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The Mystery of Growth

1.

The question of what causes economies to grow is theoretically interesting and practically important. If we could discover the secrets of economic growth—what causes income per person to increase over time—we might be able to make growth happen at will, abolishing poverty and creating a world of universal abundance.

Until about three hundred years ago, periods of economic growth had always been reversed, leaving long-term income levels unchanged: the standard of living of a European agricultural worker in the sixteenth century was little higher than it had been in Roman times. In his Essay on Population (1798) the Reverend T.R. Malthus explained why. Whenever food supply grew, population grew, but even faster. This meant that income per head—or food per person—was constantly being forced back toward subsistence levels. But from the late seventeenth century onward “perhaps for the first time in…history…both the Dutch and the British economies …succeeded in increasing the per capita income of a growing population despite the continued pressure of diminishing returns in agriculture.”1 Malthus’s population theory was by then explaining only past history. In the century after he wrote, emigration to the Americas, the Industrial Revolution, and falling birth rates banished, or at least postponed, his “problem” in the Western European countries of the world. Wealth could be made to grow faster than population.

Adam Smith, the founder of scientific economics, was the inventor of growth theory. The question he asked in The Wealth of Nations (1776) was: What laws, institutions, and public policies does a society need to experience economic growth? Smith had no doubt that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.”2 Over fifty years later, and well into the Industrial Revolution, John Stuart Mill listed three requirements for the “less civilized and industrious” nations to catch up with the advanced ones: better government and property laws; the “decay of superstition” and “growth of mental activity”; and hospitality to “foreign arts” (technology) and foreign capital.3

Behind these economists’ assertions lay the thought that economic growth is natural because, except for some monks and other ascetics, “love of gain” is universal. The main “obstacle to growth” was what Karl Marx called “ancient and venerable prejudices.” However, these would yield to scientific knowledge. In this view, no change in human motives is needed to explain economic growth, merely a change in the circumstances in which the self-interested motives are translated into action. Prescriptively, “scientific” economics tries to tell you what the required circumstances are.

However, the economists’ accounts left one huge question unanswered: Why has Western civilization been so much more successful than any other in removing the obstacles to economic growth? An equal love of gain cannot explain the highly unequal patterns of growth we have in fact observed. Sociologists argued that for growth to happen a prior shift of cultural values had to occur: the obstacles to growth were not prescientific prejudices, but cultural systems that frowned on moneymaking.

According to the sociologist Max Weber, this cultural shift was accomplished—uniquely in Western Europe—by Protestantism. Protestanism was the carrier of the “spirit of capitalism.” Protestant countries, sociologists argued, developed a special aptitude for moneymaking. This explained their economic success; the lack of a Protestant ethic explained the failure of others. Seeing growth as culturally disruptive, sociologists were more sensitive to its costs. And they were less optimistic than were economists about the benefits growth would bring. In the sociological tradition, it is the obsession with growth, not resistance to it, which is irrational.

Post-1945 growth experience has given economics the edge over sociology. The classic sociological growth theories, associated with Max Weber, R.H. Tawney, Werner Sombart, and the Harvard scholar Alexander Gerschenkron, date from a time when Europe and its offshoots offered the only material for growth stories. So it made sense to explain economic growth according to Europe’s exceptional, not readily reproducible, characteristics. This conclusion was, if anything, reinforced by early-twentieth- century attempts to force growth on the non-Protestant world by means of centrally directed “development strategies.” These produced either monstrous aberrations, as in Soviet Russia and Communist China, or monuments to inefficiency and corruption, as in India, sub-Saharan Africa, and much of Latin America.

However, while these growth strategies were being tested, the Japanese economic “miracle” provided materials for an alternative story of development, based on export-led growth in a liberalizing world economy. Japan’s success was the first real breach in the theory of European exceptionalism. In the 1970s and 1980s it was closely followed by a small cluster of East Asian “miracles” in South Korea, Taiwan, Singapore, and Hong Kong. Since 1960, according to Robert Lucas, the “entire human race [has been] getting rich, at historically unprecedented rates.” This seemed to vindicate the insight of the classical economists that, if Western standards of good government prevailed, “love of gain” would do the rest.

2.

The two books under review, one written by the political sociologist Liah Greenfeld, the other by Nobel Prize– winning economist Robert Lucas, reflect the two main traditions for thinking about growth. To Liah Greenfeld, the explanation of growth belongs to the “history of ideas and the sociology of culture.” For Lucas, growth is what happens automatically as knowledge accumulates.

Greenfeld denies the validity of naturalistic explanations of human behavior. Her key argument is that the emergence of the modern economy has to be understood “as a problem in the cultural construction of reality.” Specifically, a desire for “continuous economic growth” is not natural for human beings, and for most of history it has been absent. “I am asking,” Greenfeld writes, “why the historically exceptional inclination for ever-increasing gain…became defined, on the level of the individual, as rational self-interest…and on the level of society, as common good and paramount collective interest.” The harnessing of greed to efficiency and ethical goals requires an explanation—a Factor X, as Lucas calls it.

Max Weber’s Factor X was Protestantism. The Protestant ethic was required to convert natural, haphazardly satisfied greed into purposeful frugality. Calvinism abolished the distinction between the sacred and profane, generalizing the ascetic ideal of the monastic orders to secular life. Personal asceticism, in turn, favored the accumulation of capital. In this explanation of the origins of capitalism, Adam Smith’s engine of accumulation—frugality—arises not from a natural desire for more wealth but from a heightened concern for one’s immortal soul. But the rationality entailed by this concern became in time detached from the goal of salvation it was designed to serve. Capital accumulation became an end in itself.

Greenfeld accepts the need for a Factor X. Weber was right to see that the “spirit of capitalism” required a new morality. But the mechanism that brought this about, she argues, was nationalism, not Protestantism. By the seventeenth century, nationalism had emerged in Britain as “the cognitive and ethical framework which gave meaning to reality”—that is, consciousness of being a nation is what inspired the British to build up their wealth. Nationalism freed money from its subordination to religion and turned the accumulation of wealth into the summum bonum of life.

Britain’s economic success made it a political superpower. This stimulated “many a reactive nationalism” in other countries, their focus on economics “greatly contributing to the formation of the modern ‘economic civilization.’” Without nationalism, economic growth would have stopped earlier, the motives recognized by economists being insufficient to explain the sustained hunger for wealth. Greenfeld cites Holland as a counterexample of an economy which, after a great spurt, declined in the seventeenth century because it lacked a national consciousness.

Greenfeld believes that nationalism “necessarily promotes the type of social structure which the modern economy needs to develop.” Because it is, at least in principle, egalitarian—membership in the nation confers equal rights on all—it encourages social mobility, frees labor, encourages market forces, and gives prestige to hitherto disparaged groups like merchants. Nationalism can also set up a system of international competition, committing societies “which define themselves as nations to a race with a relative and therefore forever receding finishing line.” When international competition includes the economy, this presupposes a commitment to constant growth. “In other words, the sustained growth characteristic of modern economy is not self-sustained; it is stimulated and sustained by nationalism.”

Greenfeld’s book can be read both as an attack on economists and as a debate within sociology. Against the economists, she makes the good, though scarcely original, point that economic behavior is shaped by cultural values, and that growth-resistant cultures cannot simply be explained as products of ignorance and superstition. Within sociology, the question is whether nationalism offers a better explanation for economic growth than does Weber’s Protestant ethic. I think not, for three reasons.

First, it is far from clear how nationalism is supposed to produce the individual behavior necessary for economic growth. Weber’s theory of the Protestant ethic postulates a functional relationship between frugality (self-denial) and capital accumulation (though it was Keynes who famously remarked that “mere abstinence is not enough by itself to build cities or drain fens.”4 ) Why should nationalism make people more systematically frugal or, for that matter, enterprising—as opposed to more systematically warlike? Greenfeld herself admits it does not have to. Military conscription is as much a product of nationalism as is universal suffrage.

Secondly, the Protestant ethic, being transnational, at least explains why growth happened in some countries, whereas nationalism doesn’t. Greenfeld treats the emergence of nationalism in one country after another as “an unconnected series of historical accidents.” It is therefore incapable of explaining economic growth in any country but that in which the nationalism occurs. Apart from the vague musings I have mentioned on “reactive nationalism” (itself not original) no plausible mechanism is offered by which growth is transmitted from one “nation” to another.

Thirdly, nationalism hardly explains the origins of British capitalism. As a political doctrine, it dates from the French Revolution; but England had developed the core institutions of a capitalist market economy long before this. To save her argument, Greenfeld has to say that nationalism was “the preponderant vision” of British society by 1600. But this is nonsense, since, far from being egalitarian and democratic, England in 1600 was a hierarchical society, ruled by a hereditary monarch who held down the non-English parts of his dominion by force. What is true is that by 1600, the English had developed a strong sense of national identity (not nationalism). This was embodied in the “patriotic” Tudor monarchy, and underpinned by the sense of being a Protestant nation locked into semipermanent war with the Catholic powers of Spain and (later) France.

Greenfeld is right to see a link between national feeling and economic growth, but the connection has to be made in a historical context, and this she fails to provide. Historically minded sociologists have located the political foundations of capitalism in the failure of Europe to develop a single center of power after the collapse of the Roman Empire.5 From the ruins of the Roman imperium emerged feudalism, a fragmented, overlapping system of jurisdictions and states held together by Christianity; parts of that system had by the early sixteenth century coalesced into intensely competitive national monarchies. Feudalism checked arbitrary rule, leaving space for the growth of free cities, pan-European markets, and private property rights; military competition between states stimulated national feeling and turned the attention of rulers to augmenting the stock of national wealth, because of the close connection between wealth and power. Thus national identity and the growth-minded “spirit of capitalism” can be seen as joint products of European rivalry among states. In economic jargon, nationalism is a dependent, not an independent, variable. It is connected to growth through the competition of states. Even so, we are left with no explanation of why some nationalistic states, like Russia, failed to develop the “spirit of capitalism.” Weber’s Protestant ethic hypothesis remains superior for explaining why the growth experience of parts of Europe diverged from elsewhere.

  1. 1

    Douglass C. North and Robert Paul Thomas, The Rise of the Western World: A New Economic History (Cambridge University Press, 1973), p. 2.

  2. 2

    John A. Hall, Powers and Liberties: The Causes and Consequences of the Rise of the West (Penguin, 1985), p. 141.

  3. 3

    John Stuart Mill, Principles of Political Economy, Book 1, Chapter 13 (London, 1871), pp. 236–237.

  4. 4

    John Maynard Keynes, A Treatise on Money, Vol. 2 (Macmillan, 1930). Reprinted in The Collected Writings of John Maynard Keynes, Vol. 6 (Royal Economic Society, 1971), p. 132.

  5. 5

    See for example Jean Baechler, The Origins of Capitalism, translated by Barry Cooper (St. Martins, 1976), and Hall, Powers and Liberties.

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