued so into the 20th century. But Europe’s lead was not permanent. The California School of Pomeranz and Goldstone and Allen and others have shown that China led the West in 1500, and maybe as late as 1750, then fell dramatically behind. It was the continuation of European growth in the 19th and 20th centuries that is strange and new. Explaining the Great Divergence requires focusing on non-European events in the 19th century — not some deep-seated European cultural superiority. On the other hand, Europe’s fragmented polity was an advantage, as shown in the swift uptake of the printing press. The way that non-European places like Japan or Botswana or India have been able to grow demonstrates that the stage theories popular in European thought from the 18th century to the present (for example, in modern growth theory) are mistaken. The metaphors of biological stages or human foot races are inapt, such as the talk in business schools of “competitiveness” nowadays. The “rise” of non-European economies does not presage a “decline” or Europe or its offshoots, merely a borrowing of social and engineering technologies such as Europe once borrowed from elsewhere. The dignity and liberty of ordinary people stands in the middle of such “technologies.”
Thrift was not the cause of the Industrial Revolution or its astonishing follow on. For one thing, every human society must practice thrift, and pre-industrial Europe, with its low yield-seed ratios, did so on a big scale. British thrift during the Industrial Revolution, for another, was rather below the European average. And for still another, savings is elastically supplied, by credit expansion for example (as Schumpeter observed). Attributing growth to investment, therefore, resembles attributing Shakespeare’s plays to the Roman alphabet: the alphabet was “necessary” in a reduced sense, but was of course an assumed background, not the cause in any useful sense.
Certainly Europeans did not develop unusual greed, and the Catholics — in a society of bourgeois dignity and liberty — did as well as the Protestants (in Amsterdam, for example, where Catholics were one third of the population). Ben Franklin, to cite a leading case, was not (as D. H. Lawrence portrayed him in a humorless reading of this most humorous man) “dry and utilitarian.” If capitalism accumulates “endlessly,” as many say, one wonder why Franklin give up accumulating at age 42.
The evidence also does not support Marx’s notion of an “original accumulation of capital.” Saving and investment must be used when they are made, or they depreciate. They cannot accumulate from an age of piracy to an age of industry. Yet modern growth theory, unhappily, reinstates a theory of stages and, especially, capital accumulation. They are not initiating, whether in physical or human capital. Innovation 1700-2010 pushed the marginal product of all capitals steadily out, and the physical and human capital followed.
Transportation improvements cannot have caused anything close to the factor of 16 in British economic growth. By Harberger’s (and Fogel’s) Law, an industry that is 10% of national product, improving by 50 percent on the 50% of non-natural routes, results in a mere one-time increase of product of 2.5% (= .1 x .5 x .5), when the thing to be explained is an increase of 1500%. Nor is transport rescued by “dynamic” effects, which are undermined by (1.) the small size of the static gain to start them off and (2.) the instable economic models necessary to make them nonlinear dynamic.
The same holds for many other suggested causes of the modern world: enclosure, for example, or the division of labor or the Kuznets-Williamson Hypothesis of reallocation from agriculture to industry, country to town. Wider geographical arguments, such as Diamond’s or Sachs’, turn out to be ill-timed to explain what we wish to explain. And “resources,” such as oil or gold, have both the Harberger Problem and the timing problem. Not even coal — the favorite of Wrigley, Pomeranz, Allen, and Harris — can survive the criticism that it was transportable and substitutable. The factor-bias arguments of Allen have the old problem of the Habbakuk Hypothesis, namely, that all factors are scarce. Even if we add up all the static and quasi-dynamic effects of resources, they do not explain Britain’s lead, or Japan’s or Hong Kong’s catching up.
Trade reshuffles. No wonder, then, that it doesn’t work as an engine of growth — not for explaining the scale of growth that overcame the West and then the Rest 1800 to the present. Yet many historians, such as Walt Rostow or Robert Allen or Joseph Inikori, have put foreign trade at the center of their accounts. Yet the Rest had been vigorously trading in the Indian Ocean long before the Europeans got there — indeed, that’s why the West wanted to get there. Trade certainly set the prices that British industrialists faced, such as the price of wheat or the interest rate. But new trade does not put people to work, unless they start unemployed. If they are, then any source of demand, such as the demand for domestic service, would be as important as the India trade. Foreign trade is not a net gain, but a way of producing importables at the sacrifice of exportables. The Harberger point implies that static gains from trade are small when set beside the 1500% of growth to be explained, or even the 100% in the first century in Britain. Trade is anyway too old and too widespread to explain a uniquely European — even British — event.
One can appeal to “dynamic” effects, but these too can be shown to be small, even in the case of the gigantic British cotton textile industry. And if small causes lead to large consequences, the model is instable, and any old thing can cause it to tip. Ronald Findlay and Kevin O’Rourke favor foreign trade on the argument that power led to plenty. But domination is not the same thing as innovation. In short, the production possibility curve did not move out just a little, as could be explained by trade or investment or reshuffling. It exploded, and requires an economics of discovery, not an economics of routine exchanges of cotton textiles for tea.
Since trade was not an engine, neither was a part of trade, such as the trade in slaves. The profits from the trade, which were small and were mainly earned by African slave-catchers, did not finance the Industrial Revolution. Imperialism, too, was a mere part of trade, and despite the well-deserved guilt that Europeans feel in having perpetrated it, it was not an engine of their growth. Stealing from poor people is not a good business plan. Certainly the possession of India did little for the great British public. It taxed them for the Navy. But that Europeans did not benefit from imperialism does not mean that imperialism was good for the imperialized. That a thief kills his victim does not add to the thief’s monetary profit, and some imperialism was certainly killing. The cases of simple theft, such as the Belgian Congo, did nothing to enrich the average Belgian. Nor have internal imperialisms, such as apartheid, been profitable. The episode of economic success in Europe came from domestic sources of innovation, not from exploitation.
“Commercialization” and “monetization” dance with stage theories from Smith to modern growth theory. The sheer growth of trade or the sheer growth of money, though, do not an Industrial Revolution make. The ill-named “Price Revolution,” for example, came from American gold, not from population increases, and did not inspire innovation. Commercialization comes from falling transaction costs, which should be directly studied. Fernand Braudel, however, argued for commercialization as a force transforming “capitalism.” He distinguished “capitalism” from local trade, which no economist would, and assigned blame to the capitalists. Though hardly a Marxist, he — like a brilliant group of leftish economists such as Marglin and Lazonick — puts emphasis on the struggle over the spoils. But it was not such struggles that made the modern world. It was the positive sum arising from innovation.
An extreme materialist hypothesis explaining the Industrial Revolution would be simply genetic. Gregory Clark asserts such a theory of sociobiological inheritance in his Farewell to Alms (2007). Rich people proliferated in England, Clark argues, and by a social Darwinian struggle the poor and incompetent died out, leaving a master race of Englishmen with the bourgeois values to conquer the world. Clark will have no truck with ideas as causes, adopting a materialist (and, as he believes is implied by materialism, a quantitative) theory of truth. His method, that is, follows Marx in historical materialism, as many scholars did 1890 to 1980. But he does not carry out his promise to show his argument quantitatively.
The argument fails, on many grounds. For one thing, non-English people succeeded, as for instance the Chinese now are succeeding. And such people have always done fine in a bourgeois country. For another, Clark does not show that his inheritance mechanism has the quantitative oomph to change people generally into bourgeois, nor does he show that bourgeois habits of working hard mattered, or that bourgeois values caused innovation. What made for success in 1500 is not obviously the same as what made for innovation in 1800. And in the modern world of literacy such values are not transmitted down families, but across families. Literal inheritance anyway dissipates in reversion to the mean. What mattered in modern economic growth was not a doubtfully measured change in the inherited abilities of English people. What mattered was a radical change 1600-1776, “measurable” in every play and pamphlet, in what English people wanted, paid for, revalued.
Douglass North, with many other Samuelsonian economists, thinks of “institutions” as budget constraints in a maximization problem. But as Clifford Geertz and his colleagues put it, an institution such as a toll for safe passage is “rather more than a mere payment,” that is, a mere monetary constraint. “It was part of a whole complex of moral rituals, customs with the force of law and the weight of sanctity.” The Geertzian metaphor of negotiation and ritual makes more sense than the metaphor of a mere budget constraint. Meaning matters. North in particular thinks that the budget line of anti-property violence was shifted in the late 17th century. It was not: on the contrary, England was a land of property rights from the beginning. So “institutional change” does not explain the Industrial Revolution. The timing is wrong.
Incentive (Prudence Only) is not the main story, and cannot be the main story without contradiction: if it was Prudence Only the Industrial Revolution would have happened earlier, or elsewhere. Other virtues and vices mattered — not only prudence, beloved of the Samuelsonians; but temperance, courage, justice, faith, hope, and love, which changed radically in their disposition in the seventeenth and eighteenth centuries. Sheer commercial expansion is routine and predictable and ill-suited therefore to explaining the greatest surprise in economic history.
The Glorious Revolution of 1689, which North and Weingast have cast in a central role, merely made the British state effective. It did not change property rights (as economists such as Darin Acemoglou have supposed, on the basis of North’s tale). North praises patents and incorporation laws, neither of which had much impact in the Industrial Revolution. The 18th century, in other words, was not a century of “institutional change.” Nor is the entire absence of property relevant to the place or period. Richard Pipes argued it was relevant, on the basis of the Russian case. Yet only in society’s dominated by Steppe nomads was property weak. In Europe in the 16th and 17th centuries, as in China then, it had been strong for centuries past. The Stuarts were not princes of Muscovy. And indeed private property characterizes all settled human societies.
What happened to make for the factor of 16 were new ideas, what Mokyr calls “industrial Enlightenment.” But the Scientific Revolution did not suffice. Non-Europeans like the Chinese outstripped the West in science until quite late. Britain did not lead in science — yet clearly did in technology. Indeed, applied technology depended on science only a little even in 1900.
Why did the North-Sea folk suddenly get so rich, then, get so much cargo? The answers seems not to be that supply was brought into equilibrium with demand — on the contrary, the curves were moving out at breakneck pace. Reallocation is not the key. Language is, with its inherent creativity. The Bourgeois Revaluation of the 17th and 18th centuries brought on the modern world. It was the Greatest Externality, and the substance of a real liberalism. Left and right have long detested it, expressing their detestation nowadays in environmentalism. They can stop the modern world, and in some places have. The old Soviet Union was admired even by many Western economists — which admiration is an instance of a “cultural contradiction of capitalism,” in which ideas permitted by the successes of innovation rise up to kill the innovation. We should resist it.