Capital Gains

by Diedre McCloskey

Diedre McCloskey is professor of economics at the University of Illinois at Chicago.

This article appeared in The Christian Century, May 4, 2004, pp. 24-30. Copyright by the Christian Century Foundation; used by permission. Current articles and subscriptions information can be found at www.christiancentury.org. This material was prepared for Religion Online by Ted and Winnie Brock.

SUMMARY

Third World poverty is caused chiefly by kleptocratic governments and private interests in league with governments that make market exchange unprofitable. This is achieved by private wealth at the cost of other people’s wealth instead of by working, saving and inventing.

Any society, Christian or not, has both a sacred sphere and a profane sphere, a sphere in which love and obligation determine who gets what as against the sphere in which prudence and courage do so. And the two cannot be disentangled. We all live in families, and a church can be viewed from this social-scientific perspective as a sort of family. Businesspeople cannot be routinely avaricious and remain in business any more than a caretaker for a child can, or a dutiful daughter.

Many noneconomists imagine that, on the contrary, avarice is necessary to keep the wheels of commerce turning, "creating jobs" or "keeping the money circulating" -- that people must buy, buy, buy or else capitalism will collapse and all of us will be impoverished. It’s a bubble theory of capitalism, that people must keep puffing -- one version of the old claim that expenditure on luxuries at least employs workers.

I say as an economist that the theory is mistaken. Nothing would befall the market economy in the long run if we tempered our desires down to one car and a small house and healthy foods from the co-op. (And as the economist Robert Frank argues, taxing consumption to bring down rivalrous buying of Ferraris and other symbols of superiority would make us better off even without moderating our desires, though I doubt that rivalrous consumption is a very long-lasting or very important feature of high capitalist economies; notice, for example, that it’s always those other, silly people, not we, who are buying to keep up with the Joneses.) Workers in a temperate economy would not become permanently unemployed.

The mistake is to think that the relevant mental experiment is imagining that tomorrow, suddenly, without warning, we all begin to follow Jesus in what we buy. No doubt such a conversion would be a shock to General Motors. But, an economist would observe, people in the Christian economy would find other employment, and would choose more nonwork activity. It would still be a fine thing to have light bulbs and paved roads and other fruits of enterprise (the commercial version of courage). "In equilibrium," as economists say when making this sort of point, the economy would encourage specialization to satisfy human desires in much the same way it does now. People would buy Bibles and spirit-enhancing trips to Yosemite instead of Monica’s Story and trips to Disney World, but we would still value high-speed presses for the books and airplanes for the trips. The desires would be different, but that doesn’t change how the system works best: private property (such as your labor, your ideas) seeking its best employment; consumers (such as you) seeking the best deal.

I agree with Benjamin Hunnicutt in his remarkable books on the leisure history of Americans that long hours are connected to our great Need-Love for commodities. People following Jesus would by contrast make the plain pottery that an economy of moderation would demand and spend more time with their children. But the point is that the pottery would still be produced most efficiently in a marketing, free-trade, private property, enterprising and energetic economy. We would be richer, not poorer, in the things and deeds we value.

This should be good news for Christians. We do not need to trim our demands for ethical consumption for fear that such a policy would hurt the poor. We do not need to accept avaricious behavior because of some wider social prudence it is supposed to serve, allegedly keeping us employed.

To repeat, it is not the case that market capitalism requires avaricious people. More like the contrary. Markets, I now am claiming, exhibit behavior that Jesus would have approved of -- in fact, behavior that he did, textually, once in a while, approve of. In any event, I want to claim that the imperfect economy we now inhabit contains in its very functioning a large amount of God-regarding virtue.

Consider your own workplace. How does your office or factory actually operate? Really, now. With monsters of prudence running around taking care of Numero Uno? No, not really We find the cartoon strip Dilbert funny because the avaricious behavior of some of its characters is over the top, crazy funny, unacceptably prudent. Workplaces are in fact more like homeplaces. We are morally offended when our workmate complains about our dog in our office: what a nasty thing to do, we think; doesn’t he realize that Janie is important to me; doesn’t he care about me? A wholly prudential worker would not be capable of such sorrow and indignation.

The ethical wholeness of actors in a capitalist marketplace is not a minor, supplementary matter. The writer Don Snyder tried construction work to survive one winter in Maine:

The simple point I am making is that markets live in communities of virtue. Supply and demand, money and prices, would still go on working if people had identities more complex than the windup toys of standard economic theory. An ascetic "prefers" oatmeal in her bed-sitter to a six-course breakfast at the Savoy Grill. Yet she will follow the economist’s "law of demand" about oatmeal, buying less if its relative price goes up. She comes to her "tastes" through religious conviction, but in the market the tastes do what they also do in people motivated in other, unchristian ways -- by keeping up with the Joneses, or commodity fetishism, or unthinking acquisitiveness. These too are identities, ethical decisions, though we think poorly of them.

Oddly, the prudence-obsessed economists have themselves been forced recently in their very mathematics to admit that Homo economicus must live with an identity formed in a family within a community of speech constrained by virtues (a non-believer would call it, in summary, "culture"; a Christian would call it "a moral universe"). For example, in "game theory," an aptly named part of high academic economics, it has been discovered that games (such as the nuclear arms race or participation in an economy) cannot be played with prudence-only rules. They break down, just as they do in Dilbert’s office or on the construction site that does not attend to love and justice too. This is true even if one does posit a Homo economicus as a purely hypothetical idea to be pursued as social mathematics.

Off the blackboard it is clear that real economies depend on real virtues. Economists have recently discovered such notions as trust and Institutions, noting what the rest of us always knew, that a deal in a market (such as your employment with all its formal and informal clauses) depends on both prudence and the other virtues. One must belong to a community, since no contract can be explicit about every aspect of a difficult transaction -- and even in buying a newspaper the agent trusts that you won’t suddenly snatch the money back and run out of the store.

When I moved in 1980 from Hyde Park in Chicago to Iowa City, I was startled by the reduction in transaction costs. Every transaction was easier. Checks passed, cleaning ladies worked hard, auto mechanics did what they said they were going to do. Moving back to Chicago in 1999, I observed the contrast again. It is why coreligionists or coethnics are often so successful in business. Their communities of trust give them cheaper loans and cheaper supplies and even insurance in disaster. If you are not virtuous, you get dumped. The overseas Chinese do better as a minority in Indonesia, where they have lived without marrying outside their group since the 17th century, than at "home" in Canton. Mennonites made fortunes in 18th-century Holland. The orthodox Jewish diamond dealers in Brooklyn trade stones worth thousands of dollars on a nod and a trusted word.

Any economy depends on ethical behavior. The other virtues do not drive out prudence or make the New York Stock Exchange into a love fest. The honest workman is still worth his hire. The margin call still comes due. But actual capitalist markets depend on more than prudence. If one performs economic experiments on students, it has recently been found, love, justice, temperance, faith, hope and courage come pouring even out of the laboratories.

So far I have said things that are unpopular with economists but not with Christians. Now I must in fairness turn the tables. I say: Envisioning prudence within the other virtues does not entail abandoning prudence entirely. The mistake of thinking that economics must concern either Only Prudence, on the one hand, or No Prudence at All, on the other, is shared by hard right, hard left and soft center, politically speaking, which is to say that it is shared by most intellectuals. Most intellectuals think that introducing any element of cultural autonomy is devastating to a material explanation of class behavior, say.

A balanced regard for prudence among the virtues has a large effect on how a Christian views the market. The balance can be put so: the market, and the bourgeois ethic that supports it, must be given its due. It is not an invention of the devil. It is not intrinsically ungodly. In fact, as Max Weber noted a century ago, capitalism’s practitioners have often enough been unusually godly folk. Yet the impulse among European intellectuals since 1848 has been never to give the market its due, and to feel in fact that one is being ethical only if one sneers at market outcomes.

The chain of reasoning against the intellectuals goes like this:

1. Virtues underlay the market and its triumph ca. 1830. Not vices, contrary to the cherished views of the intellectuals. Not imperialism, whether Iberian or Northern. Not the slave trade. Not the impoverishment of the working class. Not extractions from the Third World. Not the exploitation of women. This can be shown in statistical detail on each count.

2. The triumph of the market was a necessary condition for modern economic growth.

Marx and Engels say this, of course, in The Communist Manifesto, though from the perspective of year 2000, or even 1948, even their fulsome praise for the accomplishments of the bourgeoisie in "scarce two hundred years" down to 1848 looks like understatement. Modern economic growth did not depend on central planning, nor corporate welfare, nor any sort of theft from the poor. Modern economic growth was not a result of trade unions or government regulation or the welfare state. It was a result of letting markets work.

3. Modern economic growth has been much greater than most intellectuals realize.

Let me go beyond a telegraphic style on this one. It is not true, as many Christians with social concerns believe, that the world is getting poorer. In the past two centuries and especially in the past 50 years, and most especially since the fall of communism, it has gotten much, much richer. Globalization encourages the capitalist engine of growth. If people understood how generous the engine has been, they would have less enthusiasm for protectionism or socialism or environmentalism or economic nationalism in any of their varied forms.

But most educated people believe that the gains to income from capitalism’s triumph have been modest, that the poor have been left behind, that the Third World has been made miserable in aid of the enrichment of the First, that population growth must be controlled, that diminishing returns on the whole has been the main force in world economic history since 1800. All these notions are factually incorrect. But you will find all of them in the mind of the average professor of theology or biblical studies.

Angus Maddison’s recent compilation of national income statistics worldwide, Monitoring the World Economy, 1820-1992, gives a way of measuring the generosity of the capitalist engine. The central fact is well illustrated by the United States. From 1820 to 1994 the real per capita income of the U.S. increased by. . .

Well, take a guess. The exercise of guessing is important if you are to grasp the point. What would you say? What is the rough magnitude of modern economic growth; 1820-1994, from Monroe to Clinton? What are we really talking about when we claim that globalization offers the world’s poor a chance to be much better off? Take a guess, testing how close you come to the educated person’s misunderstanding of the capitalist engine.

Fifty percent? A hundred percent? A doubling since the days of the federalists? All right, 200 percent, a tripling? Surely that is enough credit to give the bourgeois engines of economic growth?

No. Sixteen hundred percent. An increase by a factor of 17. In 1820 the average American, slave and free, produced $1,290, expressed in 1990 dollars, a little below the present average for Africa. In 1995 she earned $22,500.

If you do not find this figure impressive, I suggest you are not grasping it. It is utterly unprecedented. It dwarfs the impact of the invention of agriculture. It means that your great-great-great-grandmother had one dress for church and one for the week, if she were not in rags. Her children did not attend school, and probably could not read. She and her husband worked 80 hours a week for a diet of bread and milk (they were four inches shorter than you are). The scope of human life was radically narrowed -- and is to this day in countries that have not experienced modern economic growth.

You can say all you wish about the spiritual vacuum of modern life, and how we can’t see the sunset in Los Angeles. (In fact the environment has markedly improved in the past century: city air is cleaner after soft-coal and horse manure were banished, and now auto and factory emissions are under attack; more people can get to the countryside; indeed, one can see the sunset in Los Angeles nowadays.) But the factor of 17 represents an enormous freeing of people from drudgery and fear and insecurity.

That is a very good thing -- to go from the level of desperation to the level of hope. Notice the acceleration (greater in the past ten years) -- except for 1913 to 1950, that era of deglobalization, of protection, of foreign policy governed by notions of economic nationalism now recommended by many progressives and conservatives together, and of the wars that come from the mercantilism of Lebensraum and the East Asian Co-Prosperity Sphere, the politics of a noneconomic economics popular among realists.

As the first industrial nation and the champion of free trade Britain’s average annual income went from $1,800 in 1820 to $3,300 in 1870, nearly doubling in the face of exploding population -- during precisely the half century in which the European avant-garde turned against free markets. British income per head was above all others until the New World’s exceeded it (New Zealand in 1903, the U.S. in 1905, Australia in 1906: later the Antipodes slipped for a long while back into protectionist mediocrity). The rest of Europe did not catch up until after World War II -- all the while the avant-garde complaining that Britain was "failing" economically.

Now Britain wobbles upward with the other advanced industrial countries in a band plus or minus a few percentage points from the average, excepting the big, rich nation of churchgoers, which persists at 30 percent above the rest. So much for economic "failure" among the "Anglo-Saxon" leaders of industrialization.

Japan in 1870 was roughly at the present-day Bangladeshi level of income per head, the same as Brazil’s in 1870. By 1939, it had attained the level of U.S. income per head 60 years before (and was double Brazil’s). In 1994, Japan had attained the U.S. income level ten years before (four times Brazil’s). It was a convergence through imitation, saving, education and work -- which then its former colony South Korea repeated. Korea’s income in 1952 was a desperate $860 in 1990 prices. Now it is $10,000. So much for the lasting effects of even an especially brutal colonialism.

If we can hold off neosocialist attempts to divide the wealth before it is created, the whole world can be rich. If India can restrain its Gandhian impulse to throttle the market, it can adopt American ways of retailing. Japanese ways of manufacturing and German ways of chemical-making and enter the modern world of a wider human scope. India does not need to repeat the stages through which Britain and France have traveled (contra the pessimism born of London School of Economics educations among Congress Party politicians that think India needs to go slow, to plan, to wait before leapfrogging into a post-computer world). There is no racial or cultural reason why India cannot in five or ten decades have an American standard of living. The 21st century can be a grand alternative to the Century of Protection (and Slaughter) just concluded.

4. Modern economic growth has transformed the ethical universe for its beneficiaries, who are everyone involved.

Contra the accepted view, there has in fact been no worsening of income distribution. The gap between rich and poor is smaller, not larger.

For example, modern economics are now able to indulge their tastes (as economists put it in their cold way) for environmental change, social justice, human rights. Sine qua non. It is emblematic that the first industrial nation was the first to abolish slavery. Until the rise of a market and bourgeois ideology, until those devout Quaker traders -- even slave traders -- around 1780, it had occurred to no one that slavery was anything but God’s plan.

5. The Malthusian and now environmentalist notion that population growth is itself an evil and is the source of our poverty has been proven false.

The zero-sum politics of the 1930s is ever popular, because pessimism always sounds wiser than optimism, but has been falsified again and again. It is not the case that the final struggle of capitalism, any more than Armageddon, is upon us. On the contrary, the century beginning offers a prospect of ever-widening enrichment: India is starting to see explosive growth; China has been experiencing it now for ten years. And in such countries the environment improves when the people want it to -- that is, when they become well off,

I realize that saying such things brings a hard, unchristian tone into the analysis. But surely it is incumbent upon a Christian heart to help the poor prudently, not in order to save money but in order to really save the poor. Prudence, I said, is a virtue. In such matters, practical wisdom, knowing how to achieve a spiritual end, proves itself.

In the first place, cui bono? Are the poor of Tanzania, say, helped by forgiving debt owed by their government? The forgiving of debt has an "incidence," as economists put it, which may not correspond to its apparent legal placement. You help "the country." But wait: who gets the benefit? If the poor in the countryside get it, good; if the thieves running the government get it, no poor person has been helped. So forgiving debt may not accomplish its ethical intention.

Here is a concrete example of what economists mean by "efficiency" and what I am calling prudence: enriching the rich in Tanzania simply does not accomplish what its label claims; it is inefficient, inefficacious, imprudent.

Second, look at the other side of the transaction. Will big banks continue to make loans to poor countries if the debts are forgiven? Is lack of access to the international capital market a good thing for the poor of Bolivia?

Last and most important, the magnitudes involved are trivial relative to the poverty to be relieved. If the poverty of the Third World was in fact caused by debt to the First World, no one but the worst sort of Benthamite could reasonably object to forgiving it. But it is not so caused. It is caused chiefly by kleptocratic governments or private interests in league with governments that make market exchange unprofitable, that make investment in producing something to exchange silly, that encourage achieving private wealth at the cost of other people’s wealth instead of by working, saving and inventing (economists know this last by the odd term "rent seeking").

The plight of the world’s poor is indeed caused by insufficient Christian charity. It is caused by greed. But the greed and lack of charity is not that of the First World. A Christian economics should concern itself with the ethical grounding not of Danish journalists or American college professors but of African politicians and Latin American generals.