Why Economics MUST Explain the Modern World

Economics pulls in neophytes with a grand and exciting vision of the world: people are highly responsive to incentives, differences in incentives explain all major variations in wealth and poverty across societies, and easy institutional changes will create the incentives to launch a brave new world. This is the buzz that animates Freakonomics, the book, and now the movie. This is the vision that led Roland Fryer, Professor of Economics at Harvard University, to offer students in the New York, Chicago, and Washington, DC school systems “cash for grades.”

Deirdre McCloskey earlier in her career did stellar work advancing this program in economics — her virtuoso writings recruited me to the study of the history of economies. But having over many years considered the general problem of economic growth, and the specific puzzle of the timing and location of the Industrial Revolution, McCloskey has come to a stunning epiphany. This is that incentives explain very little of the huge gaps in wealth across the world. Growth is a cultural production, a society wide embrace of “bourgeois virtues.” Specifically, she claims, growth came because the activities of marketing, profiting, and innovating have become in our society uniquely respected, admired and praised. The rise of the Bourgeois Virtues has created societies such as those of Northern Europe, so primed for growth that even though the grabbing hand of the state is on every shoulder, people continue to produce and innovate.

I fully agree with McCloskey about the surprisingly poor ability of incentives alone to account for growth. In order to hold on to the central idea that the 10,000-year delay in the Industrial Revolution from the first appearance of settled agriculture was created by a lack of incentives, economists have to maintain the collective fiction that all societies before 1800 were run along the lines of Kim Jong-Il’s North Korea. Yet, in case after case, we find, deep in the 10,000 years of economic stagnation, fully incentivized market societies.

Go to any village in Suffolk in England in the years of the Poll Tax, 1377-81 and you will find in the tax lists an abundance of traders, craftsmen, and merchants.[1] Go to the records of Oxford University in 1500 and you will find the descendants of those traders and craftsmen, revealed by surnames such as Smith and Baker, had become within a few hundred years nearly fully incorporated into the elites of medieval society. Go to Paris in 1300 and you will find living cheek by jowl with the locals Scots, English, Italians, Flemish, and Jews. Medieval cities were hives of enterprise and industry, taxed lightly by kings fearing to kill the golden goose. London, among others, was almost as polyglot in 1300 as it is today. And the clay tablets of ancient Sumer bear testament to the deep antiquity of the market. Yet these societies had extremely low rates of growth. The market and incentives predate modern growth by perhaps 10,000 years.

Similarly when we see U.S. cities such as Detroit collapse internally, and revert to wasteland, it is not because the inhabitants of these benighted places were offered any worse incentives than their suburban neighbors. It is because the inhabitants responded differently to these same incentives, and in a way that was destructive to economic activity.

But while I share McCloskey’s view, and that of Joel Mokyr in his recent The Enlightened Economy, that a shift in behaviors and values is the foundation of modern growth, and the true underpinning of the prosperous societies of the modern world, I cannot accept their view that growth culture is sui generis, the product of transient and ineffable intellectual fashions.

McCloskey’s own précis of her argument after all is, “Through a ‘Bourgeois Revaluation’ redefining such virtues, first in the Netherlands and then in Britain, people started accepting [my emphasis] the creative destruction of innovation.”[2]

This makes the supposed admiration of bourgeois virtue in seventeenth and eighteenth century England and the Netherlands seem as accidental as the fashion for powdered wigs in the early eighteenth century, or the fall from favor of the codpiece after the 1590s. In that case we have no account for why the Industrial Revolution waited so long. Why didn’t the right intellectual fashion emerge some time earlier in the 10,000 years of settled agriculture?

And if admiration for bourgeois virtue is like any other fashion, then we have no assurance that bourgeois virtue can survive the combined assault of Facebook, Fox TV, Twitter, Jersey Shore, and Paris Hilton. Modern high-income societies may be as transient as Athenian democracy, or the Paris Commune. Fashions are cyclical. We know that in some future society, men will once again proudly sport codpieces. Why must we not also assume, then, that in time bourgeois virtue will once again be despised, innovation cease, and the world slip back into the stasis that comprised most of human history?

If cultural shift is the foundation of modern high-income societies, then there must be an explanation for why that cultural shift took so long, why it took the direction it did, and why it seems a permanent change. For I agree with Matt Ridley in The Rational Optimist that the Industrial Revolution was an event from which there will be no going back.

Another reason I am wary of the public embrace of bourgeois virtues as a world historical force is that what people admire or disapprove of, and what they actually do are so frequently disconnected. Most people believe now that burning more fossil fuels will potentially devastate the planet. But Big Oil has little difficulty in recruiting the talented and driven engineers that allow it year by year to tap even deeper and more inaccessible deposits of the precious black fluid. The amount of actual reduction in fossil energy use in the modern United States is tiny compared to the emotional and intellectual energies devoted to this. There is just too much wriggle room between ideologies and acts for the one to constrain the other very tightly. China — home of a whole coterie of billionaires — is after all still a communist regime.

I believe modern growth is associated with a deeper, more basic shift in values and capacities than McCloskey identifies for a number of reasons. First, the behavioral shifts that took place in societies like England before the Industrial Revolution were much longer in development than some brief intellectual fashion of the seventeenth and eighteenth centuries. England already in 1300 was a fundamentally different type of society than that of our hunter-gatherer forbears. We are talking in some cases about at least 3,000 years of change.

Second, behaviors changed that people were not even aware of, or subjecting to public discussion. These fundamental changes include changes in how impatient people were, changes in how hard they liked to work, and changes in how much interpersonal violence they displayed. [3]

Third, the drive toward innovation, improvement, and consumption that moves capitalism ever forward is remarkably resistant to attempts at reformation. Mao could re-educate a whole generation of Chinese on the virtues of communism, yet they have turned en masse to a fervent pursuit of material goods and personal interest within two decades of his death.

If we are forced by the facts to embrace culture as the vital economic force, then we need to work towards a scientific theory of culture. Any such theory, I think, has to be Darwinian at its core, founded in evolutionary anthropology. For in human society the success that matters for the long-run dynamics of the society is not your lifetime consumption, but instead your success in replicating your behaviors and capacities in the next generation, some of which is encoded in genetic inheritance. Evolutionary anthropology has wrestled with the problem of the seeming too-great plasticity of human cultures, if culture is to be rooted in the common pressures of an evolutionary past. But there is a vast range of human behavior that must have an evolutionary rooting in maximizing reproductive success in past environments. North Korea, for example, is a bizarre regime that has broken radically from other societies. But when its leaders look for successors, they look to their children, in the timeless fashion of absolute rulers of old, as would be predicted by evolutionary anthropology.

Thus McCloskey is right to emphasize the importance of values and behaviors in modern economic growth. But she is wrong to frame these changes in values in a way that makes them as predictable and explicable as the 1970s craze for platform shoes.

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Notes

[1] The Poll Tax did lead to a significant tax revolt movement, a sort of medieval Tea Party, which causes some disruption and a few deaths before being swiftly suppressed, though with no further Poll Taxes attempted in England until Margaret Thatcher. But the tax that led to this brief convulsion of revolt was equivalent to three days’ wages. A derisory morsel compared to the taxing appetites of modern governments.

[2] http://www.deirdremccloskey.com/weblog/2009/09/25/the-argument/

[3] See Clark, 2007.

References

Clark, Gregory. 2007. A Farewell to Alms: A Brief Economic History of the World. Princeton: Princeton University Press.

Mokyr, Joel. 2010. The Enlightened Economy: An Economic History of Britain 1700-1850. New Haven: Yale University Press.

Ridley, Matt. 2010. The Rational Optimist: How Prosperity Evolves. Harper.

Also from This Issue

Lead Essay

  • Bourgeois Dignity: A Revolution in Rhetoric by Deirdre McCloskey

    In this month’s lead essay, Deirdre McCloskey summarizes the argument of her forthcoming book, Bourgeois Dignity: Why Economics Can’t Explain the Modern World. She argues that while the modern world rode an economic tide, the tide did not have economic causes. Changes in thinking and, yes, in rhetoric did the real work. Neither thrift, nor greed, nor the Protestant ethos are at the heart of this transformation, which brought material prosperity to whole classes that had never before known it. A variety of possible causes must be dismissed, she argues, from foreign trade, to legal institutions, to coal. The dignity and liberty of the bourgeoisie are the keys to economic transformation.

Essays

  • Don’t Dismiss the Materialist Explanation by Matt Ridley

    Matt Ridley makes two connected points: First, surges in creativity and innovation are far from unique. They can be observed throughout history, and they are usually connected to increases in trade and specialization. In this sense, Britain during the eighteenth century was not exceptional.

    Second, however, Britain was exceptional in another respect – it had large reserves of coal, and it began putting them to use. Cheap energy helped ensure that the boom in innovation didn’t die out. Entrepreneurs won out against plunderers in part because they had this resource at their disposal, and because they could make the case for the benefits of innovation so easily. It was only after the switch to a coal-driven economy that wages finally began to rise for the typical British worker. They continue to do so today thanks to coal and to other sources of cheap energy that have since been discovered and exploited.

  • Unleashing Creative Development by Jonathan Feinstein

    Jonathan Feinstein suggests that the revolution in human creativity is still underway, and that we have not yet fully recognized what it means to be creative. The science of creativity, he argues, is key here, as the creative process is very different from what most people imagine it to be.

The Conversation