James Pethokoukis on Bourgeois Dignity: “Romney is right. Culture is why Israel and the West are rich”

James Pethokoukis’s post in AEIdeas, 3 August 2012:

Mitt Romney supposedly made an economic blunder in Israel the other day by saying that "if you could learn anything from the economic history of the world it's this: Culture makes all the difference.” In Romney's view, it's culture that explains why Israelis are rich and the Palestinians are not.

Not so says geographer Jared Diamond, whose book Guns, Germs, and Steel Romney dismissively mentioned in that same speech. In the New York Times, Diamond calls Romney's cultural explanation "dangerously out of date.” Diamond's thesis is that it's the sort of environment — from plants and animals that exist to the physical features of the continents — where different societies emerged that's made, to use Romney's phrase, "all the difference.”

Or, as Barack Obama might put it, Israel "didn't build that.”

Academics like Diamond and many economists tend to prefer materialistic explanations as to why nations succeed or fail. Diamond's theory is just one of many similar attempts to explain why the West (the United States, Europe, Japan) has a per capita GDP — adjusted for cost of living differences — of around $40,000 a person vs, say, Burkina Faso at $1500 per person or Afghanistan at $1000 per person.

Or, to put it another way, why did the average Brit or American live on $3-$5 a day in 1800 vs. $130-$140 a day in 2012, but other nations seem hardly any better off now than their ancestors 200 hundred years ago?

What explains that?

Economist Deidre McCloskey offers a long list of things that she argues don't explain that amazing surge: capital accumulation, trade, transportation, geography, natural resources, property rights — basically all the stuff economists tend to focus on. Here's what McCloskey says about Diamond:

Diamond argues very persuasively that the east-west axis of Eurasia from Spain to Japan made for shared domestications of plants and animals—wheat, rice, horses, chickens—that the north-south places like sub-Saharan Africa or the isolated places like Australasia or the north-south and isolated places like the Americas could not enjoy. His is a powerful argument for why "advanced” societies tended strongly to be Eurasian, from China to Rome (though he does emphasize that in Africa and in Polynesia and the Americas the advance was coming along, slowly—though in the sixteenth through nineteenth centuries it was shorted out by European conquests).

Yet Diamond's insight offers no explanation as to why "northwest European ‘white people' had an Industrial Revolution and the other people—whether Eurasian or African or Mesoamerican—did not, until after the northwest Europeans had led the way.

"Italians, Iraqis, Indians, Chinese, and other beneficiaries of the 4000-year head start in civilization coming out of the Fertile Crescent did not get there first. The Dutch and British did, closely followed by the French and Germans and Americans.”

In her book Bourgeois Dignity, McClosksey argues that it was a change in the culture of Holland and then Britain in the 1700s that kicked off the Industrial Revolution and the Age of Innovation, which then led to a stupendous jump in the Western standard of living. Simply put, people started thinking and talking about commerce and treating business in a new and respectful way. This led to the emergence of what McCloskey calls the Bourgeois Deal:

Give a woman some rice, and you save her for a day. Give a man some seed and you save him for a year. That's the plan of investment in capital, tried for decades in foreign aid, without much success.

But give a man and a woman the liberty to innovate, and persuade them to admire enterprise and to cultivate the bourgeois virtues, and you save them both for a long life of wide scope, and for successively wider lives for their children and their grandchildren, too. That's the Bourgeois Deal, which paid off in the Age of Innovation.

And wherever this Bourgeois Deal of economic freedom and the acceptance of innovation and creative destruction has been accepted — Great Britain, America, Japan, Israel, perhaps finally China — society has prospered beyond what previous generations could have ever imagined. As Romney explain further in National Review:

But what exactly accounts for prosperity if not culture? In the case of the United States, it is a particular kind of culture that has made us the greatest economic power in the history of the earth. Many significant features come to mind: our work ethic, our appreciation for education, our willingness to take risks, our commitment to honor and oath, our family orientation, our devotion to a purpose greater than ourselves, our patriotism. But one feature of our culture that propels the American economy stands out above all others: freedom. The American economy is fueled by freedom. Free people and their free enterprises are what drive our economic vitality.

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