How capitalism really works

Deirdre Nansen McCloskey sees the spread of liberal ideas as responsible for the world’s increasing riches. So how does China fit the theory?

21 May 2016

9:00 AM

21 May 2016

9:00 AM

Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World Deirdre Nansen McCloskey

Chicago University Press, pp.768, £31.50, ISBN: 9780226333991

Deirdre McCloskey has been at work for many years on a huge project: to explain why the world has become so much richer in the past two centuries, and at an accelerating rate since 1945. This is the third and final volume in the series. In it she argues that ‘our riches were not made by piling brick on brick, bank balance on bank balance, but by piling idea on idea’. The Great Enrichment, which she dates from 1800 to the present, depends on the spread of ideas of liberty, seeded in a series of ‘egalitarian accidents’ in European politics between 1517 and 1789.

The liberalism she describes operates in a very narrow free zone, hemmed in by what she calls the ‘clerisy’ — critics on left and right alike who do not accept a full version of liberalism — and roughly a third of the text sees McCloskey, vorpal sword in hand, slaying the dragons of the state. But she’s fighting enemies from the past: her side has won the battle. Globalisation, neo-liberalism, the expansion of monetary assets and instant internet communication have spawned a new world order without any state powerful enough to contain it.

The transfer of Russian and Chinese billions to safe havens in western cities has caused housing crises in many of them. An Indian family business buys the British steel industry for £6 billion, loses lots of money and simply closes it. The UK state can do nothing. This is not the benign progress that McCloskey describes, and nothing like it has happened before. The Financial Times reported recently that at the end of February there were $267 trillion dollars in exchange traded derivatives — and that’s just one class of asset. For comparison, the gross domestic product of the USA is a mere $17 trillion.

The world today produces 70 times more goods and services worldwide than in 1800. McCloskey gives imaginative examples of the improved standard of living by looking at the products in one’s room, starting with ‘the 20 ballpoint pens stuffed into a mass-produced coffee cup, pens and cups greatly cheapened after the second world war’. I have just that on my desk. Citizens of the most prosperous half of the world are hundreds of times better off than they were even in 1900 or 1945, and that standard of living is spreading quickly to the poorer places on the planet. A small refrigerator at Home Depot today costs 15 hours of work: at Sears in 1956 it cost 116 hours.

The history of western capitalism does owe a great deal to the onward march of ideas of liberty. But it’s not the whole story. The greatest expansion of capitalism, the Chinese economic miracle, has taken place under a very restrictive communist regime. Tycoons who annoy Xi Jinping, General Secretary of the Communist Party, President of the Republic of China and Chairman of the Military Commission, ‘disappear’ for consultation. The People’s Congress rubber-stamps the decisions of the Politburo. The cult of the leader flourishes and the exposure of corruption depends not on a free press but on which tycoons or provincial governors are out of favour. Liberty in the Anglo-Saxon version championed by McCloskey has not played a serious part in the Great Enrichment of the Chinese people, the fastest and most comprehensive enrichment there has ever been.

In Germany, capitalism was Jewish and was condemned by the aristocracy, the artisans, the peasants, the Protestant and Catholic churches and increasingly by the upper bourgeoisie. From 1933 on Hitler and the Nazis excluded Jews from public and commercial life, and when the Reich went to war in 1939, it had as a war aim the destruction of the Jewish race and their international capitalism. Millions died because of Hitler’s insane fear of free markets and Jewish power. After 1945 liberalism literally conquered Europe because the Americans had an occupation army, money and atomic weapons. The Cold War pushed them into the Marshall Plan and kick-started the great recovery of 1948 to 1973. Ideas, no matter how persuasive, could never have created that set of circumstances.

The problem is that McCloskey’s mono-causal history of ideas ignores institutions. Ideas exist in a material culture. They have to be communicated. She calls Samuel Johnson (1709–1783) as a key witness; but she omits the Copyright Act of 1709, which made possible the world of commercial writing in which this eccentric country boy was able to prosper. Liberalism in literature depended on a framework of laws just as much as in any other business. The market for ideas could only exist when the Crown let it.

McCloskey writes that ‘the rich and powerful run the government’ and that ‘the poor and other powerless have been regularly hurt by governmental regulation’. Agreed — but they are equally regularly hurt by the rich and powerful who control giant corporations and who fire poor people in one place to hire poorer people somewhere else.

Individual chapters are long and rich in erudition, but McCloskey refuses to accept that ideas work in and through the institutions of society. It is both/and, not either/or. There is at the core of this huge project a structure of ideas which seems outside history, outside society but eternally valid: the power of the liberal ideal. But when everything else changes — longevity, gender, work, consumption, climate, population, speed of communication and its nature, wealth, food, memory — why should a set of bourgeois values enunciated after 1800 be immutable? Unbridled liberalism on a global scale today has little in common with its portrait in this book. It has exploded its limiting conditions to make the whole world economy a giant speculative game. It looks, to this member of the clerisy, to be a threat to the society that spawned it.

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  • “An Indian family business buys the British steel industry for £6 billion, loses lots of money and simply closes it. The UK state can do nothing. This is not the benign progress that McCloskey describes”.
    Oh yes it is. Getting people to work more productively generates vast fortunes for the few, but raises the standard of living of the many.
    Capitalism may not have produced strong communities, or enriched our cultural lives, or even enhanced our quality of life in any meaningful way, but sooner or later it makes all those it touches better off.
    Ordinary people, given the choice, will always walk towards capitalism rather than away from it.

  • Zalacain

    You misunderstand China’s growth. In 1980 China was one of the poorest and most restrictive countries in the world with a GDP per head of about 200 USD per person. The Chinese communist party realised that their economic policies weren’t working so they freed up the economy. The more they freed it (the more capitalistic it became) the more it grew. This within a framework of relative rule of law. Now GDP per head is about 10,000 USD per person. However to make the next step, to maybe double GDP per head China is going to have to improve its institutions. This means reducing corruption, increasing freedom of speech and improving political freedom. This almost invariably means introducing democracy. Taiwan, South Korea, Spain and Chile are all examples of countries who had to move from dictatorship to democracy at a similar stage of development.
    In other words, reduced corruption + increased democracy + more capitalism = increased wealth. The only exception that comes to mind is the not very democratic but very rich Singapore (oil rich countries don’t count as their wealth is not produced by the citizens of that country).

  • irina palm

    Ideas always beat wasteful consumer spending, living above one’s means followed by inevitable decline in the global socio-economic rankings.

  • davidofkent

    Since time immemorial, personal self-interest has always trumped ‘we are all in it together’. Private ownership and capitalism has followed human nature and has allowed most of the world to become wealthier and healthier. Where this is not true one need only look for wars and tyranny. In recent years in the West, redistributive taxation systems have generally held people back, although most of the cost of welfarism has been borne by the Defence of the Realm. This cannot continue because we have more or less hit rock bottom and in the not-too-distant-future, this policy will cause us a great deal of heartache. Ask the ancient Greeks, Romans, etc.

  • Dryermartinithanyours

    At the risk of throwing 2c into the ring, stability is the key, within which people find things to do, whereas ideas ‘about society’ are vastly overrated by people who make their living by peddling said ideas, eventually coming to believe they are all.

  • enoch arden

    Feynman has pointed out an obvious fact that the most significant event of the 19th century in terms of its impact on our life (prosperity) were Maxwell’s equations.

    More generally, the only reason for GDP growth is growing productivity. And the only reason for the productivity increase is technological progress. And the only reason for technological progress is the development of fundamental science (mathematics and physics). We are better off now then in the 19th century because of the efforts of a handful of physicists. The rest what happened during this interval of time was just an accompanying noise.

    All sorts of economic and social models, capitalism/socialism/buddhism/feminism are as relevant to our prosperity as the trends in fashion. All the “economic studies” are waste of time and public money.

    • Ser Na₂Ca(CO₃)₂•5H₂O

      I firmly disagree with regards to feminism. The active participation of women in the labour force has lifted entire countries out of poverty, in addition/conjunction with technological advancement. There’s more than one way to raise productivity!

      • enoch arden

        Women didn’t participate much until the recent technological advances. They couldn’t work in mines, steel production, farming, oil industry, mechanical engineering, construction. Their share in labour increases as soon as the physical capacity and skill becomes unimportant.

        Moreover, they are not needed: much less people are now employed in production sector. The rest are doing service, advertising, entertainment or are useless paper pushing financial parasites. Women are good in that. But it would be better for everyone if they stayed home cooking.

        There is no other way to raise productivity except technological development.

        • Ser Na₂Ca(CO₃)₂•5H₂O


          • enoch arden

            Sometimes their charming is irresistible.

    • Hugo Spinoso

      i agree that technoly its the main driving force, however economy and politics should serve to study offert and demand, supplies, production needed, workforce impact, possible outcomes from social plans and thecnology advances, in other word they should adapt their studies to the reality and the impact of real life events,as a priority to try and adapt, since economy and politics do represnt human interactions.

      Considering capitalism i believe its main problems now are that competition drives cheaper products and a constant look to lower prices, wich is destructive to the envirement and its backwards to what it should do, to better the product.

      It creates speculation for profits with no consecuences over what it should really be doing, it creates imaginary profits that backfire in the real life world, and finaly it could be used as a weapon internationaly and domesticaly because there are no consecuences for economic policies and “speculation” and they can blame it on occus pocus stuff, where no one is responsible but the economic god.

  • Ludwig Apsel Weber

    If the British steel industry is not competitive, it can’t be magically rendered competitive by complaining. It is not ordained in the heavens that Britain will forever produce steel.

    • Bonkim

      You pay a premium for being in control. The Japanese can buy rice cheaper from outside but subsidise local rice farmers. Steel is a strategic metal.