Why Economics Can’t Explain the Modern World
Background paper for an address to
the Australian Conference of Economists, Melbourne, July 9, 2012
Deirdre Nansen McCloskey
deirdremccloskey.org
University of Illinois at Chicago
and Gothenburg University
Abstract: NNNN
A big change in opinion about markets and innovation caused the Industrial Revolution, and then the modern world. The change began during the seventeenth and eighteenth century in northwestern Europe, when Dutch and British and then American and French people began talking about the middle class, high or low—the bourgeoisie—as though it were dignified and free. The result was modern economic growth, the jump from the long, long Malthusian handle of the Hockey Stick of $3 a day per person to the business end of the stick, and $125 a day, and all our joy.
I am claiming that ideas, or “rhetoric,” enriched us. It was mere words, which are the most human of our accomplishments, not mere prudent decisions, our least human. Grass, after all, is prudent. But grass is not hopeful and faithful and loving and courageous and just and temperate. The cause of the enrichment was not in the first instance material change or routine incentives. It was not the rise of this or that class, or the flourishing of this or that trade, or the exploitation of this or that group.
It was not, that is, a matter of prudence-only, which any life form has. Grass and rats and pigeons are rational in same sense as is Max U, the strange character whom Paul A. Samuelson taught us to admire. Contrary to such Samuelsonian economics, aseventeenth-century change in rhetoric about prudence, and about the other virtues exercised in a commercial society, started the material and spiritual progress. Meaning and ethics became for the first time in history favorable to frenetic, unregulated innovation. Northwestern Europeans began to accept the Bourgeois Deal—“You let me engage in creative destruction and in the third act I’ll make all of you rich.” It had parallels in scientific and artistic creative destruction, from Galileo to Charlie Parker. The new rhetoric of bourgeois dignity and liberty has ever since been spreading progress to the poor of the world.
I am arguing that historical materialism, unreflectively popular for nearly a century among historians and economists and other proudlytough-minded folk, is mistaken. It is mistaken whether as Marx’s “original accumulation of capital” or Walt Rostow’s “takeoff” or Douglass North’s “institutions” or the economist’s “modern growth theory.” Ideas radically altered tastes and technologies.
One could make the case for such an ideational explanation the modern world positively by showing the ideology changing, as I do in a forthcoming book, The Treasured Bourgeoisie: How Innovation Became Ethical, 1600-1848. But here, and especially in the book published in 2010, Bourgeois Dignity: Why Economics Can’t Explain the Modern World, of which the present paper is a desperately brief summary, the case is mainly negative. The usual and materialist economic histories from Marx to Northseem to be mistaken—which frees space, I suppose, for ideas of dignity and liberty.
The ideational theme is old-fashioned, as old as eighteenth-century political theory. Or it is new-fashioned, as new as twenty-first century studies of discourse. Either way, it challenges our usual ideas about the ill-named “capitalism.” Most people carry around ideas about the origins of the modern economy that historical and economic science have long since shown to be mistaken. People think, for example, that imperialism explains European riches. Or they think that the Middle Ages did not know property rights. Or they think that foreign trade differs from domestic trade. Or they think that markets and greed came recently. Or they think that the only large cities in the world were European. Or they think that Europeans well before 1700 were unusually innovative. Or they think that “capitalism” required the “rise” of a new class (as against a new rhetoric about an old class). Or they think that economic events have to be explained every single time by material interests. None of these is correct. And none of the material explanations, alone or in combination, has the oomph to explain the modern world.
We know empirically that the economistic explanations are mistaken on two grounds. Historically, other places and times, such as China always and Europe before, had massive trade or massive exploitation or massive investment, but did not experience the Great Fact—a rise of income per head, if one includes improved quality of goods and services, of upwards of a factor of one hundred, but anyway thirty or forty. The largest international trade happened until the nineteenth century not in the Mediterranean or the North Sea or the Atlantic, but in the Indian Ocean. The Chinese had massive cities and stable property rights for millennia. The West Africans could cast iron and brass in a thousand shapes for two thousand years. The South Asians invented big-scale production of steel and the analysis of grammar hundreds of years before the West caught on. Trade or investment, exploitation or profit, were ancient routines everywhere. But dignity and liberty for ordinary people were unique to the age of the Industrial Revolution and to northwestern Europe. The history makes it plausible that it was such ideas, not material causes, that most mattered.
And economically we know that routine investment, absent innovation, rapidly drives marginal products down to zero. We know that Harberger triangles of efficiency gain are small single digits when set beside the magnitudes of percentage change that modern economic growth entails. But the factor of 100 if the improved quality of modern goods such as lighting and medicine and, for that matter, economic knowledge is properly accounted is a percentage change of 9900 percent; and a factor of 10 worldwide on the most conservative accounting, and including areas like Chad and Bangladesh which have not yet joined the blade of the hockey stick, is still a percentage change of 900 percent. Of course, if we introduce economies of scale suddenly in 1800 we can “explain” the explosion. Likewise, if we assume a can-opener we can open a can of beans. The non-tautological, non-magic economics makes it again plausible that radical ideas, such as electric lighting and the modern university, not routine reallocation, are what most mattered.
Economics, whether Samuelsonian or Marxist, 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. If the historians don’t grasp the economics they will not understand the pattern of modern history. The pattern was shaped by the trade in cotton and the investments in seaports, by the supply of steam engines and the demand for elementary education, by the cost of iron and the benefit of railways, by the plantation exploitation of slaves and the market participation of women. Economics of a material sort can surely explain why Americans and Swedes burned wood and charcoal longer than did the forest-poor and coal-rich people of inner northwestern Europe. It can explain why education was a bad investment for a British parlor maid in 1840, or why the United States rather than Egypt supplied most of the raw cotton to Manchester, or why indeed the cotton growers of the present-day African Sahel are damaged by protection for American cotton. Economics can explain why comparative advantage in making cotton cloth shifted from India to England and then back to India.
Economics, though, can’t explain the rise in the whole world’s (absolute) advantage from $3 to $30 a day and beyond. It can’t explain the onset or the continuation, in its magnitude as against its pattern, of the uniquely modern—the coming of automobiles, elections, computers, tolerance, antibiotics, frozen pizza, central heating, and higher education for the masses, such as for you and me. If the economists don’t grasp the history they will not understand this most important of modern historical events. The economics of the conventional sort does not account for the unprecedented size and egalitarian spread of the benefit from growth, only the fine details of its pattern. Material, economic forces were not the original and sustaining causes of the modern rise, 1800 to the present, accelerating after 1980. Economics does most cleverly explain how the rising tide expressed itself in micro-geographical detail, channeled into this or that inlet, mixing with the river just so far upstream, lapping the dock to such-and-such a height. But the tide itself had other causes.
Ethical (and unethical) talk runs the world. One-quarter of national income is earned from sweet talk in markets and management.[1] 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 rely exclusively on silent and monetary incentives, such as executive compensation. In particular, three centuries ago in places like Holland and England the talk and thought about the middle class began to alter. Ordinary conversation about innovation and markets became more approving. The theorists were emboldened to re-think anti-bourgeois prejudices by then millennia old. (Sadly, the talk and thought along such lines didn’t alter right away in China or India or the Ottoman lands; it has by now.) The North-Sea talk at length radically altered the local economy and politics and culture. In northwestern Europe around 1700 the general opinion shifted in favor of the bourgeoisie, rather suddenly as such things go. There was a big change in what Alexis de Tocqueville called “habits of the mind”—or more exactly, habits of the lip. People stopped sneering at market innovativeness and other bourgeois virtues exercised far from the traditional places of honor at the basilica of St. Peter or the palace of Versailles or the gory ground of the First Battle of Breitenfeld.
We economists have recently saved our models in the face of a new realization of how radical the alteration was by speaking of “nonlinearities” or “economies of scale” or “multiple equilibria.” I am claiming that the economy grew far beyond all previous expectations in the eighteenth and especially the nineteenth century because the forms of speech about enterprise and invention suddenly changed. Technically speaking, the new conversation caused the dimensions of the Edgeworth box to explode. Re-allocation by improved exchange within a fixed box à la Harberger, or reallocations by imperial aggression along the contract curve à la Wallerstein, was not what happened: the production possibility curve leapt out, à la Schumpeter and more.[2] The habits of the lip changed in the seventeenth and especially the eighteenth century, for various good and interesting reasons—some in turn material, some rhetorical. Speech, not material changes in foreign trade or domestic investment, caused the non-linearities or (in more conventional theorizing) the leaping out of the production possibility curve.
The change in talk and thought about the bourgeoisie was probably of greater importance for explaining the modern world than the clerical Reformation in Germany after 1517, or the aristocratic Renaissance during and after the Tuscan Trecento. Yet both of these influenced the change in talk, as did more powerfully a third great R-shift of late medieval and early modern times, the political Revolts and Revolutions which shook Holland and Britain and America and finally France. The point here, though, is about a fourth great and (for a while) uniquely European R-shift—the “Bourgeois Revaluation” in Holland and Britain. An old class of town dwellers formerly sneered at by the clergy and the aristocracy and the peasantry began to acquire a new and more dignified standing in the way people thought about it and talked about it, in their rhetoric.
Faith is the virtue of backward looking, of having an identity. Keep the faith. Dignity encourages faith. You are dignified in standing. Hope by contrast is the virtue of forward looking, of having a project.[3] Liberty encourages hope. You are free to venture. I claim here that the modern world was made by a new, faithful dignity accorded to the bourgeois, to take his place, and by a new hopeful liberty, to venture forth. To take ones place and to venture, both the dignity and the liberty, were new, and both were necessary.
My libertarian friends want liberty alone to suffice. But it seems to me that it did not. To be sure, from 1600 on the new dignity and the new liberty normally reinforced each other---there is one possible source of the economist’s “nonlinearities.” Yet liberty without dignity makes for activity without faithful self-esteem, the eager but lowly and self-despising niggling of the marketplace. And if thus lacking in dignity the bourgeoisie is under constant assault from politics and society and literature, assuring bad economic politics as in Habsburg Spain, and $3 a day, or as in the sad history of Jewish emancipation liberty without dignity leading to loss of liberty and worse. Likewise, dignity without liberty makes for status without hope, merely another version of the hierarchy of olden times, as in the overregulated guild towns such as Venice or Lübeck. If the bourgeoisie were admitted into the elite but at the price of being disabled from radical innovation, the modern world would again look a good deal like the ancien régime of Northern Italy or the Hansa, down to the $3 a day.
All this changed in the Bourgeois Revaluation of the seventeenth through the nineteenth century. Revaluations of the honorable transcendent, no longer confined to heroism or saintliness or courtly grace, changed sociology and politics. By contrast, what Tocqueville called “habits of the heart” did not change much. The initiating change was not psychological (as for example Max Weber argued in 1905), nor economic (as Karl Marx argued in 1848), but sociological and political. That is, around 1600 on a big scale in pioneering Holland, and then around 1700 on a bigger scale in innovating Britain, some of the elite began to revalue the town and its vulgar and corrosive creativity. By the 1660s the Dutch cloth merchant Pieter de la Court was declaring that “a power of using their natural rights and properties for their own safety . . . will be to the commonalty. . . an earthly paradise: for the liberty of a man’s own mind, especially about matters wherein all his welfare consists, is to such a one as acceptable as an empire or kingdom.”[4] No aristocratic empires or kingdoms, please; we’re bourgeois. In 1690 an English merchant to the Ottomans, Dudley North (himself from an aristocratic family), wrote in an even more modern and economistic way that “there can be no trade unprofitable to the public, for if any prove so, men leave it off; and wherever the traders thrive, the public, of which they are a part, thrives also.”[5]
Such pro-market opinions have never become universal. The British elite took a century or more after the age of Shakespeare to even begin speaking of commercial creativity as O.K., acceptable, not-to-be-sneered-at. Shakespeare’s only play (partly) about the bourgeoisie is The Merchant of Venice, in which the merchant Antonio is sad and silly (for love, charmingly) and the other major bourgeois figure is Shylock. All his other plays concern aristocrats or peasants or imagined shepherds, and his contemporaries like Marlowe express similar anti-bourgeois views. Two centuries later in England, by contrast, even the heroes in Jane Austen’s novels, though gentry and not by any means in trade, think in terms of sense and sensibility, prudence and love; and dear Jane herself speaks methodically in her letters of her bourgeois business, authoring. Anti-commercial snobbery in Britain did not entirely end, ever—you see it in Emma Woodhouse’s ill-begotten advice to Harriet Smith in Emma to not marry the farmer Robert Martin. But 1600-1800 is a sea change.
The liberty half of the Revaluation was equally, and more famously, slow in coming. The domination of British politics by an illiberal Establishment did not entirely end, ever. As the historian Margaret Jacob argued long ago, and as Jonathan Israel has confirmed lately in the history of ideas, the free-market and free-voting “radical Enlightenment” of people like the Levellers, de la Court, Spinoza, Mandeville, Rousseau, Paine, and the well-named Freemasons was undercut by the more conservative and monarchical Enlightenment of Locke, Newton, Voltaire, and the rest, in the utter liberty of trade that the radicals sometimes favored among others matters.[6] (And of course the reactionary powers fought both Enlightenments, the radical and the conservative, with galley and with rope; their descendants moved on to the gulag and the machine gun.) But bourgeois values, and revaluation, triumphed, with startling economic results.