Part V. Saving, Investment, Greed, and Original Accumulation Do Not Explain Growth

How, then? How and why did the first Industrial Revolution happen, with its astonishing follow-on in the nineteenth and twentieth centuries? In this book we specialize in widely believed explanations that don’t work very well. One widely believed explanation is thrift.

The word “thrift” in English is still used as late as John Bunyan to mean simply “wealth” or “profit,” deriving from the verb “thrive” as “gift” from “give” and “drift” from “drive” (the derivation was still vibrant in 1785 to a scholarly poet like William Cowper, who laments the working poor in The Task [17 ; Book IV], “With all this thrift they thrive not”). But its sense 3 in the Oxford English Dictionary is our modern one, dating significantly from the sixteenth century: “so I will if none of my sons be thrifty” (1526); “food is never found to be so pleasant . . . as when . . . thrift has pinched afore” (1553).

The modern “thrift,” sense 3, can be viewed as a mix of the cardinal virtues of temperance and of prudence in things economic. Temperance is the cardinal virtue of self-command facing temptation. Lead me not into temptation. Prudence, by contrast, is the cardinal virtue of practical wisdom. Give us this day [a way to make prudently and laboriously for ourselves] our daily bread. It is reason, know-how, savoir faire, rationality, getting allocation right. Prudence lacking temperance does not in fact do what it knows it should thriftily do. Temperance lacking prudence, on the other hand, does not know in practice what to do. A prudent housewife in the “Ladder to Thrift,” as the English agricultural rhymester Thomas Tusser put it in 1580, “makes provision skillfully.”¹ Without being full of skill, that is, prudent, she does not know how to be thrifty in saving tallow for candles or laying up salt mutton for Eastertide.

Prudent temperance has in a sense no history, because it happens by necessity in every human society. The Hebrew bible, for example, speaks of thrift, though not very often, usually associating it with diligence: “The sluggard will not plough in the autumn by reason of the cold; therefore shall he beg in [the] harvest, and have nothing”; “Seest thou a man diligent in his business? He shall stand before kings” (Proverbs 20:4; 22:29). Jesus of Nazareth and his tradition used parables of thrift to point to another world, though again the parables of thrift are balanced by parables of liberality, such as changing water into wine to keep the party going. “Eat and drink,” advises the Koran, “but do not be wasteful, for God does not like the prodigals” (7:31). In the Koran, as in the Jewish and Christians books, thrift is not a major theme.

Of course other faiths than the Abrahamic admire on occasion a prudent thrift. The Four Noble Truths of Buddhism, to be sure, recommend that life’s sorrow can be dissolved by the ending of desire, in which case advice to be thrifty would be somewhat lacking in point. Be “thrifty” with your modest daily bread in your monk’s cell? Buddhism is similar in this respect to Greek and Roman stoicism, which advocated devaluing this world’s lot, an inspiration early and late to Christian saints of thriftiness. But Buddhism allows for prudent busy-ness, too. The “Admonition to Singâla” is in the Buddhist canon “the longest single passage . . . devoted to lay morality.”² Buddha promises the businessman that he will “make money like a bee” if he is wise and moral:

Such a man makes his pile
As an anthill, gradually.

And then it counsels an astounding abstemiousness far beyond that contemplated even in Max Weber’s worldly asceticism:

He should divide
His money in four parts;
On one part he should live,
With two expand his trade,
And the fourth he should save
Against a rainy day.

The rate of savings recommended is fully 75 percent—though with no allowance for charity, which made Buddhist commentators on the text uneasy.

In England the thirteenth-century writers of advice books to Norman-English landowners start with a little bit on thrift and then go on to the prudent details of managing an agricultural estate. The third paragraph of The Husbandry by Walter of Henley, after a bow in the second paragraph to the sufferings of Jesus, prays “that according to what your lands be worth yearly . . . you order your life, and no higher at all.”³ And then in the same vein for five more paragraphs. The anonymous Seneschaucy, written like Walter in Norman French in the late thirteenth century, instructs the lord’s chief steward “to see that there is no extravagance. . . on any manor . . . . and to reduce all unnecessary expenditure. . . which shows no profit. . . . About this it is said: foolish spending brings no gain.”⁴ The passage deprecates “the practices without prudence or reason” (lez maners saunz pru e reyson). So much for a rise of prudence, reason, rationality, Calvinist asceticism, and thrift three or four centuries later. From the camps of the !Kung to the lofts of Chicago, humans need to live within their incomes, being by their own lights “thrifty.”

The prehistory of thrift, in other words, extends back to the Garden of Eden. It is laid down for example in our genes. A proto-man who could not gain weight thriftily in feast times would suffer in famine and leave fewer children, and therefore his descendent in a prosperous modern society needs irritatingly to watch his weight. Prudent temperance does not require a stoic or monkish or Singâla abstemiousness. A ploughman burning 3000 calories a day had better get them somehow. One should be thrifty in eating, says Tusser, but not to the point of denying our prudent human solidarity:

Each day to be feasted—what husbandry worse!
Each day for to feast is as ill for the purse.
Yet measurely feasting with neighbors among
Shall make thee beloved, and live the more long.”⁵

And so too actual luxury, the opposite of thrift. “Depend on it, sir,” said Samuel Johnson in 1778, “every state of society is as luxurious as it can be. Men always take the best they can get,” in lace or food or education.”⁶ Marx noted cannily that “when a certain stage of development has been reached, a conventional degree of prodigality, which is also an exhibition of wealth, and consequently a source of credit, becomes a business necessity. . . . Luxury enters into capital’s expenses of representation.”⁷ It sounds plausible enough. Otherwise it would be hard to explain the high quality of lace on the collars of black-clad Dutch merchants in paintings of the seventeenth century, or indeed the Dutch market for the paintings in their hundreds of thousands that reflected back in oily richness the merchants and their world.

The average English and American-English person from the sixteenth through the eighteenth century, then, surely practiced thrift. But this did not distinguish her from the average English or American-English person before or after, or for that matter from the average person anywhere on Earth since the Fall. “‘My other piece of advice, Copperfield,’ said Mr. Micawber, ‘you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.’ . . . To make his example the more impressive, Mr. Micawber drank a glass of punch with an air of great enjoyment and satisfaction, and whistled the College Hornpipe. I did not fail to assure him that I would store these precepts in my mind, though indeed I had no need to do so, for, at the time, they affected me visibly.”⁸

Thrift in the sense of spending exactly what one earns is indeed forced by accounting. Not having manna from heaven or an outside Santa Claus, the world must get along on what it gets. The getting and spending must happen if the free gifts of nature such as sunlight are to be of any use. If we do not at least hunt or gather, we do not eat. The world’s income from the effort must equal to the last sixpence the world’s expenditure, “expenditure” understood to include investment goods. So too Mr. Micawber. If he spends more than he earns he must depend on something turning up, such as a loan or a gift or an inheritance. He draws down his credit. In the meantime his transfers from his diminishing balance sheet—what he owns and owes—pays to the last sixpence for his glass of punch and his house rent.

Thrift in the sense of spending less than one earns and thereby accumulating investments is again a matter of accounting. You must allocate everything you earn somehow, to bread or bonds or house-building. If you can resist consuming soft drinks and other immediate consumption goods, “abstaining from consumption” in the economist’s useful way of putting it, you necessarily save. That is, you add to your bank account or to your investment in education or in battleships. But of course you can allocate foolishly or well, to bombs or to college educations, to glasses of punch or to a savings account.

There is nothing modern about such accounting. It comes with life and the first law of thermodynamics, in the Kalahari or in Kansas City. In particular the pre-industrial European world contrasted with modern times needed urgently to abstain from consumption, “consumption” understood as immediate expenditures that are not investments in some future. Yields of rye or barley or wheat per unit of seed planted in medieval and early modern agriculture were extremely low: only 3 or 4—they are 50 or so now for wheat, and 800 for maize. (In monsoon Asia the flooding rains allow the cultivation of rice, which has always had a high yield-seed ratio, with the additional benefit that the annual and sometimes biannual flooding fertilized and weeded the fields, without plowing. Rice was introduced by the Muslims into Spain and Sicily, and it spread by the fourteenth century into, say, the Po Valley in northern Italy. But it was not raised in the flooding way of the East, and of course it was never grown in northern Europe.”⁹ ) The low yields forced Europeans in the good old days if they did not want to starve next year to refrain from a great deal of consumption this year. That is, one quarter to one third of the grain crop had to go back into the ground as seed in the fall or the spring, its fruit to be harvested the next September. It had better. In an economy in which the grain crop was perhaps half of total income, that portion alone of medieval saving implied an aggregate saving rate of upwards of ½ times ¼, or 12 percent. The rate of saving in modern industrial economies is seldom above 10 or 20 percent. No wonder there was little savings available for trying out innovations, and the less so because the crops were variable. Medieval life was precarious, and innovation correspondingly dangerous.

The trade in grain was restricted to the parts of Europe served by rivers and seas, since overland cartage was enormously expensive when roads were mere tracks through mud — and even water transport was usually expensive as a share of the price. The price of wheat in Valencia, Spain in 1450 was 6.7 times the price in Lwow, Poland (by 1750 it had fallen to a few percentage points of difference).”¹⁰ Therefore local grain storage for local consumption was also high by modern standards. In recent times if the grain crop does poorly in America the market easily supplies the deficiency from the other side of the world. In the late Middle Ages some grain did flow from the Midlands to London or from Burgundy to Paris. But it began to flow to Western Europe in large amounts from as far away as Poland only gradually in the sixteenth and seventeenth century, by the efforts of thrifty Dutch merchants and shipbuilders. Only in the nineteenth century did it come from as distant a clime as Ukraine or, later, North and South America, or finally Australia. Until the eighteenth century therefore the grain crops in the narrow market tended to fail together. The potato famine of the 1840s was the last big replay in Europe of a sort of undiversified catastrophe commonplace there in the 1540s and more so in the 1340s. Grain storage, in other words, amounted to another desperate form of saving, crowding out more modern forms of investment.”¹¹ In such circumstances you stored grain in gigantic percentages of current income, or next year you died (in West Germanic languages except English, and in English itself until modern English, the word cognate with “starve” [for example, German sterven] is the main word for “die”).

Such desperate scarcities were broken in the New World of British Americans, who ate better than their Old—World cousins within a generation of the first settlements. It was not a remarkable achievement, considering that the rivers were full of fish and the woods full of game, and that their English cousins were then passing through the worst times for the workingman since the early fourteenth century.”¹² Plentiful land in Massachusetts or Pennsylvania, at any rate on the literal frontier, made it unnecessary to save so much in grain, and freed the forced thrift for other investments.

But notice: although the North American English became even in the late seventeenth century pretty well off by the poor British standards, and therefore freed from using up its savings protecting next year’s grain crop or grain store (which anyway was in good part Indian corn with a high ratio of yield to seed), British North America was by no means the home of the Industrial Revolution. It was too small, too tempted by agriculture, too far away from a mass of consumers, or for that matter too restricted by British mercantilism. The northeast of the United States, like southern Belgium and northern France, was to become a close follower, of course, in the 1790s and 1800s. “Yankee ingenuity” is not a myth, as the quick industrialization of New England was to show. The North American colonies did indeed contain many ingenious inventors willing to get their hands dirty. Even the slave areas were not inventive deserts by any means: look at Jefferson’s ingenuity, and the improvement of cotton varieties. But the leaders of industrialization, from the 1760s, were northwest England and lowland Scotland. These were lands of grindingly necessary thrift. Yields of agriculture were still low—the real “agricultural revolution” came finally in the nineteenth century with guano, selective breeding, steel plows, cheap water transport, reaping machines, commodity exchanges, and clay-pipe drainage, not as used to be thought in the eighteenth. In short, the homeland of the Industrial Revolution was not a place of excess savings waiting to be redirected to factories.

The point is that there is no aggregate increase in thrifty savings to explain the modern world. Thrifty saving is not peculiar to the Age of Innovation. There was no rise of thrift or prudence or greed in the childhood of modernity. Actual saving was high before modern times, and did not change much with modern innovation. We were thrifty long before we were mainly urban, and long, long before we came to celebrate bourgeois dignity and bourgeois liberty and the creative destruction they wrought.

Looking at thrift in a cheerful way, the starting point used to be said to be (according to Max Weber in 1905, for example) a rise of thriftiness among Dutch or especially English Puritans. Marx characterized such classical economic tales, from which Weber later took his inspiration, as praise for “that queer saint, that knight of the woeful countenance, the capitalist ‘abstainer’.”¹³ We can join him for a moment in disbelieving the optimistic tale-noting further, and contrary to his own pessimistic version of the same tale, that abstention is universal. Saving rates in Catholic Italy or for that matter Confucian China were not much lower, if lower at all, than in Calvinist Massachusetts or Lutheran Germany. According to recent calculations by economic historians, in fact, British investment in physical capital as a share of national income was strikingly below the European norm—only 4% in 1700, as against a norm of 11%, 6% as against 12% in 1760, and 8% against over 12% in 1800.”¹⁴ Britain’s investment, though rising before and then during the Industrial Revolution, showed less, not more, abstemiousness than in the less advanced countries around it.

The evidence suggests, in other words, that saving depends on investment, not the other way round. You should by all means innovate, with a modest stake borrowed from your brother, and then earn the additional savings to reinvest in your expanding business. When in the nineteenth century the rest of Europe started to follow Britain into industrialization, its savings rates rose, too. The rest of Europe’s markedly higher rates during the eighteenth century did not cause it then to awaken from its medieval slumbers. Saving was not the constraint. As the great medieval economic historian, M. M. Postan, put it, the constraint was not “the poor potential for saving” but the “extremely limited” character in pre-nineteenth-century Europe of “opportunities for productive investment.”¹⁵

And innovation, not the sheer piling of productive investments, dominates economic growth. The late Charles Feinstein, who pioneered the estimation of the national accounts of Britain back into the mid-nineteenth century and before, disagreed. He argued that “in the earlier stages of economic development, increases in the stock of physical capital accounted for a large part of the rise in output per man hour; workers were able to produce more because they had more capital to work with.”¹⁶ Yet such capital-induced rises in output per man hour were limited. Doubling the number of horses that a plowman works with does indeed raise wheat output per man hour some — though much less than a doubling (it will raise it by 100 percent [from the doubling of the horses] multiplied by the share of horses in the cost of producing wheat, 5 percent perhaps).¹⁷ Multiplying the traditional equipment in scythes and open drains and barns without innovating does not come close to yielding a factor of sixteen. Innovating in clay-pipe under-drainage and plant breeding and forward markets and mechanical reapers and experimental stations and diesel tractors and rail car delivery systems and hybrid corn and farm cooperatives and chemical herbicides does. Feinstein knew all this, of course. He was a great and learned economic historian. He observed that “more recently [than 'the earlier stages of economic development'] . . . advances in the quality of equipment have become progressively more important.” But he could not let go of what William Easterly (2001) has called “capital fundamentalism.” Innovation “must be embodied in physical equipment,” Feinstein declared, thus retaining investment in the leading role. (His assertion is true for reaping machines and diesel tractors; but it is largely false for organizational innovations such as selective breeding.) The embodiment “made investment and saving . . . crucial to economic growth.” The assertion is true in an accounting sense — no investment, no reaping machine. But it is false in an economic sense. Attributing the Age of Innovation to piling up of capital is like attributing Shakespeare to the English language or to the Roman alphabet. Yes, he needed the language and even the alphabet. Granted. But is “crucial” the right concept of causation to use?

The supply of saving to one region such as Lancashire or one country such as Britain — even economically dominant Britain around 1840—came at a fixed rate of interest, 4 or 6 percent. The demand for saving was the usefulness of a loan to build a barn or a machine, a usefulness that economists call the “marginal product of capital.” Piling brick on brick, or even machine on machine, led to rapidly diminishing returns. Think of a bricklayer oversupplied with bricks, or a 100-acre farm with six tractors. During the 1930s and early 1940s the prospect of diminishing returns deeply alarmed such economists such as the American Keynesian at Minnesota and Harvard, Alvin Hansen.¹⁸ They believed that the technology of electricity and the automobile was exhausted and that sharply diminishing returns to capital were at hand, especially in view of declining birthrates. People would save more than could be profitably invested, the economists believed, and the economy would stagnate. In line with the usual if doubtful claim that spending on the War had saved the world’s economy, they believed that 1946 would see a renewal of the Great Depression. But it didn’t. Stagnationism proved false.¹⁹ Instead, world income per head grew faster from 1950 to 1974 than at any time in history, and the liberal countries boomed.

That is, innovation prevented the return to capital from declining. Improved washing machines and better machine tools and innovative construction techniques and a thousand other fruits of resourcefulness made people richer, and incidentally kept investment profitable. In terms an economist will understand, the demand curve for capital moved steadily rightward, and has been doing so since the eighteenth century. Tunzelmann argues that in some cases technological change works mainly through increasing the capital employed, not only by raising productivities.²⁰ (To continue with an audience of economists for a moment, the area under the marginal product of capital is of course national income as a whole. You can devise models in which saving out of the rising national income becomes innovation, which raises income, which raise innovation, in a virtuous spiral. But then you have to explain why such a mechanism only applies to the past two or three centuries. You are back to having to explain the Age of Innovation by something unique to the Age of Innovation. It can’t be wholly endogenous.²¹ ) Human resourcefulness that was rare before 1700 and increasingly common afterwards made us rich. Like Shakespeare’s alphabet, the saving and investment required to express the innovations were rather easily supplied.

The ease shows in Feinstein’s own splendid table of investment as a share of gross national incomes of a dozen countries, 1770-1969.²² The claim is that investment was “crucial” for innovation. From 1770 to 1839 Britain was the most innovative economy on earth, and later it was no slacker, arriving at last among the richest countries. And yet savings/investment rates in Britain were lower than in most of the dozen countries, as I noted, and by the late nineteenth century about half the savings was invested abroad. Britain’s rate 1770-1839 was about 7.5 percent, and not until the 1960s did it briefly exceed 15 or 16 percent. The early, 7.5 percent figure was exceeded by every one of the other eleven countries in the table, taken over the two or three decades in which their figures begin to be available — decades which usually corresponding to their entry into industrialization. It is Feinstein who introduces the talk of “stages,” and so there cannot be a complaint that France in the 1820s and 1830s is not to be compared with Britain earlier: the comparison is at the same “stage.” And setting stage thinking aside, in any given decade across the table the British rates are commonly lower than in the other countries. If investment and saving were crucial to economic growth, then Britain with its low rates of investment would not have been the leader in industrialization. Rates of investment and saving rose as a result of innovation. They did not cause it.

What was indeed “crucial” was the innovation itself, the steam engines and the steel ships, the hybrid corn and the agricultural cooperatives. What was crucial was working smarter, not harder, as the South African economist Stanislav du Plessis puts it. Du Plessis is summarizing what all economists and economic historians have known since the 1960s—that sheer accumulation of frozen labor in capital is not what has made us rich. Yet in 2003 Feinstein (also by the way a South African) was still resisting the finding, part of which he himself had established. He quoted with approval an opinion of the economist Arthur Lewis in 1954, when capital fundamentalism was forming and before the scientific work showing it to be misleading had been done, that “the central problem. . . is to understand . . . [how] a community which was previously saving and investing 4 or 5 percent of its national income or less converts itself into an economy where voluntary saving is running at about 12 or 15 percent.”²³ I have noted that in an agricultural economy with low yield-seed ratios the figure has to be much higher than 4 or 5 percent. Perhaps Lewis meant by “voluntary saving” the saving above “involuntary”—net of depreciation, say, and the storing of seed. But in that case the innovations that made physical depreciation lower or that made unnecessary massive “involuntary” saving for seed are what explains the modern world, not piling brick on brick. And anyway the Lewis-Feinstein argument would have led to modern economic growth in, say, ancient Greece or China, in which savings rates could so easily be driven up to 12 or 15 percent: merely force the slaves in the silver mines of Laurion, or the workers before they were entombed in the Great Wall, to eat less.

Capital fundamentalism, in short, has been rejected scientifically, despite echoes in the minds of economists who very much want it to be true. Capital is a fine thing to have. But it is easily gotten by loan when the prospect for innovation is large. Capital is not the constraint, not in the long run. Smarter, not harder or more extensive (and capitalized) work did the modernizing. Innovation puts smartly into practice the idea of a light bulb or of limited liability. The word “capitalism,” with its hidden assumption that piling up frozen labor does the trick, du Plessis notes, was applied in the nineteenth century to the system of property rights coordinated by prices before we grasped that the innovation encouraged by such a system is what chiefly matters.

Schumpeter defines capitalism variously at various times. His definition in Business Cycles (1939) is “that form of private property economy in which innovations are carried out by borrowed money.”²⁴ In other words, “we shall date capitalism as far back as the element of credit creation,” by which he means fractional reserve banking—in effect any sort of money storage in which the storer is not legally or practically liable to keep all the money on hand all the time. He notes that such institutions existed in the medieval Mediterranean before they existed in Northern Europe, and so he would be unsurprised to find business cycles there. (He did not realize that Asia had such institutions hundreds of years before.) He claimed in his posthumous History of Economic Analysis that “by the end of the fifteenth century most of the phenomena we are in the habit of associating with that vague word Capitalism had put in their appearance.”²⁵ And yet it would be three more centuries before modernity emerged, economically speaking. Finance and saving and investment cannot have been crucial, or else Florence or Augsburg (or Beijing) would have innovated us into the modern world.

Capitalism on Schumpeter’s 1939 definition forms part of a private enterprise economy, but there can be private enterprise and innovation without credit and therefore without “capitalism.” Note, however, that what is at stake in Schumpeter’s argument is the use to which the thrift is put, not its total amount. Schumpeter said it was used for innovation. Yet even Schumpeter, the inventor of innovation in the modern analysis of the economy, allows himself to be tempted by the word “capitalism” into discussing finance. It is not thrifty finance, however, that changed everything—as he himself elsewhere agrees. What changed everything was using trust for innovation, Newcomen’s tinkering with atmospheric engines, Rothschild’s style of massive arbitrage, Edison’s first generator in Manhattan, Alfred P. Sloan’s years at General Motors.

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1. [back] Tusser 1588, p. 13.
2. [back] Introduction by A. L. Basham, p. 120, to the passage in Embree, ed., Sources of Indian Tradition, Vol. I. The passage below is Dīgha Nikāya 3.182ff., reprinted p. 123.
3. [back] Walter, late thirteenth century, in Oschinsky 1971, p. 309.
4. [back] Senechaucy, late thirteenth century, in Oschinsky 1971, p. 269.
5. [back] Tusser 1588, p. 18.
6. [back] Boswell 1791, April 14, 1778 (vol. 2, p. 203), quoted in Mathias, p. 302.
7. [back] Marx 1867, Chp. 24, Sec. 3, p. 651.
8. [back] Dickens, David Copperfield, 1849-50, Chapter 12.
9. [back] Goldstone 2009, p. 11.
10. [back] Braudel and Spooner 1967, Figure 23, p. 477.
11. [back] McCloskey and Nash 1984. Compare Cipolla 1994, p. 89.
12. [back] Innes 1988, p. 5.
13. [back] Marx 1867, Chp. 24, Sec. 3, p. 656.
14. [back] Crafts, Leybourne, and Mills 1991, Table 7.2, p. 113; and Feinstein 2003, p. 45.
15. [back] Postan is thus quoted with approval by another great student of the times, Carlo Cipolla, in Cipolla 1994, p. 91.
16. [back] Feinstein 2003, p. 47, from which subsequent quotations are also taken.
17. [back] According to the "marginal productivity theory" developed by economists from the 1890s to the 1940s, the share in total costs of an input into production such as horses or land or labor is the farmer's opinion of the percentage change in final output that will come from 1 percent more of the input. The theory is true if farmers face constant returns to scale and have no market power and are in the economist's sense rational.
18. [back] Hansen 1938, 1941, out of Keynes 1937.
19. [back] Fogel 2005.
20. [back] Tunzelmann 2003, p. 89.
21. [back] McCloskey 1995.
22. [back] Feinstein 2003, p. 45. The table stands as a monument to the massive scholarly effort of numerous economic historians since Simon Kuznets invented the methods in the 1930s and 1940s.
23. [back] Feinstein 2003, p. 46.
24. [back] Schumpeter 1939, Vo. I, p. 223. The next quotation is from p. 224.
25. [back] Schumpeter 1954, p. 78.

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