It took more than capital accumulation to ignite the Industrial Revolution — it took a paradigm shift in how Westerners thought about commerce. Now, we're seeing the same shift play out in Asia.
"The big economic story of our own times is not the Great Recession, unpleasant though it was. The big story is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy."
Why do big leaps like the Industrial Revolution happen, if not economic forces?
Because it was an utterly unprecedented and extraordinarily big leap, the Industrial Revolution and its outcome. Economics is not good at big leaps.
How big? In 1800, the average income per person per day was, in present-day money, anything from $1 to $5. Call it an average $3 a day. Imagine living in present-day Chicago on $3 a day: For a whole day's living, merely 3/4ths of a cappuccino at Starbucks. Appalling.
By now, in the numerous places that have adopted bourgeois liberty and dignity, it is over $100 a day. And that doesn't take account of the great improvement in the quality of many goods and services, from electric lights to antibiotics. People in Japan and Norway and Italy are, in these conservatively measured terms, around 30 times better off in material circumstances than their ancestors. All the other leaps into the modern world are firmly attached to that one: democracy, liberation of women, improved life expectancy, greater education, spiritual growth, artistic explosion.
It is so big, so unprecedented, this great fact, that it's impossible to see it as coming out of routine causes such as trade or exploitation or investment or imperialism. That's what economists are good at explaining: routine. Yet all the routines had occurred on a big scale in China and the Ottoman Empire, in Rome and South Asia. Slavery was common, trade was large, investment in grand canals and Roman roads was immense. Yet no "great fact" ensued. In other words, something is deeply fishy with explanations of the usual economic sort. Yet economists, naturally, want to stick by them.
Why can't--as the subtitle of your book says--economics explain the modern world?
Economics is of two main types, neoclassical and Marxist. (To which can be added neo-institutionalism, which depends on neoclassical arguments, too.) Both of them put capital accumulation at the heart of economic growth. Pile brick on brick, BA on BA, machine on machine, and we shall be rich. The chief difference between the two schools is that the neoclassicals think the accumulation comes from voluntary savings and the Marxists think it comes nasty exploitation. Yet both subscribe, you see, to what the economist William Easterly calls Capital Fundamentalism. Accumulation of capital made the modern world, they proclaim. No it didn't, say an increasing number of economists since Robert Solow in 1957. It came, we economists and economic historians have decided, from innovation--that is, from new ideas about making stuff and providing services and organizing the economy.
So if economics is confined to these two (and a half) schools, then it can't explain such an increase as a peculiar factor of 30 and more. I conclude--unhappily, because I am a former Marxist--well ? at least a Joan Baez Trotskyist, who became a professional neoclassical economist!--that the schools are looking in the wrong direction. Another school, the so-called "Austrian" one, has got it more right: The dark energy of the modern world is innovation. The capital accumulation followed the innovation. It was, as economists say, elastically supplied. That is, it was easy to come by once the new ideas about making goods and services happened.
What changed that enabled the Industrial Revolution to get off the ground, so to speak?
What changed was sociology and politics, the dignity and the liberty for the middle class--the bourgeoisie. The bourgeoisie is the innovative class, as in 1848 Marx and Engels correctly asserted. The aristocracy and the peasantry and the clergy have long detested the middle class, as vulgar profit-seekers. In my first book in the multivolume, "Bourgeois Era" series I'm writing, The Bourgeois Virtues: Ethics for an Age of Commerce, I discuss whether the detestation is justified. I conclude: No.
In the present book, I argue that the society of Holland, first, then England and Scotland and British North America, and then Europe, and then the world, started admiring innovators and marketeers and manufacturers. Or at least they started not detesting them as much as was traditional in China and Europe and virtually everywhere in olden times. Ben Franklin and Adam Smith are good examples of the new talk, the one a practitioner, the other a theorist of "bourgeois virtues." So the world signed on to what I call "The Bourgeois Deal"--you let me innovate, and don't steal from me after it succeeds, and in the long run I'll make you rich. And that's what happened.
When you say that "innovation" drives a creative economy, how do you define it?
I mean any smart move that increases the size of the social pie, what Joseph Schumpeter called "creative destruction." The good innovation really does make an offer that the society can't refuse. It doesn't always benefit every single person, but it benefits the average person, and contributes to that rise from $3 economies to $100 economies. Blacksmiths were made poorer when Model Ts replaced horses. That's why it's called creative destruction. On balance we are much, much better off with cars than with horses. But it's the same in the realm of ideas or of art, and we wouldn't want to restrict such exercises of liberty. When Einstein in 1905 revolutionized physics, he put out of business a lot of physicists who had theorized that the world was strictly Euclidean and Newtonian.
What do your conclusions about the rise of the Industrial Revolution tell us about the modern world and the modern economy?
It tells us, as the economic historian Joel Mokyr put it in a recent book making an argument similar to mine, "Economic change in all periods [and, he and I would emphasize, especially from the 17th century on] depends, more than most economists think, on what people believe." The big economic story of our own times is not the Great Recession, unpleasant though it was. The big story is that the Chinese in 1978 and then the Indians in 1991 adopted liberal ideas in the economy, and came to attribute a dignity and a liberty to the bourgeoisie formerly denied. And then China and India exploded in economic growth. The important moral, therefore, is that in achieving a pretty good life for the mass of humankind, and a chance at a fully human existence, ideas have mattered more than the usual material causes.
Your approach to the study of economics does tend to take more of an interdisciplinary approach, incorporating from the humanities. Why work this way, as opposed to a purely quantitative approach?
Conventional economics is the pure theory of the virtue of prudence, know-how, savoir faire. Prudence is a virtue. For decades I did that sort of scientific work, and love it still. But maximizing utility--which is the economist's phrase for a prudent activity--is not all there is to human life, even in the economy. Businesspeople know that their decisions are made with prudence in mind, of course, but also with hope for the future, faith in their identity as people of integrity, justice towards their employees, temperance in dealing with customers, courage in venturing on innovations such as changing the location of the factory or bringing a new routine to the office or installing new machines. And a businessperson who does not love is a shallow, pointless human being. So a full economic science has to deal with all of the seven principal virtues of the Western tradition (one can find similar lists in the East and South): prudence, the most characteristically bourgeois of the list; but also courage, temperance, justice, and faith, hope, and even love. Ask yourself, does such a list of economically relevant virtues sound like something that could be greatly illuminated by studying Homer and Confucius, Plato and Wittgenstein? I think so, and so does a very small but growing group of economists.