An excerpt from
Why Economics Can’t Explain the Modern World
Deirdre N. McCloskey
The Modern World Was an Economic Tide,
But Did Not Have Economic Causes
Two centuries ago the world’s economy stood at the present level of Bangladesh. In those good old days of 1800, furthermore, the average young person in Norway or Japan would have had on past form less rational hope than a young Bangladeshi nowadays of seeing in her lifetime the end of her nation’s poverty—or at least the beginning of the end. In 1800 the average human consumed and expected her children and grandchildren and great-grandchildren to go on consuming a mere $3 a day, give or take a dollar or two. The figure is expressed in modern-day, American prices, corrected for the cost of living. It is appalling.
By contrast, if you live nowadays in a thoroughly bourgeois country such as Japan or France you probably spend about $100 a day. One hundred dollars as against three: such is the magnitude of modern economic growth. The only people much better off than $3 or so up to 1800 were lords or bishops or some few of the merchants. It had been this way for all of history, and for that matter all of prehistory. With her $3 a day the average denizen of the earth got a few pound of potatoes, a little milk, an occasional scrap of meat. A wool shawl. A year or two of elementary education, if lucky and if she lived in a society with literacy. She had a 50-50 chance at birth of dying before she was thirty years old. Perhaps she was a cheerful sort, and was “happy” with illiteracy, disease, superstition, periodic starvation, and lack of prospects. After all, she had her family and faith and community, which interfered with every choice she made. But at any rate she was desperately poor, and narrowly limited in human scope.
Two centuries later the world supports more than six-and-half times more souls. Yet contrary to a pessimistic “Malthusian” belief that population growth would be the big problem, the average person nowadays earns and consumes almost ten times more goods and services than in 1800. Despite the disturbing pauses during the three dozen or so recessions that have roiled the world’s economy since 1800, nearly every trough of a business cycle has been followed in a few years by a new all-time peak in the welfare of the poor of the earth, and the cases of very long recoveries were those from the two world wars, now distant. Starvation worldwide is therefore at an all-time low, and falling. Literacy and life expectancy are at all-time highs, and rising. Liberty is spreading. Slavery is retreating, as is a patriarchy enslaving of women.
In the now much richer countries, such as Norway, the average person earns fully forty-five times more than in 1800, a startling $137 a day, or $120 a day for the average person in the United States, or $90 in Japan. The environment—the concern of a well-to-do and educated bourgeoisie—is in such rich places improving. Even the merely improving places, like China, which is still very poor at $13 a day but much better off than in 1978, have started to care about the future of the earth. Economic history has looked like an ice-hockey stick lying on the ground. It had a long, long horizontal handle at $3 a day extending through the two-hundred-thousand-year history of Homo sapiens to 1800, with little bumps upward on the handle in ancient Rome and the early medieval Arab world and high medieval Europe, with regressions to $3 afterward—then a wholly unexpected blade, leaping up in the last two out of the two thousand centuries, to $30 a day and in many places well beyond.
True, some whole countries, and many people even in rapidly growing places like China or especially India, remain terribly poor. Out of the 6.7 billion people on the planet the terribly poor constitute a “bottom billion,” thankfully shrinking, but for the present suffering the appalling $3 a day that had been the human lot since the African savannah. Some hundreds of millions live on a bare dollar, sleeping on mats on the streets of Mumbai. Some 27 million are literal slaves, such as the Dinkas in Sudan. And many girls and women worldwide, as in much of Afghanistan, are held in slavish ignorance. Yet the share of the terribly poor and the terribly unfree in world population is now falling faster than at any time in history. World population has in fact been decelerating since the 1970s, and in a few generations will actually start falling. Look around you at modern family sizes.
In fifty years, if things go as they have since 1800, the terribly poor will have become adequately nourished. Slaves and women will be largely free. The environment will be improving. And the ordinary person worldwide will have become bourgeois. In 1800 there were good reasons to be pessimistic—though many people in that bright dawn were in fact optimists. Nowadays, although an age of widely circulating tales of impending catastrophe, there are many more reasons to be optimistic about our future.
In a good deal of the world the optimistic outcome has already happened. Marxists have long been vexed by the complacently bourgeois character of the American working class. The economic historian Werner Sombart asked in 1906, “Why is there no socialism in the United States?” and answered that “all socialist utopias come to grief on roast beef and apple pie.” It turned out that the prosperous Americans were merely showing the way for the British and the French and the Japanese. We seem to be on track to merge not into a universal class of the proletariat but into a nearly universal class of the innovative bourgeoisie. (I use the French word bourgeoisie in its wide sense, as the hiring or owning or professional or educated class [bourgeois, without the -ie on the end, “boor-zhwa,” is the adjective, and is also the male person of the class, singular and plural], usually in towns, the “middle class.” I do not use it in its frequent Marxist sense as la haute bourgeoisie, the class of captains of industry alone.) Your physical therapist, now earning $35 an hour, or $280 a day, working for AthletiCo, who went to university and then to graduate work and now to continuing education, does not regard himself as a wage slave. He works four days a week, and his wife, also a physical therapist, three. He and she can at any moment become a little company in private practice. The relations of production no longer tell much about the mentality or the prospects of hired labor. You work for a wage. Do you feel immiserized? Reflect, oh dear bourgeois-by-education reader, on the real and demeaning poverty of your own ancestors in 1800, and offer thanks to the Bourgeois Era and to the Age of Innovation.
In 2007 the economist Paul Collier observed that for decades “the development challenge has [been thought of as] a rich world of one billion people facing a poor world of five billion people. . . . By 2015, however, it will be apparent that this way of conceptualizing development has become outdated. Most of the [formerly poor] five billion, about 80 percent [or four billion], live in counties that are indeed developing, often at amazing speed.” Collier is right, and the sums in 2015 will be more like six billion rich or richifying people facing a bottom billion of persistently poor. Witness richifying China and India nowadays—places still poor by the standard of Hong Kong or Belgium, but growing in real income per head at amazing, unprecedented speeds, twice or three times faster than other countries—7 to 10 percent per year. Their growth rates are faster than the rates at which the United States or Japan ever grew, and imply a quadrupling of human scope every twenty or fourteen years, in a short generation. In two such generations their real incomes per head will have risen by a factor of sixteen, to the $48 a day the United States enjoyed in the 1940s. The fact provides some scientific ideas about what to do for the bottom billion or so.
Yet Collier also says that “since 1980 world poverty has been falling for the first time in history.” That last is mistaken (though perhaps he means the absolute numbers of poor people instead of their share, in which case maybe he is right). As a share of all the world’s population the world’s poverty has been falling not for two decades but for two centuries. A higher and higher share have become since 1800 those $30- or $48- or $137- or $280-a-day folk, in the top four to six billion. Witness again Norway and Japan, once abysmally poor. The history provides some scientific ideas about how we got here and where we are going.
The last two centuries worldwide favored the ordinary person, especially a person who lived in a bourgeois country. Consider a third cousin once removed of mine, thirty-five-year old Eva Stuland, in Dimelsvik on the Hardanger Fjord of western Norway. In 1800 our mutual ancestors had been $3-poor. Compare Bangladesh. Yet by now, ten generations further on, the honest, educated, and oil-blessed Norwegians have the second-highest average income in the world. Expressed in American prices of 2006 it is fully $50,000 a year for every man, woman, and child, that $137 a day. (Tiny Luxembourg ranks first out of 209 countries at $60,000 a head; closed-citizenship Kuwait ranks third at $48,000; and the big U.S.A. lumbers along at merely fourth, $44,000—nonetheless a stunning increase over the U.S.A. in 1900 or 1950, and most stunningly for the American poor.) Fru Stuland consumes with her $137 a day a good deal of Belgian chocolate and a summer home in the mountains and a nice little Audi (her husband Olaf has the BMW). Her daily earnings are of course much higher than $137—compare the AthletiCo therapist—because the average consumption per Norwegian includes allotments for Eva’s young children and for her parents and her grandmother on pensions. She and the rest of the Norwegians work fewer hours per year than the citizens of other rich countries, and many fewer hours than the workaholics in Japan or the U.S.A. At birth Eva could have expected to live to age eighty-five. Her own two children will probably live even longer, and certainly will be even better off financially than she is, unless they decide on careers in fine arts or charitable works—in which case the satisfactions from such sacred careers amount to income. Norway contributes more per capita to international governmental charities than any other country. Eva supports nonviolent and democratic institutions. She graduated from the University of Bergen, studying mathematics. She works as an actuary in an insurance company, getting six weeks of paid vacation a year in Sicily or Florida. Her husband (who is by no means her lord and master) worked as a diver on the oil rigs for a few years, but now is deskbound at Statoil’s regional office. As a girl at school Eva read many of the works of Ibsen in Norwegian, and a couple even of Shakespeare in simplified English. She’s been pleased to attend performances of both at the National Theatre in Oslo over the mountains. Her home resonates with recordings of the music of Edvard Grieg, who in fact was a not-so-distant relative on her mother’s side.
Why did it happen? How did average income in the world move from $3 to $30 a day? How did the Norwegians move from being poor and sick and marginally free and largely ignorant to being rich and healthy and entirely free and largely educated?
The main point of this book is that the hockey-blade leaps, such as Norway’s from $3 to $137 per head, with its cultural and political accompaniments, did not happen mainly because of the usual economics. That is, they did not happen because of European trade or Dutch investments 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—a matter of incomes and property and incentives and relative prices. If a historian doesn’t grasp the economics he 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 wrought 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 burned wood and charcoal many decades 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, England, or to Manchester, New Hampshire, or why indeed the cotton growers of the present-day African Sahel are damaged by protection for American cotton. Economics can explain why a comparative advantage in making cloth out of cotton 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, not to speak of $137 a day. That is the main scientific point of the book. Economics can’t explain the blade of the hockey stick. It can’t explain the onset or the continuation, in the magnitude as against the details of the pattern, of the uniquely modern—the widespread coming of automobiles, elections, computers, tolerance, antibiotics, frozen pizza, central heating, and higher education for the masses, such as for you and me and Eva. If an economist doesn’t grasp the history she will not understand this most important of modern historical events. An economics of a bourgeois or Marxist sort does not account for the unprecedented size and egalitarian spread of the benefits from growth, only the details of its pattern. Material, economic forces, I claim, were not the original and sustaining causes of the modern rise, 1800 to the present. Economics does most usefully explain how the rising tide expressed itself in microgeographical 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.
What then? I argue here, and in complementary ways in the two volumes to follow, that innovation (not investment or exploitation) caused the Industrial Revolution. Many historians and economists would agree, so there’s not much that is surprising in that part of the argument. But I also argue—as fewer historians and very few economists would—that talk and ethics and ideas caused the innovation. Ethical (and unethical) talk runs the world. One-quarter of national income is earned from sweet talk in markets and management. 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. The economists and their eager students choose Prudence Only, to the exclusion of the other virtues that characterize humans—justice and temperance and love and courage and hope and faith—and the corresponding sins of omission or commission. The theorists of prudence forbid ethical language, even in the word-drenched scene of banking. Such a reduction to Prudence Only works reasonably well in some parts of the economy. You’ll do well to choose Prudence Only, and silent incentives, when trying to understand covered interest arbitrage in the foreign exchange markets. But it doesn’t explain the most surprising development of all.
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 high theorists were emboldened to rethink their prejudice against the bourgeoisie, a prejudice by then millennia old. (Sadly, the talk and prejudice and theory along such lines didn’t alter right away in China or India or Africa or the Ottoman lands. By now it has, despite resistance from European progressives and non-European traditionalists.) The North Sea talk at length radically altered the local economy and politics and rhetoric. In northwestern Europe around 1700 the general opinion shifted in favor of the bourgeoisie, and especially in favor of its marketing and innovating. The shift was sudden as such things go. In the eighteenth and nineteenth centuries a great shift occurred 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 in the Basilica of St. Peter or the Palace of Versailles or the gory ground of the First Battle of Breitenfeld.
To speak for a moment to my economist colleagues, some of us have saved our models in the face of a dawning realization of how radical the development was in the eighteenth and especially in the nineteenth and twentieth centuries by speaking of “nonlinearities” or “economies of scale” or “multiple equilibria.” Though such tricks are fun to think about, they don’t work scientifically. Some other economists, now led by an astonishing group of economic historians with a serious focus on growth theory and growth theorists with a serious focus on history, argue instead that Europe, and especially Britain, was preparing for the blade of the hockey stick for centuries. The new history has a theme similar to an old history attributing Europe’s excellence to its ancient civilization, Christian and humanist, from Israel and Greece, and the Germanic tribes in the forests. The trouble is, as the best among the economists admit with puzzlement, that India and the Arab lands and Iran and China and especially Japan were equally excellent and ready. Many such rich areas long before had the low interest rates and good property laws praised by the economists—China in the seventeenth century, Northern Italy in the fifteenth century, the Arab world in the tenth century, Rome in the first century. But for millennia no blade of the hockey stick ensued. When ideology changed, it did.
I am claiming that the economy around the North Sea grew far, far beyond expectations in the eighteenth and especially in the nineteenth and most especially in the twentieth century not because of mechanically economic factors such as the scale of foreign trade or the level of saving or the amassing of human capital. Such developments were nice, but derivative. The North Sea economy, and then the Atlantic economy, and then the world economy grew because of changing forms of speech about markets and enterprise and invention. Technically speaking (I continue saying to my economist colleagues), the new conversation caused the dimensions of the Edgeworth box to explode. Pareto-optimal reallocation by exchange within a fixed box, or reallocation by aggression along the contract curve, or the modest expansion of the box achievable by investment, was not what happened—though it is these three which economists want most to talk about, because they understand them so well. On the contrary, the production possibility curve, the dimensions of the Edgeworth box, leapt out, radically, and from the point of view of conventional economics, inexplicably.
The argument in truth should not shock a thoughtful economist. All economists have realized since the 1870s that economics is something that happens between people’s ears. The economists learned so from the various forms of neoclassical economics Mengerian or Marshallian, or from institutionalism or from modern Marxism). Valuations, opinions, talk on the street, imagination, expectations, hope are what drive an economy. In other words, you don’t have to be a materialist, denying the force of ideas, just because you are an economist. Rather to the contrary. One of the leading contributors to the new growth theory, Robert Lucas, declared that “for income growth to occur in a society, a large fraction of people must experience changes in the possible lives they imagine for themselves and their children. . . . In other words . . . economic development requires ‘a million mutinies.’” Lucas’s formulation is more psychological than the sociological and rhetorical one proposed here. But in any case, to believe that habits of the lip changed in the seventeenth and especially the eighteenth century, for various good and interesting reasons—some in turn material, some autonomously rhetorical—does not deny conventional economics a place. It merely takes speech seriously within the economy and the society. It initiates a humanistic science of the economy, “humanomics” as the economist Barton Smith calls it. Speech, not material changes in foreign trade or domestic investment, caused proximally the nonlinearities, or (expressed in more conventional theorizing) the leaping out of the production possibility curve, the imaginings of possible lives. We know this empirically in part because trade and investment were ancient routines, but the new dignity and liberty for ordinary people were unique to the age. What was unique was a new climate of persuasion, out there in the shops and streets and coffeehouses populated by the bourgeoisie. As I shall try to persuade you, oh materialist economist.