The Competitiveness of Nations
in a Global Knowledge-Based Economy
April 2003
Stanley L. Engerman *
The big picture: how (and when and why) the West grew
rich
Policy Research, Vol. 23
1994, 547-559
Index
2. Definitions and implications
3. Politics, economics, and the rise of the West
4. The role of the nation-states
5. Governments and economic policy
7. Recent changes and their implications
This paper surveys the analysis of Nathan Rosenberg
and L.E. Birdzell, Jr. in How the West Grew Rich. They deal with two major questions:(1) the explanation of the original onset of
economic growth in the Western world; (2) the circumstances that permitted this
economic growth to continue, without decline or stagnation, for several
centuries. Their focus on the critical
role of the relationship between economic and political spheres, particularly
the importance of political decentralization and individual freedoms, is examined.
Also discussed is the attention given to
the impact of the expansion of trade and to the causes and consequences of the
scientific and technological changes of the modern era. The arguments of Rosenberg and Birdzell are briefly compared and contrasted with those of
other economic historians who have dealt with similar questions.
In How the West Grew
Rich, Nathan Rosenberg and L.E. Birdzell, Jr.
(1986) deal with two of the major issues of modern economic history: (1) what
explains the original onset of economic growth in the Western world; (2) why
was this economic growth able to continue, without decline or stagnation, for
several centuries, and, indeed, to experience sharp acceleration over time. Their answers and analysis attracted considerable
attention in professional journals as well as some more popular outlets. Perhaps the spirit and message were best
captured in a 1986 review by Donald N. McCloskey, in the New York Times book
review:
This book is an argument for capitalism, in the same
way that the successes Of Hong Kong or the failures of Moscow are arguments for
capitalism. But this is no pamphlet. It is jammed with economic argument and
historical fact... This lively and intelligent book is not meant to see
details. It is an essay in
interpretation and not a tome. It carries
on the project of historical research begun by Marx. And it contributes brilliantly to the argument
in favor of Adam Smith’s deal - leave me alone and I’ll make you rich.
The authors themselves, it
might be noted, prefer not to use the word capitalism since it implies a set of
definite ideological commitments and does not reflect the ‘pragmatic character’
of European institutions and the Western ‘lack of ideological commitment to any
economic principle other than economic effectiveness and survivability’ (p.
xi).[1] They do
claim, however, that, by
* University of Rochester, Department of
Economics,
Rochester, NY 14627, USA
1. The authors would prefer the term mixed economy, but feel that its
current usage, which “assumes that an age of purer capitalism occurred earlier”,
makes it presently inappropriate to describe “the changing sets of economic
institutions that arose in Western European countries during the West’s
centuries of economic growth” (p. xi). While they focus on economic institutions,
they point out throughout the changes in politics, culture, and society
involved with the commitment to Western economic growth, another theme found in
Adam Smith. Smith claimed that “commerce
and manufactures gradually introduced order and good government, and with them,
the liberty and security of individuals” (1937, p. 385).
547
whatever name, it is to Western Europe and its evolving
institutions that we must turn for the secret of the onset and maintenance of
modern economic growth.
2. Definitions and implications
At the start of this
examination of several of the major themes of Rosenberg and Birdzell,
it will be useful to point to some of the definitions contained within their
title, and to describe some of their broader implications.
The West is rather broadly
defined as those areas where, in the last two hundred years “progress and
prosperity have touched the lives of somewhat more than the upper tenth of the
population” - “Western Europe, .the United States, Canada, Australia, Japan,
and a few other places” (p. 3). Although
they remain quite skeptical of the measures of national income accounting, and
none of the familiar tables of comparative income rankings are to be found, if
we consider the basic 19 high-income OECD countries listed by the World Bank
for 1990, this includes countries with about one-seventh of the world’s
population, over two-thirds of its measured GNP, and have a per capita income
almost 14 times that of the rest of the world (World Bank, 1992, pp. 196, 218-219).
In regard to one of the many hypotheses
in the literature concerning factors in economic growth, it seems that all of
the developed areas are in the temperate climatic zone, although, of course,
not all the temperate zone countries can be considered to be developed
economically (Kamarck, 1976).
Yet, however broad the
definition of the West, there is a familiar aspect to the detailed examinations
presented. Although there are some,
rather brief, discussions of other areas, much of the pre-1880 analysis, particularly that for the eighteenth and
nineteenth centuries, is focused on England, and the material for the period
from 1880 to date is basically drawn from the US. This is, of course, not surprising since these
countries were, in those periods considered, the leading industrial nations,
setting the precedents for others to follow. Within the period of Western economic
expansion there has been a sequence of new leaders, both of regions within
countries and of countries, a growth and dynamism in reaction to the changing
needs of location and resources. [2] The general Westward movement of European economic
growth is usually argued to have begun with the economic leadership of Italian
cities and the Low Countries by around the fourteenth or fifteenth century; a
shift to Portugal and Spain after 1500 (with the development of their extensive
overseas colonial empires); by 1600 Holland assumes leadership; then sometime
by the second half of the eighteenth century, it is England; 100 years later it
is the US, and today is it now either Japan or Germany (at least the Western
part of Germany). Other Western nations
followed closely, without their assuming leadership, and perhaps it can be
argued that it is the wide diffusion of growth among nations that is the
striking characteristic of Western development. Angus Maddison
(1980, p. 7) presents data for 16 ‘Western’ countries between 1870 and 1976,
showing. a marked inverse correlation between the 1870 level of per capita
income and the rate of growth over the next century, with the ratio of the per
capita income of the richest of these nations to the poorest falling from 5: 1 in
1870 to less than 2: 1 in 1976. [3]
In terms of the historiographic debate, it is very clear who was not in the
West, and whose failures in today’s world provide the counterpoint to the successful
Western experience. Most explicitly
discussed is the nature of what can be referred to as ‘The European Miracle’. According to Eric Jones (1987), another
economic historian concerned with the emergence of economic growth in the West,
the leading contenders for world economic leadership since the tenth century
had been China, India, and the Islamic empires. China, perhaps the richest large country in
2. Such patterns of change are even longer-standing. Smith (1937, p. 394) observed, in discussing economic
change in post-Elizabethan England, that “It is now more than two hundred years
since the beginning of the reign of Elizabeth, a period as long as the course
of human prosperity usually endures.”
3. For a similar analysis of convergence in levels of productivity among
the Western economies in this period, see Abramovitz
(1986, 1992). It seems clear that since
the late nineteenth century (unlike the earlier part of that century) there has
been convergence in per capita incomes among the Western nations. Such a convergence has not been characteristic
of the global economy to date.
548
the world in the fourteenth century (Elvin, 1973),
recently had a per capita income less than 2% that of the high-income OECD
economies, but it is an economy that has made rapid strides in recent years. Similarly, India, with a per capita income
possibly equal to that of England’s at the end of the sixteenth century, also
had, in 1990, a per capita income less than to 2% that of the high-income OECD
economies, while Turkey, the major part of the old Ottoman Empjre,
is found among the World Bank’s tower-middle income countries. [4] Africa and the Americas, relatively heavily populated at the
end of the Middle Ages, are generally considered to have been too limited
technologically, although both included well-developed .societies and had
extensive trading networks. The population decimation, by disease, of the native-American
population throughout the Americas after European contact precluded indigenous
economic development, however rich its societies, prior to the sixteenth
century. Development in the
Americas was in the areas settled by Europeans.
There are a number of
contentions as to why the West has clearly won the economic development
sweepstakes. The correlations, if any,
between the gains to the winners and the costs to the losers who have not
succeeded as well in this economic competition, are discussed by Rosenberg and Birdzell. They
conclude that the West did not need to profit from the rest of the world in
order to grow, but they do leave open the possibility that some ‘non-Western
countries’ may have been injured by ‘overseas political adventures’ after
Western development became secure (p. 18). [5] Little is said
about the questions of whether the worse form of exploitation was economic or
cultural, or, if the former, whether it was by exploitation in the buying
and/or selling of goods with the less developed world or by the exploitation resulting
from a pressured dependency relationship, these not being central to the
argument.
Similarly, particularly for
the twentieth century, excluded from the West are the USSR and the remainder of
what were called the Eastern European ‘nonmarket
industrial economies’, who had not been able to benefit from the Western road
to prosperity, and whose per capita incomes were considerably below those of
the high-income OECD economies, even before their recent problems (see World
Bank, 1992, pp. 218-219).
Rosenberg and Birdzell date the West’s (slow and gradual) “take-off” to
after a time “when the West was as least as poor as its contemporary economies”
(p. 37) - the Middle Ages. They claim, that the institutions of Western
society functioned normally in the thirteenth century but, after the Black
Death and other disasters of the fourteenth century, recovery by the 1400s meant
a new set of institutions were developing, and that innovations - in trade,
technology, and organization - became “a significant factor in Western growth
as early as the mid-fifteenth century” (p. 20).
Some scholars date the emergence of a gap between the West and elsewhere
to an earlier period. David Landes (1969, 1986) argues that the West was clearly
richest prior to the Industrial Revolution, and places the crucial take-off in
the period between 1000 and 1350, claiming that Western dominance was clear by
1500. Others historians, however, argue
it came much later, Paul Bairoch’s (1981) income estimates
suggesting that marked shifts in relative income levels did not occur until
after 1750. De-
4. The estimates in this paragraph of 1990 per capita
income are from the World Bank (1992, pp. 218-219), based upon exchange rate
adjustments. Adjustment for differences
in purchasing power parity would modify some comparisons, but not alter the
basic points here. The comparison of per
capita incomes in Mughal India and England in 1600 is
from Goldsmith (1987, p. 102).
5. There are several ways to demonstrate the sharp relative decline in
non-Western economic conditions in the modern era. Maddison (1983) presents
data for 16 developing nations for various years in the nineteenth and
twentieth centuries. Six passed the 1700
level of English per capita income only in the first half of the twentieth
century, seven in the second half, one (Bangladesh) still trailed, while two
(Spain and Argentina) had achieved this 1700 British level in the nineteenth
century. Bairoch
(1981) argues, rather controversially, that the level of per capita income of
Third World and developed countries was about the same in 1750, but that over
the subsequent two centuries the developed countries grew at 0.88% per annum, and the Third World at 0.04% per annum. From 1950 to 1977, the developed countries
grew at 3.6% per annum, the Third World at 2.1% per annum. Thus, after 1950, with the direct interests
and concerns of the West, the Third World’s per capita income increased more in
4 years than it had in the preceding two centuries.
549
pending on the mix of political, military, and
economic factors considered, most historians seem to place the transition to
Western dominance and prolonged economic growth somewhere between 1300 and
1500. It seems generally agreed both
that any initial lead was quite small relative .to the differences we now
observe, the OECD economies, now having a per capita income level about 57 times
that of the low-income countries (World Bank, 1992, pp. 218-219), and also that
Western growth rates prior to the industrialization of the nineteenth century
must have been relatively low by the standards of subsequent years.
Rosenberg and Birdzell present a three-stage pattern of economic growth,
each stage with a differing cause and. set of consequences. [6] In the late Medieval and the Early Modern era, starting
with the Italian cities of the twelfth century and accelerating in the
mid-fifteenth century, trade in commodities across political boundaries was the
key. In the era of the classic
Industrial Revolution, 1750-1880, when England was the West’s economic leader,
critical were the rise of the factory system and the applications of empirical
innovations. After 1880, when the US
assumed Western leadership, scientific research became the key to economic
development. Despite these shifts,
however, it is suggested that the critical political and economic policy
components leading to, and permitting, economic growth
remained basically unchanged and, indeed, it was these policies that permitted
the flexibility of adjustment to the changing economic requirements across
Western Europe and many of its overseas offshoots.
Rosenberg and Birdzell provide a rather broad definition for rich, going
beyond the basic concepts of national income accounting. They point to “a single widely shared value -
the value of advancing the material welfare of human beings, as measured by the
means available to the great majority of individuals to choose and shape the
quality of the lives they lead” (p. 303). [7] They stress the benefits of expanding economic output,
such as increased life expectancy, the avoidance of famine, hunger, and plague,
and the “move toward literacy, education, and variety of experience” (pp. 3-4).
There is no overall trade-off perceived
between economic and moral progress, the authors arguing that: “it is only as a
result of the material success of the Western world that the pronounced shift
in [moral] values occurred” as well as claiming that “such values as social
justice, equality, and a concern for the environrnent,
simply... have not dominated life in any of the past societies from which the
West differentiated itself” (p. 303). [8]
3. Politics, economics, and the rise of the West
The story of the economic
rise of the Western world is one of the classic themes of all varieties of
history, not just economic history. It
is one popular since at least the nineteenth century and it is still able to
generate considerable interest, as the reactions to works such as How the
West Grew Rich demonstrate. Classic
studies of the rise of capitalism have been presented by Karl Marx (1936),
Werner Sombart (1916-1927), Max Weber (1930), and
R.H. Tawney (1926), among others. These have been followed, more recently, by
works by major historians including those by
6. W.N. Parker (1984, pp. 191-213; cf. also Parker, 1991) presents
another variant of a three-stage system with overlapping time periods,
describing each with a familiar economist: to 1750 (Malthusian); 1500-1900 (Smithian); and, after 1770 (Schumpeterian). There is little attention now given to the
stage theories made familiar by earlier German historians or to the precise
stages of growth as delineated by W.W. Rostow.
7. Rosenberg and Birdzell would appear to deny
that these gains from material progress were at the expense of any spiritual or
cultural worsening of human existence. They
do point out, however, that “the West has been remarkably willing to pay the
price of growth, in the form of changing the whole structure and interpretation
of Western life”, “for that path involves a diffusion of power and a degree of
individualism which is incompatible with many modes of social life” (p. 328).
8. Smith (as well as others in the Scottish Enlightenment) made similar
connections. This belief accounts for
the continuing intellectual problems generated by the expansion of slave
economies in the eighteenth and nineteenth centuries. It has recently become clear that
environmental issues have been more important to the West than to others (see
Jones, 1991), and indeed this issue promises to provide a ‘new imperialism’ for
Western involvement in the economies of the less developed nations.
550
William McNeilI (1963), Fernand Braudel (1981, 1982, 1984),
Immanuel Wallerstein (1974, 1980, 1989), and Perry
Anderson (1975a,b). Among the prominent works by economic
historians in the past two decades are those by David Landes
(1969), Douglass C. North and Robert Paul Thomas (1973), W.W: Rostow (1975), Eric Jones (1987, 1988), Douglass C.
North (1981, 1990), William N. Parker (1984, 1991), and Joel Mokyr (1990), as well as an extended essay in economic
history by the Nobel Prize winning economic theorist, J.R. Hicks (1969). [9] Of particular interest here in framing
questions for analysis concerning the rise of the West are the works of North
(with and without Thomas), which focus on the importance of the creation of the
appropriate set of economic and political institutions and the proper
allocation of property rights, and those of Jones, with their attention to
natural forces and environmental features and the manner in which responses to
them helped to set the conditions which influenced the pattern of economic
change. Jones also makes explicit an
argument that economic growth may be expected to have been the typical outcome
of human decisions, but that bad governmental decisions and inappropriate policies
have frequently prevented its accomplishment.
Thus the question of how
did the West grow rich is obviously not a new one, nor, given its long history,
would it be easy to come up with a completely new or novel answer. Rather, the impact of How the West Grew
Rich comes from focusing on one particularly important set of components of
the process of Western dominance, one that highlights
a specific interpretation of the past and can also be is used to present a
clear message for the present and for the future.
The attention given to the
political circumstances necessary for economic progress highlights what can be
regarded as its necessary condition, with many other frequently discussed features
considered to be complementary to, or derivative from, the political
structure. Other familiar factors
regarded by some scholars as the important causes of economic development are
denied by Rosenberg and Birdzell, in their rejection
of a number (specifically nine) of single-cause explanations, generally because
these factors had been present in many societies without their necessarily
generating economic growth. Thus their
presence need not, and has not, led to growth in a large number of cases,
although the counter-example of the possible existence of countries having
appropriate economic and/or political conditions without generating economic
growth is not raised (perhaps it does not exist), nor is there a fully
specified discussion of the relation between the time that appropriate
conditions are achieved and the onset of accelerated economic growth. [10]
To Rosenberg and Birdzell, the “immediate sources of Western growth were
innovations in trade, technology, and organization in combination with
accumulation of more and more capital, labor, and applied natural resources”
(p. 20). Underlying this, however, was
the importance of having “the freedom of the economic sphere from political
influence” (p. viii), as well as from religious restrictions, and the role of
“efficient government” in contributing “to the security of life and to advances
in material welfare” (p. ix). This set
of political circumstances permitted the emergence of markets and of a
competitive process that determined the rewards generated by eco-
9. Other useful works on this topic, aimed more at text markets, include
Hughes (1970), Davis (1973), DeVries (1976), and
Cameron (1989). See also the essays in Baechler et al. (1988), and for different approaches, see Easterlin (1981) and Findlay (1992). There is a rather considerable Marxist
literature on the so-called transition from feudalism to capitalism that deals
with similar issues from a seemingly different perspective. For presentation and analysis of this
literature, see Hilton (1978) and Holton (1985), and for a brief (negative)
commentary on the usability of this work because of its misunderstanding of the
analogy between political and economic power, see Rosenberg and Birdzell (1986, pp. 102-106).
10. Presumably the political freedoms and the economic gains both came
from the same set of conditions, and it therefore makes little historical sense
to ask whether economic growth was an unexpected byproduct of the drive for
political freedom or if political freedom was seen to be the most efficient way
to achieve the desired pace of economic change. Rather, both were desirable and they came together
historically without any deliberate planning to achieve either. The single-cause explanations discussed are
science and invention, natural resources, psychological explanations, luck,
misconduct, inequalities of income and wealth, exploitation, colonialism and
imperialism, and slavery (Rosenberg and Birdzell,
1986, pp. 9-20).
551
nomic change. [11] Attention is
given to change, ‘innovation, novelty, and diversity in permitting the economic
system to operate effectively over the long run, and it is this that not only
led to the original generation of Western growth but also, to the Western
ability to have growth continue and accelerate, unlike the paths taken by those
other societies that may have achieved, for their times and for limited time
periods, relatively high income levels but were unable to continue their
advance or to avoid eventual decline.
In tracing the basis of
Western European political fragmentation, Rosenberg and Birdzell
have, perhaps surprisingly, some good things to say about feudalism, and its
dispersion of power, leading to the absence of a single power center which
could control trade. More traditional is
their praise for the rise of ‘towns, where the merchant class flourished,
property rights were developed and enforced, and the concept of political
freedom developed for subsequent extension ‘elsewhere. [12] Over time individual freedom emerged in the Western
European countryside, so that, as pointed out by Adam Smith (1937, p. 365;
1978, p. 181), “it is only in the western and south-western provinces of
Europe, that it [slavery (serfdom)] has gradually been abolished altogether”, a
contrast from its presence “all over Muscovy and all
the eastern parts of Europe, and the whole of Asia, that is, from Bohemia to
the Indian Ocean, all over Africa, and the greatest part of America” where “it
is still in use”. This point about the
limited extension of individual freedom was further developed at about the same
time by the agricultural reformer and political pamphleteer, Arthur Young
(1772, p. 21), who argued that less that 5% of the world’s population
lived in societies with liberty and freedom, almost all of those being in
Western Europe and the British overseas colonies, with the rest being ‘slaves
of despotic tyrants’. The limited provenance of individual liberty, and also of economic change, were
thus clear at this time of expansion of Western economic growth.
Rosenberg and Birdzell trace the changing economic fortunes of the West
to its expansion of political freedom, and argue that this economic expansion
was possible because it was based upon improving the economic circumstances of
the less well-off members of society and bettering their living conditions. They attack some current romantic views on
technology and production by, arguing that early-day artisans and craftsmen
were mainly involved in the production of goods for the wealthy, and thus the
benefits of craftsmanship were only for a few, contrary to the benefits that
were to come from factory production. Thus
capitalist freedom was (and is) not only necessary for economic growth, but it
also generated a more equitable distribution of income and of political power
than did alternative socio-economic systems. It is difficult to imagine a more favorable
report-card grade for Western institutions - they worked and, if allowed to,
can continue to work for everybody’s benefit.
4. The role of the nation-states
In the Rosenberg and Birdzell view on why the West, and not the others, grew
rich there is particular stress on the role of the political system. They argue that advancing material output has
been “a widely shared value” (p. 303), sug-
11. The question of the optimum political framework for economic growth
is hard to answer, since too much freedom for too many people may limit, not
promote, change. In his 1885
publication, Popular Government, Henry Maine raises this issue - the
true difference between the East and the West lies merely in this,
that in Western countries there is a larger minority of exceptional
persons who, for good reasons or bad, have a real desire for change. All that has made England famous, and all that
has made England wealthy, has been the work of minorities, sometimes very small
ones. It seems to me quite certain that,
if for four centuries there had been a very widely extended franchise’ and a
very large electoral body in this country, there would have been no reformation
of religion, no change of dynasty, no toleration of Dissent, not even an
accurate Calendar. The threshing
machine, the power loom, the spinning jenny, and possibly the steam-engine,
would have been prohibited. Even in our
day, vaccination is in the utmost danger, and we may say generally that the
gradual establishment of the masses in power is of the blackest omen for all
legislation founded on scientific opinion, which requires tension of mind to
understand it and self-denial to submit to it (Maine, 1976, p. 112).
12. The external benefits ultimately generated by cities must be seen to
have been abnormally large. As of 1500,
only 2.0% of the population of the British Isles resided in urban areas with a
population over 10 000. For Italy, the
estimate is 12.4%, and for the Low Countries, about 18.5%. The figure for Europe overall was 5.6% (DeVries, 1984a, p. 39).
552
gesting, perhaps, that it is not limitations on the tastes
(or at least the tastes of the mass of the population) for goods, but other,
political, constraints that precluded the worldwide onset and diffusion of
economic development. Some point to
various natural and geographic constraints (suggested by the absence of rapid
growth in arctic and tropical areas) as limiting factors for economic development,
but Rosenberg and Birdzell would also stress that for
most of the world in which growth was possible the important constraints were
political and institutional in nature. It
may be that the rulers of society have had different ends in view than
widespread material economic betterment, whether it was for interests of their
own private wealth or else because of a concern with some other ultimate goals
that limited society’s commercial and economic change in their own self
interest. Or perhaps it was that the
political rulers, owing to error and/or inertia, permitted inappropriate
institutions to emerge and continue even if economic growth were aimed at. Whatever the reason for failure, however, it
would appear that all the world should be developable,
with the adoption of the one, correct, political and economic framework. [13]
Rosenberg and Birdzell draw, in effect, upon the economic model of the
perfectly competitive industry in linking the Western political system to
Western economic development. The
advantage of the Western system of nation-states was that each was large enough
to impose its political and economic power over a sufficiently large area to be
effective and important, but none was so large and monolithic so as to become
an empire with both the static (the inflexibility of too large a scale) and the
dynamic (the absence of pressures to develop further) inefficiencies analogous
to those of the monopolistic firm. Western
Europe, during its period of expansion, was characterized by relatively small,
diverse units that permitted flexible adjustments to economic and military
changes. The competition among the
several units meant that continued adjustments to changing circumstances were
necessary for successful survival, or that when there
were losers they were replaced by others willing to take those risks. The political fragmentation and decentralized
power in Europe, as contrasted with the centralization of the Chinese and
Islamic empires, led to multiple sources of decision-making and a pluralism and
diversity of responses. In addition to
the pressures competition generated, the plurality of policies meant, in
effect, a diverse menu from which it would be possible for one set (and one
leading nation) to emerge as effective for generating economic growth, unlike
the limitations on alternatives generated by a centralized empire with its
limited variation in decision-making. The
constraints imposed economically, politically, and militarily by the set of
nation-states had further long-run advantages for Western Europe. Trade across national markets required
various legal and institutional arrangements to be determined by traders and
merchants, not only by political leaders, and the desires of any nation not to
be excluded from the benefits of trade meant that these privately generated
institutions would have to be accepted. The
availability of alternative nation-states for production meant that labor expelled
from one nation could find other nations in which to locate, the competition
for effective laborers and soldiers led to a concern with education and
literacy, and the possibilities opened for capital mobility operated as a
deterrent to widespread confiscation. Militarily,
the maintenance of a system of relatively stable balance during the epoch of
growth meant that there were a variety of power centers, with even the one
strongest power unable to dominate the others, unlike the oriental despots,
thus limiting any external territorial growth within the core area of Europe,
as well as placing limits on the degree of internal political control. As Rosenberg and Birdzell
(p. 138) note:
It may be that a prerequisite to sustained economic
growth is an economy trading across a geographical area divided among a number
of rival states, each too small to dream of imperial wars and too fearful of
the economic competition of other states to impose massive exactions on its own
economic sphere.
The reason for the specific
number and nature of nation-states remains less clear. Whether due
13. Given the authors’ emphasis on diversity and flexibility, it might
be suggested that perhaps there is more than one correct route, but such
alternative paths at any moment of time are difficult to discern.
553
ultimately to geographic forces, which made uniform control difficult,
or to the accidents of the balance of military power resulting from the
influence of the prevailing optimum military technology, is not certain. For whatever reason, however, the Western
European nation-state system is considered to have some quite desirable characteristics,
for the political diversity and pluralism comes within a single market and
cultural system, thus providing some of the beneficial economies of scale of a
larger political and economic unit but without the heavy political costs of a
monolithic empire.
Most economists will find
this application of the principles of a perfectly competitive industry to the
Western system of nation-states, one which has also been used, implicitly or
explicitly, by other writers, rather plausible. The advantages of competition in leading to an
appropriate set of incentives to respond to constraints and changes, the
existence of alternative innovators from which the successful ones will emerge,
and the limited scale of political decision-making are seen to be reflected in
the success of the West in a manner that monopoly-empires were unable to
achieve. Less is said, however, about
the costs of such a competitive political system except, perhaps that, no
matter what, they were obviously less than were its benefits. For most of the period of expanded European
expansion, from the fifteenth to the nineteenth centuries, much of the continent
was at war (roughly half the time) with resultant drains on manpower, capital,
and other resources (Wright, 1965, p. 653). Perhaps these costs were less than those
confronted by empires, and, as argued by Jones (1987), the wars in Europe were
less destructive than those in Asia. Perhaps
as Sombart (1913), and others, have suggested, the
needs of war and of geopolitical stability led to an encouragement of
technological and industrial development. [14] Perhaps, as G. Parker (1988) suggests, the benefits of
wartime developments emerging from intra-European conflict meant that the
Europeans developed the superior military technologies which permitted them to
dominate other continents. Nevertheless,
the existence of this nation-state system was not, without its economic costs
and drawbacks. This question of possible
costs would similarly apply to issues of competitive economic policy among the
European nation-states, since conflicts for economic and political power led to
the implementation of programs such as tariffs and trade restrictions which
limited market-size, trading relations, and economic freedoms. While the British Navigation Acts, about
which even Adam Smith had some good things to say, probably did help to
accelerate the transition in economic power from the Dutch to the British,
advocacy of such a policy, with its economic costs in the form of higher
shipping expenditures, need not provide the most. desirable
message for today’s policymakers. [15] Is the reason why the Western nations would not suggest such measures to
the Third World nations today because they might feel themselves in the place
of the Dutch or is it because they have learned the messages of past political
economy and modern economic theory?
5. Governments and economic policy
That there was a crucial
role to be played by decentralized power and multiple sources of decision-making
is important in understanding the rise of the West, but it is also critical to
examine what was done with the decision-making power within each nation-state. Rosenberg and Birdzell
argue that it was the emergence of an economic sphere free from political and
religious influences - an autonomous economic sphere of activity - that
provided the basic conditions of economic development, so that economic growth
was most rapid where the government was weakest and the
14. See, however, Nef (1950), and Mokyr (1990).
15. Smith (1937, pp. 429-431) did point to some economic costs of the
controls introduced by the Navigation Acts, but justified their implementation
since “defence... is of much more importance than
opulence.” Thus, according to Smith,
“the act of navigation is, perhaps, the wisest of all commercial regulations of
England.” Note that Smith is here
approving of only a part of the British scheme of regulations. For this period, DeVries
(1984b) points to an absolute decline in per capita income in the Netherlands,
while that of Britain was expanding.
554
population most free. [16] This autonomy of the economic sphere meant that
individuals were free to organize new experiments, and to develop new products,
technologies, and forms of organization; there was a market economy, with
individuals free to make decisions in regard to consumption and production;
and, in general, there was freedom from arbitrary political acts and confiscations
of private property that would have dramatically limited individual actions in
pursuit of future economic rewards. [17]
The constraints on
confiscations did not, of course, mean that individual rewards were certain and
that wealth was protected against losses. Indeed, in regard to these possible losses of
wealth, Rosenberg and Birdzell (p. 235) make the
strong claim that this possibility has been one of the main virtues of
capitalism:
Historically, one of the most distinctive features of
capitalist economies has been the practice of decentralizing authority over
investments to substantial numbers of individuals who stand to make large
personal gains if their decisions are right, who stand to lose heavily if there
decisions are wrong, and who lack the economic or political power to prevent
at least some others from proving them wrong.
Indeed, this particular cluster of features is among the stronger
candidates for the definition of capitalism.
While government economic policy in the West may have
been more laissez-faire than in other places, crucial to the growth of
the West was that when the government did intervene in the economy, as it often
did, at least early on, it did so in support of the growth of industry and
commerce, not with the intent to restrict or control their economic activities.
This distinction - encouragement versus restriction
- is not always easy to draw, definitely ex ante and possibly even ex
post, in part because policies to encourage one segment of the economy act
to restrict another part, in part because policies seeking to encourage at one
time may act perversely and serve to hamper, not to spur, economic change. At the time of its early industrialization,
England had restrictions on foreign trade, both for the metropolis and in regard
to its overseas colonies, and the magnitude of its taxes probably exceeded those
of France and much of the rest of Western Europe. Nevertheless these taxes followed well defined
legislative rules and did not resemble the arbitrary levies characteristic of
many other Western and non-Western countries, Rosenberg and Birdzell
(p. vii) state that:
the practice of laissez faire was only occasionally
characteristic of Western economies. On
the contrary, both nineteenth-century and earlier Western governments were very
active in trying to facilitate manufacturing and trade.
They go on to list a range
of contributions of the government to economic growth, including ‘courts of
law’, ‘legal modes of organization’ ‘subsidized railways, canals, and
turnpikes’, protection of ‘domestic enterprise with tariffs and quotas’, ‘a
currency’, ‘free compulsory education and transport systems’, ‘assistance to
ocean transport’, ‘grants of monopolies to encourage the formation of new
industries’, and ‘the grant of patents for new inventions’ (pp. vii-viii). Some of these are no doubt a necessary part of
any laissez faire program, others would, given their political nature,
seem to be difficult to fit into the customary sense of such policies.
In regard to recent
interpretations of mercantilism, Rosenberg and Birdzell
take a perhaps unexpected tack, at least to those of us raised or certain views
of Smith and of modern politics. They
indicate that any linking of mercantilisn and central
planning is obviously inappropriate since mercantilism was a system providing
state aid to growth, with most decisions in regard to
16. See Landes (1969, p. 19): “the
scope of private economic activity was far larger in Western Europe than in
other parts of the world and grew as the economy itself grew-and opened new
areas of enterprise untrammeled by rule or custom. The trend was self-reinforcing: those
economies grew fastest that were freest.” While national law, moderated for
international purposes, was crucial to setting the conditions for political and
economic behavior, in the more successful cases laws provided the basic
framework within which individuals could operate, not directly intervening in
the broad range of choices and actions. Whatever
the complexities involved in establishing this legal order, it was to expand,
not limit, freedoms in the same manner as the political order. Berman (1983) places the origin of the crucial
changes for the Western legal tradition in the eleventh century and stresses
the flexibility and dynamic character of the Western legal tradition.
17. This part of the story is told with a limited sense of struggle
against the ruling elite, of changing power balances with the state, or of
conflict of labor versus management, perhaps because these may have been less
in the West than elsewhere or else because it was the particular outcomes of
these struggles that helped generate growth.
555
production, consumption, and investment left to private
individuals. The early state system provided
for security of property rights, law and order, and the reduction of internal
trade barriers, while, via the introduction of tariff and shipping regulations,
attempting to achieve self-sufficiency in trade and control over empire. The approving description of such methods -
“the mercantilist partnership” (p. 134), in which “the political authorities
thus became substantial personal participants in the profits of the mercantile
and manufacturing enterprises” (p. 135), may seem surprising, even if
these restraints are considered a rather unfortunate but disappearing legacy of
feudalism rather than an undesired harbinger of capitalism. (While the argument for internalizing the externalities
generated by political authorities has a certain appeal, observe the frequent
reactions with charges of corruption when this is found to have occurred.) To point to the impact “of restricting imports
and granting exclusive trading privileges to their own nationals” in “building
a merchant class free to trade, on its own terms, because sufficiently
influential members of the political class shared the profits” and to note that
“the trading monopolies served as a teaching device, as if they had been
invented to supply the royal governments with a concrete, short-term demonstration
that they shared with the rising merchant class an interest in the expansion of
trade” (pp. 135-136), is to present a view that is not quite Smithian, at least as, usually understood. While some may regard praise of mercantilism
as somewhat misleading as a guide to growth policy for today, not only might
such policies help explain growth in the past, but they also could provide an
explanation for the belief in neo-mercantilism in today’s world.
Perhaps, as they claim, by
Smith’s day the benefits of mercantilism had been achieved, thus explaining
Smith’s urge that “the device be discarded” (p. 136). It might be that no infant industry tariffs
were permitted to become senile industry tariffs, but it may not be clear
politically when and how to provide for such a policy transition. There were major differences among the practitioners
of mercantilism. Contrast the Dutch,
British, and French handling of overseas trade -by charters granted to private
individuals (however political, or competitive, the allocation process) - with
that of the Spanish, where overseas trade was handled by the royal house, which
led to rather limited overall economic expansion for the European metropolis. To that extent, then, it could be argued that
the British and Western ‘partnership’ was at least a partnership of government
and private interests, and that this was better than a royal monopoly, but it
still poses questions about defining the most appropriate role for government. This question concerning the specifics of the
governmental role resurfaces in regard to the mid-nineteenth century ‘follower’
countries on the European continent, for whom Gerschenkron
(1962) argued both that the need existed for more and stronger governmental action
than in the earlier, more gradual developers and that, historically, there was
a stronger governmental policy input than there had been in the British case
(at least as the latter is usually visualized). And, of course, a further extension of
arguments about the need for a more active governmental partnership has been
made for many of the less developed nations of the world in the twentieth
century,
Rosenberg and Birdzell argue that down to 1800 industrialization was
demand led, spurred by declining transport costs and new channels of trade, and
that it was not until after 1800 that increases in productivity become the
prime mover in expanding industrial output - patterns consistent with what is
now generally believed about productivity growth in eighteenth and nineteenth-century
England. And while the
precise role of science in the early economic growth of the West remains
another widely debated issue. Rosenberg
and Birdzell argue that it was only after 1700 that
an empirically based science and technology emerged to influence economic
development. [18] And it was only after the ending of the
18. The West had, however, “surpassed other societies in the systematic
study of natural phenomena by learned specialists - that is, in science - by
the time of Galileo, say, 1600. The gap
has been widening ever since. But the
wealth of Western economies did not clearly draw ahead of the wealth of their
predecessors and other economies for an other hundred
and fifty or two hundred years. Evidently the links between economic growth and leadership in science
are not short and simple” (p. 242). For more detail on the links between science,
technology, and economic performance see the essays in Rosenberg (1982).
556
first, British, Industrial Revolution, about 1850, that a more
direct economically productive link between science, technology, and production
was to become dominant. Thus the origins
of Western growth and its first highly successful centuries relied more on
organizational innovations, broadly -defined, than on technological changes,
consistent with an argument that stresses the role of social and political
factors in early economic development.
Given the importance of “the
link between science and wealth’ after the late nineteenth century, it is
argued that it is important that the organization of science and innovation be
decentralized, and that political hierarchies refrain from exercising direct
authority over the innovative process.. The
diversity of sources of funding of research, the decentralization in invention
and innovation, and the ability of those who succeed to capture their rewards
are the basic ingredients of the successful Western performance, in contrast
with the “ignominy, memorialized in the eponym ‘Lysenkoism”
(p. 255), when the political hierarchy prevails over the scientific establishment.
Thus the policy for science-based
economic growth is no different than it had been for trade-based economic
growth.
7. Recent changes and their implications
There are a number of
questions posed by the dramatic world changes in the period since the book was
written. First, the increased attention
to the relative decline of the US (or is it attention to the increased relative
decline) raises questions about the various explanations given to explain the
earlier success of the US economy. Have
the conditions necessary for a nation to expand changed, or is it, rather, that
the conditions within the US economy have altered in a less than optimal way,
for whatever reason? Will we benefit
more from studying and adopting the Japanese model than, one century earlier,
the British gained from studying the American case? There remains the possibility that this is
primarily a long-cycle downturn and that all problems are exaggerated. The prospects for a capitalistic future looked
(and were) quite different in the 1960s than they had seemed in the 1930s.
Second, there has been a
shift in the primary arguments of those opposing economic growth from a focus
on limited resources and technological limits to an emphasis on environmental
problems owing to increased growth. While
some still argue that these problems will ultimately stop growth, for many we
have again returned to a belief in the power of technology to provide for goods
and services, and, possibly, even to provide for methods of limiting
environmental damage once the appropriate incentives are given. Third, there has been the
breakdowns in the former Soviet Union and Eastern Europe, and the major
market reforms (with intended minimal political changes) in China. These have clearly demonstrated the economic
and political advantages of the Western example, if not to all observers,
certainly to most residents of those countries. The aim for a market-type economy, with or
without the full set of political freedoms characteristic of the West, might
provide some tests of the arguments linking these. The early problems of introducing a market
economy, if not always for the first time at least in some cases after a rather
long detour, have presented some interesting questions for economic historians.
Markets do not begin to operate with
full efficiency on an instantaneous basis, but apparently take time to develop
the appropriate laws and beliefs. How
long such a lead-in needs to be will help in understanding the conditions for
economic growth in the past. And we now
see the difficult politics of introducing a market (or any economic system
change) under the watchful eye of the public effected
by such a changes. As long as demand
curves slope downward and supply curves slope upward, any change seems to leave
someone unhappy, and if they can be vocal enough, anxious to limit at least
some of the change. The education of a
society to accept new measures, some of which will not benefit them (at least
not as soon and by as much as they will benefit others) provides a central
political dimension to any of these economic changes.
Fourth, the precise
relation between economic freedom and political and social freedom has come to
appear more complex and less easy to ascertain. When the comparison was between a West without
slavery and serfdom and with only limited numbers of contract laborers, and
other areas that still contained considerable amounts of these economic
controls as well as lacking the
557
voting and political changes that existed in much of the West,
the contrasts seemed clear, both economically and politically. The political changes that have accompanied
economic growth may begin to impose constraints upon the economy, an issue
raised earlier by Schumpeter, while elsewhere the onset of economic growth may
permit what can be regarded as favorable political changes. And whether it will be economic freedoms or political freedoms that are to be granted first, and whether
different countries will choose different routes, also remains
uncertain. Perhaps for the first modern
nations the linkage posited by Rosenberg and Birdzell
was the only one; once, however, the trail has been opened it may be that
different alternatives are feasible - at least for limited periods of time. Given that owing to what Rosenberg and Birdzell have argued to be the spread of Western moral
standards, our concepts of political and economic freedom may have become more
inclusive of different individuals and groups, and our sense of the appropriate
time over which benefits should accrue to them have become shortened, while the
broadest generalizations linking these freedoms may remain true, it is doubtful
that things will continue to look as clear-cut as they did in the previous
century.
How the West Grew Rich is a fertile work of comparative economic history. It provides many new insights and interesting
interpretations of the historical past as well as of the current world economic
situation. Central to its arguments, and
linking Rosenberg and Birdzell’s views of the past,
present, and future, are the critical roles of political decentralization and
individual freedom in the achievement of economic growth in the West. Political decentralization and individual
freedom were central to Western economic development, whether economic growth
was dependent upon the expansion of trade or upon the outcome of scientific and
technological change. Some might find
the views of Rosenberg and Birdzell upon the extent
of Western liberties and the diffusion of the benefits of its economic growth a
bit optimistic - but their reply would, no doubt, be to ask where else such
economic growth has been so great, where else has its allocation throughout the
population been so broad, and where else the extent of political liberty been
so great, as in the West. It is that set
of achievements that How the West Grew Rich explains, and it is to them
that they point the readers to when questions of current economic policy are
debated. It remains an appealing and a useful
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The Competitiveness of Nations
in a Global Knowledge-Based Economy
March 2003