Deirdre McCloskey’s book Bourgeois Dignity on the economic miracle of the modern world and why it happened is truly dazzling. I wrote about it in my column today but couldn’t do justice to its sweep and erudition. Her basic argument is that the key to our world is the new respect that the bourgeoisie, the creators of wealth, began to get roughly 200 years ago, starting in Holland and Britain. Combine this new dignity with liberty and you get the amazing run-up in the world’s wealth over the last two centuries in contrast to what had been relative stasis throughout the rest of human history (put it in a graph and you get a real “hockey stick”–flat forever, then spiking upwards). One of McCloskey’s contentions is that capitalism is a bit of a misnomer. We don’t create wealth on the order of the last two centuries merely by accumulating capital. We create it through ceaseless change and entrepreneurialism. McCloskey suggests the neologism “innovism,” although she knows that’s awkward, so settles simply on the word “innovation.” (George Gilder e-mailed this morning to say he still prefers capitalism, derived from caput, for the head or mind.) Anyway, all of this is a long way of saying that in the contemporary debate over the economy and fiscal policy, we shouldn’t lose sight of the ultimate goal: preserving and fostering an innovation economy. Otherwise, we’re just shifting around what we already have and balancing the books of a stagnant enterprise.
(For more on Bourgeois Dignity, check out Matthew Shaffer’s interview with McCloskey.)
"...we shouldn’t lose sight of the ultimate goal: preserving and fostering an innovation economy. Otherwise, we’re just shifting around what we already have and balancing the books of a stagnant enterprise."
But isn't that exactly what a service economy is - shifting stuff around? You mow my lawn, I'll paint your house; you fix my teeth, I'll prepare your will. We use money so we don't have to barter all these services, but there is precious little wealth created by just performing services for each other.
Who are the innovators, the people who will create real wealth? The people who President Obama thinks don't pay enough tax. You'd think someone would have explained to him by now that the more you tax something, the less you get of it. That includes innovation and wealth creation. If someone HAS explained that to him, then maybe he isn't the intellectual that Joe Biden thinks he is.
Reply to this commentLinkReport AbuseIf I remember correctly, it was Karl Marx who termed it 'capitalism', which may explain why it's not apt.
Ludwig von Mises suggested 'catallactics' as the new term, but that never really took off.
Reply to this commentLinkReport AbuseCapitalism is not private property.
Capitalism is not free enterprise.
Capitalism has nothing to do with whether you have employees, or how they are treated.
Someone wishing to start or enlarge a business by borrowing money is not a capitalist, since the debt remains regardless of how well the business fares.
The lender has no control over how the business is managed (unless it reaches the brink of failure, and then only by operation of law).
"Capitalism" is the method whereby a business (real or conceptual) is started or enlarged by use of external funds, without incurring debt.
In exchange for funding, the owner(s) transfer part of the management authority and future profits to those providing the funds. Shares of stock are the vehicle by which this is done. In addition, the stockholders have the right to dispose of their investment to others under certain regulated terms.
We no longer have capitalism in this country, since the nature of the business, how it is conducted, the sale of stock, the value of the stock, the volume of stock sold and held, and the stockholders' equity in the corporation are now completely at the mercy of administrative fiat.
Civil law requires the exhaustion of available remedies before seeking extraordinary relief. A corporation already has, by its own application, the right to raise money: sale of new stock, not a bail-out.
A corporate bankruptcy may not bypass the order of priority of its owners (established by SEC regulations) to suit some other purpose.
The government may not force issuance of new stock without the consent of the current stockholders.
There is, at present, no accurate term to describe what actually takes place in corporate finance, but it's certainly not capitalism.
Reply to this commentLinkReport AbuseI'll have to read her books to see whether she goes more into this, but in the interview link she says, "what changed was the attitude of the rest of the society toward businesspeople, and with that new attitude came a change in government policy." I'd like to hear what she believes caused this change in attitude toward businesspeople.
While Weber was wrong on many counts, I suspect that Calvinism—which was strongest in Britain and the Netherlands—played a role in this change. The Calvinist belief that a person could serve God just as faithfully running a business as he could running a church was a big change from the past. I don't doubt, as she said, that the Catholic (or Lutheran) cared as much about his business as the Calvinist did, but the idea among others that he might be as good a Christian as the local pastor was new. I also wonder whether the Calvinist businessman's disdain for ostentation and status symbols may have caused his success to provoke less envy in society, which is bound to lead to better government policies.
Anyway, I'd be interested to know why she thinks this change in attitude happened.
Reply to this commentLinkReport AbuseI'll have to read her books to see whether she goes more into this, but in the interview link she says, "what changed was the attitude of the rest of the society toward businesspeople, and with that new attitude came a change in government policy." I'd like to hear what she believes caused this change in attitude toward businesspeople.
While Weber was wrong on many counts, I suspect that Calvinism—which was strongest in Britain and the Netherlands—played a role in this change. The Calvinist belief that a person could serve God just as faithfully running a business as he could running a church was a big change from the past. I don't doubt, as she said, that the Catholic (or Lutheran) cared as much about his business as the Calvinist did, but the idea among others that he might be as good a Christian as the local pastor was new. I also wonder whether the Calvinist businessman's disdain for ostentation and status symbols may have caused his success to provoke less envy in society, which is bound to lead to better government policies.
Anyway, I'd be interested to know why she thinks this change in attitude happened.
Reply to this commentLinkReport AbuseTim L., here is a snippet of what she says on Weber (although it doesn't bell the cat on whether Protestant countries were likely to be the first to make this change for reasons related to Protestantism):
"Max Weber’s Protestant Ethic and the Spirit of Capitalism of 1905 has inspired an enormous literature. What seems to have charmed people about it is that it combines an idealist focus on 'spirit' with a materialist and Marxist focus on accumulation. The result of Weber’s intellectual diversification has been that defenders of Weber keep springing up, despite repeated findings that his connecting of late Calvinism to the Great Fact (a hypothesis which he himself appears to have dropped after 1905) doesn’t work very well. The economist J. Bradford DeLong, for example, wrote in 1989 a characteristically brilliant defense of the Weberian hypothesis against the libertarian notion that liberty suffices, and therefore that countries will converge to the best standard if you just let people get on with it. Prominent among his cases in 1989 showing that Catholicism kills enterprise were Ireland, Spain and Portugal. By contrast, 'the seven countries with predominantly Protestant religious establishments all have higher 1989 per capita income levels than the other seven countries.' Unfortunately for Weberians and for DeLong, since 1979, or 1989, Ireland, Spain, and Portugal have been economic miracles of liberal economic policy. Ireland is the most thoroughly liberal example, with very low corporate taxes, and therefore it went from being one of the poorest countries in Europe in 1979 to having in 2002 the second highest per capita real income in the world. And the Irish Catholics still go to church, in much greater numbers than the normally Protestant British or Swedes."
Reply to this commentLinkReport Abuse"Capitalism" is the derogatory term Karl Marx coined for freedom in the economic sphere. Marxists see freedom and call it "capitalism".
Reply to this commentLinkReport AbuseRich, just one problem with her remarks re: Ireland, Spain, etc.
"Unfortunately for Weberians and for DeLong, since 1979, or 1989, Ireland, Spain, and Portugal have been economic miracles of liberal economic policy."
Unless I'm misreading recent news, at least a very large chunk of the Irish, Spanish and Portugese "economic miracles" appear to have been largely a bubble produced by EU fiscal policy. Not necessarily involving much genuine economic growth.
Reply to this commentLinkReport AbuseI continue to be amazed at how Ayn Rand nailed it.
Reply to this commentLinkReport AbuseRich:
Thanks for the snippet. Weber in some ways misunderstood Calvinism, and his thesis has some real problems. I've known too many hard-working Catholics to think that hard work is a Protestant-only phenomenon. And I have no doubt that, as she argues, "countries will converge to the best standard if you just let people get on with it."
The question that I don't think she answers is, Why were Calvinist-influenced nations the first to let people get on with it? It seems plausible to me that the Calvinist view that being a businessman could be just as godly a calling as being a pastor or missionary would have a pro-free market effect on society, that it would make political attacks on business less effective. I do realize, though, that correlation doesn't always equal causation, and that this viewpoint's emergence may not be related to the vibrant markets that emerged around the same time. But I'd like to see her give a different explanation for WHY attitudes toward business changed in Britain and the Netherlands.
Reply to this commentLinkReport AbuseBernie Gilbert said:
"But isn't that exactly what a service economy is - shifting stuff around? You mow my lawn, I'll paint your house; you fix my teeth, I'll prepare your will. We use money so we don't have to barter all these services, but there is precious little wealth created by just performing services for each other."
Wealth is created via innovation either by inventing new goods and services (that people desire and are willing to pay for) or by improving productivity in the production of those goods and services.
If I cut hair for a living and am able to improve my productivity in doing so (for example by inventing electric clippers, or by purchasing a pair to use instead of my scissors), then I am able to cut my customer's hair with less time and effort, and can either cut more customers' hair or reduce the prices that I charge. In the former case total wealth is increased because some who desired a service and could not get it now can, in the latter because a desired service is now available more cheaply, leaving my customers with additional funds to spend on other goods and services.
Reply to this commentLinkReport AbuseMarx did not invent the phrase 'capitalism'. I do not know who did, but in Dutch pre-1848 tax lists you can find 'kapitalist'. i.e. a kind of rentier who invests in business instead of government bonds or land.
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