Mark Thoma, at Economist’s View, points us toward an interesting essay by Richard White called “Before Greed: Americans Didn’t Always Yearn for Riches.” In it, White tells how Abraham Lincoln accumulated only modest wealth, during an era in which “great wealth was an aberration” and the very idea that the accumulation of great riches was a foreign concept.
One gets the sense that people “back then” were more noble, more high-minded, and more public-spirited. At least they seem to be more easily satiated, yearning only for “progress from poverty to competency.” According to such a narrative, we have degenerated into money-obsessed creatures whose public-mindedness has been considerably damaged in the process.
White goes on to claim, without presenting any evidence, that “Most Americans have come to think of the American dream not as a competency but rather as the accumulation of great wealth.” It’s not clear how “great wealth” is defined, so this claim is certainly open to interpretation; however, evidence from the General Social Survey (GSS) suggests that people still consider non-monetary factors to be important reasons why they do what they do. When asked to list the characteristics of a job they most preferred, 48 percent of respondents said the most important to them was that their work was important and they felt a sense of accomplishment from doing it. We have to be careful in interpreting survey data like this in general, but it does not suggest that desire for “great wealth” is the only factor.
Despite the survey data, perhaps we have come to put far too much emphasis on accumulating “great wealth.” But even if that’s true, it’s certainly not a new feature of human nature. Except that White tells us that it is new – and that the shift occurred in the 1890s. That idea is without foundation, as Deirdre McCloskey succinctly summarized in her impressive work on Bourgeois Dignity:
People have indulged in the sin of greed, for food or money or fame or power, since Eve saw that the tree was to be desired, and took the fruit thereof. Soviet Communism massively encouraged the sin of greed, as its survivors testify. Medieval peasants accumulated no less “greedily” than do American corporate executives, if on a rather smaller scale. Hume declared in 1742 that “Nor is a porter less greedy of money, which he spends on bacon and brandy, than a courtier, who purchases champagne and ortolans [little song birds rated a delicacy]. Riches are valuable at all times, and to all men.”
And McCloskey reminds us what the great sociologist Max Weber had to say on the subject:
“The notion that our rationalistic and capitalistic age is characterized by a stronger economic interest than other periods is childish.” The lust for gold, “the impulse to acquisition, pursuit of gain, of money, of the greatest possible amount of money, has in itself nothing to do with innovation. This [greedy] impulse exists and has existed among waiters, physicians, coachmen, artists, prostitutes, dishonest officials, soldiers, nobles, crusaders, gamblers, and beggars. One may say that is has been common to all sorts and conditions of men at all times and in all countries of the earth, wherever the objective possibility of it is or has been given.”
PRI recently ran a story featuring the work of Eric Zencey, a University of Vermont political scientist. Zencey doesn’t like the concept of GDP as a measure of well-being, suggesting we rename it “gross domestic transactions.” It’s not clear why it would matter if we replaced the word “product” with “transactions,” but there are deeper problems with Zencey’s logic than the name he prefers to use.
In justifying his renaming of GDP, he said:
“That’s all it is, it totes up the monetary value of all the transactions. And if it had that name that would help break the association people have with the idea that more GDP is better. It’s like hmmm, more transactions are better? Well it depends on what you’re transacting.”
Think about that for a moment – Zencey is wondering whether having more GDP (in other words, more income) is better (presumably against the alternative of having less). He goes on to say that it does not ”measure the actual thing you’re trying to do, which is improve the living standards and well-being of people.”
There’s nothing wrong with trying measure other things like education or health, but Zencey seems to approach the issue from the assumption that there is something wrong with consumption (at least at modern levels). It may well seem that way, but it is important to remember that vulgar levels of ostentatious consumption are nothing new. One only has to read Veblen’s Theory of the Leisure Class to see that’s not the case (0r, McCloskey’s excellent recent book Bourgeios Dignity – she points out that the only thing new is that a vastly larger percentage of the population is now able to indulge in the vast vulgarities).
More importantly, GDP does measure the “living standards and well-being of people.” People who are richer – those who live at higher levels of per capita GDP – have higher living standards. They can afford the vulgarities of modern economies, yes, but they can also afford to consume more Beethoven symphonies and to donate to charities. Circa 1800, the average person lived on around $3 per day (and this corrected for inflation). As McCloskey notes,
“two centuries later the world supports more than six-and-a-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 18oo.”
Not only do they earn and consume so much more, but they live longer too. So, no, GDP measures are not perfect but they certainly do measure the ‘thing we’re trying to do,’ which is to raise living standards.
I recently watched a good documentary called “The Better Hour,” which tells of the life and works of William Wilberforce. Wilberforce was among the leaders of the abolitionist movement in England that led to the end of slavery there in 1807.
In the film, Prof. James Walvin, a historian at the University of York, argued there was “a huge amount of money to be made in the slave trade…” which got me thinking about the old Eric Williams thesis and the rebuttal by Stanley Engerman (and, curious to see if there has been any more recent work on the topic since Williams’ published his book in 1944 and Engerman’s paper was published in 1972).
Williams’ major arguments have been summarized as: (1) racism was a consequence of slavery but not its cause; simply put, slavery was a way of exploiting labor, (2) profits earned in the slave trade were used to finance industrialization, and (3) abolition of the slave trade was driven by changing economic incentives, not by humanitarian interests.
The second argument has been of primary interest for economic historians since Williams’ original thesis appeared in Capitalism and Slavery. Was, as Williams claimed, the British Industrial revolution financed by the slave trade? To what extent does modern industrial capitalism depend on that supposedly highly profitable institution?
These are ultimately empirical questions and the Williams thesis simply does not hold up to empirical scrutiny, as Engerman showed back in 1972 (and whose critique has been pretty widely accepted).
The economic logic behind this is the simple story of competition eroding high profits: entry was, as David Richardson pointed out, easy since merchant ships could easily turn into slave transport ships. One would, under those circumstances, not expect exorbitant profits and Engerman’s work showed that prediction to be consistent with the evidence.
While some individuals certainly grew wealthy from the slave trade and invested those profits into British factories, they were of minor importance in the Industrial Revolution. The slave trade was not especially profitable relative to alternative investments and revenues from it were not big enough to have had much of an impact on British capital formation. The slave trade was actually quite a small part of British trade overall and, as McCloskey pointed out in Bourgeois Dignity, “to attribute great importance to a tiny trade would make every small trade important – we are back to the brass industry as a cause of the modern world.”
As for other recent scholarship on this topic, here is a short list for the interested reader:
Eltis, David and Stanley L. Engerman, “The Importance of Slavery and the Slave Trade to Industrializing Britain,” Journal of Economic History, Vol. 60, No. 1 (March 2000)
Darity, William A., “British Industry and the West Indies Plantations.” In The Atlantic Slave Trade, edited by Joseph. E. Inikor and Stanley L. Engerman, 1992.
Bailey, Ronald, “The Slave(ry) Trade and the Development of Capitalism in the United States: The Textile Industry in New England.” In The Atlantic Slave Trade, edited by Joseph. E. Inikor and Stanley L. Engerman, 1992.
Engerman, Stanley L. and Barbara Solow (eds.), British Capitalism and Caribbean Slavery: The Legacy of Eric Williams
McCloskey, Deirdre N. “Slavery and Imperialism Did Not Enrich Europe” in Bourgeois Dignity
Greg Mankiw has annoyed some folks enough that there is actually an “Anti-Mankiw” blog. Predictably, it is generally a diatribe against Mankiw and against markets, the latest of which is on the topic of exploitation. The basic idea is that markets are somehow inherently evil partly because they exploit people.
The authors suggest we work backward to understand this exploitation:
Instead of beginning with the idea that everything should be marketized, begin from the idea and theory that nothing should be marketized, and then ask what would qualify something to be marketized.
They go on to attempt to make a historical anti-market argument, but it is strange logic indeed. Here’s what they say:
In fact, if you think historically, this is actually the way in which the debate occurred — we didn’t start out with a fully marketized society and we only got there from peeling off various layers of social-institutional control!
I agree that we did not “start out” with a “fully marketized society” (although I’m not quite sure I understand what that means); rather, we had a slow and unsteady emergence of markets. That’s because folks gradually figured out that by trading with their neighbors, they could improve their lot in life, and that’s what market economies have done. Would the trade privileges of Elizabethan England – granted to the wealthy merchants at the expense of the laboring poor – have been a better place? Would it have been less “unfair” or less exploitative? Or, hit the rewind button a bit longer and consider the feudal society of medieval Europe. Less exploitative than modern market capitalism? Hardly. Industrialized economies, as the economic historian Greg Clark has pointed out, do indeed save their best gifts for the poorest.
But more than that, as Deirdre McCloskey has been arguing for years, markets nurture our virtues. Commerce, in her view, helps to develop our ethics (she reminds us of something Chief Rabbi of Great Britain Jonathan Sacks once said: “It is through exchange that difference becomes a blessing, not a curse.”). According to McCloskey, “Even an ethics of greed for the almighty dollar, to take the caricature at face value,” is not as bad as the opponents of capitalism would have us believe. ”…It is better than an ethics of slaughter, whether by patrician sword or plebeian pike.”
On March 9, Adam Smith’s Wealth of Nations turns 236 years old. Smith’s 1776 book marked the beginning of the Classical school of economic thought and was the most aggressive (and effective) attack on the web of mercantilist trade policies that had come to characterize England’s economic policy during that era. Smith wrote his monumental book as one part of an unfinished trilogy, which also included the 1759 (later updated in 1790) Theory of Moral Sentiments and an unfinished work on jurisprudence.
Smith’s opening sentence set the stage:
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.
Labor productivity stands at the heart of economic growth and itself comes from man’s natural propensity to exchange to better his own position in life. Man’s natural interest in bettering himself leads him to look for ways of increasing productivity and the division of labor is the most effective way of doing that. The concept of the division of labor was a very old one, going back to Xenophon’s Oeconomicus (around 362 B.C.), but it really took center stage with Smith’s theory of growth.
Smith emphasized openness to trade and to an expansion of markets when he wrote about the limits placed on these productivity gains by the size of the market:
When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.
Limited markets, whether by force of nature or man, lead to a predictable lack of economic development:
All the inland parts of Africa, and all that part of Asia which lies any considerable way north of the Euxine and Caspian seas, the antient Scythia, the modern Tartary and Siberia, seem in all ages of the world to have been in the same barbarous and uncivilized state in which we find them at present.
When men are free to deploy their capital profitably, they will do so in response to market signals, but this requires security – a theme Smith emphasizes throughout:
In those unfortunate countries, indeed, where men are continually afraid of the violence of their superiors, they frequently bury and conceal a great part of their stock, in order to have it always at hand to carry with them to some place of safety, in case of their being threatened with any of those disasters to which they consider themselves as at all times exposed. This is said to be a common practice in Turkey, in Indostan, and, I believe, in most other governments of Asia. It seems to have been a common practice among our ancestors during the violence of the feudal government.
Smith had, in his Theory of Moral Sentiments, written of the importance of justice (and the other virtues of prudence and benevolence) in securing this liberty:
The man who acts according to the rules of perfect prudence, of strict justice, and of proper benevolence, may be said to be perfectly virtuous.
But since man cannot reasonably be assumed to act according to these rules, we have the imperfect remedy of the state to impose constraints on us in the pursuit of opulence:
What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these.
While man is imperfect, Smith did believe that progress toward the state of “perfect prudence…strict justice…and proper benevolence” was important. As Jerry Evensky put it, Smith saw that “general progress is contingent on a multitude of particulars: the ethical maturation of individual human beings.”
There is much more to Smith’s work, of course. While it is hard to improve upon the original, as you might expect, there is a mountain of research on Smith and his theories. Here are a few of my favorites, in no particular order:
Jerry Evensky, Adam Smith’s Moral Philosophy: A Historical and Contemporary Perspective on Markets, Law, Ethics and Culture. Evensky presents
Deirdre McCloskey, “Adam Smith, The Last of the Former Virtue Ethicists” McCloskey claims that “Smith…was a virtues man, a half-conscious follower of Plato and Aristotle and therefore of Aquinas, and also of the Stoics…in emphasizing a system of multiple virtues – and indeed precisely five of the seven Aquinian virtues.”
Vernon Smith, “The Two Faces of Adam Smith”
Jacob Viner, “Adam Smith and Laissez Faire” - Viner concludes that Smith was not a doctrinaire advocate of laissez-faire. Not surprising to anyone who has actually read the Wealth of Nations, but that strikes me as a dwindling few (as compared to the number of people who use Smith without having bothered to read him)
And here are some good online resources:
Gavin Kennedy’s blog, Adam Smith’s Lost Legacy
Donald Boudreaux reviews McCloskey’s new book Bourgeois Dignity here. From the review:
Being group animals, we care deeply what other people think about us. And what people think about us is typically conveyed, to us and to others, by talk. McCloskey insists that, first in Holland and soon afterward in England, the way people talked about profit-seeking merchants and commercial and industrial innovators changed. That talk became more admiring. What we might call the “dignity return” to bourgeois activities rose.
Of course, McCloskey’s rhetoric-centered theory of the Great Fact does not deny the importance of secure property rights, the benefits of prudent and industrious behavior, the helpfulness of low-cost means of transportation, and the wonders of science. Even the most boundless glorification of the bourgeoisie would have done nothing to spark the Industrial Revolution if, say, private-property rights in northwestern Europe were insecure or if the terrain there was so rugged and harsh that transportation over even short distances cost a prince’s ransom.
But all the pre-McCloskean explanations fail because none of the many phenomena that these various theories propose as The Cause is unique to eighteenth-century northwestern Europe. Secure property rights existed in England long before the Glorious Revolution of 1688, and prudent, sober attitudes about saving did not first appear then and there. Nor did big cities (by eighteenth-century standards) and their potentially thick markets. Nor did science. Nor did reductions in transportation costs.