Friday, August 3, 2012

The Bad History Behind ’You Didn’t Build That’

The controversy surrounding President Barack Obama’s admonishment that “if you’ve got a business -- you didn’t build that. Somebody else made that happen” has defied the usual election-year pattern.
Normally a political faux pas lasts little more than a news cycle. People hear the story, decide what they think, and quickly move on to the next brouhaha, following what the journalist Mickey Kaus calls the Feiler Faster Thesis. A gaffe that might have ruined a candidate 20 years ago is now forgotten within days.

About Virginia Postrel

Virginia Postrel writes about commerce and culture, innovation, economics and public policy. Shes the author of "The Future and Its Enemies" and "The Substance of Style," and is writing a book on glamour.
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Three weeks later, Obama’s comment is still a big deal.
Although his supporters pooh-pooh the controversy, claiming the statement has been taken out of context and that he was referring only to public infrastructure, the full video isn’t reassuring. Whatever the meaning of “that” was, the president on the whole was clearly trying to take business owners down a peg. He was dissing their accomplishments. As my Bloomberg View colleague Josh Barro has written, “You don’t have to make over $250,000 a year to be annoyed when the president mocks people for taking credit for their achievements.”

Hectoring Entrepreneurs

The president’s sermon struck a nerve in part because it marked a sharp departure from the traditional Democratic criticism of financiers and big corporations, instead hectoring the people who own dry cleaners and nail salons, car repair shops and restaurants -- Main Street, not Wall Street. (Obama did work in a swipe at Internet businesses.) The president didn’t simply argue for higher taxes as a measure of fiscal responsibility or egalitarian fairness. He went after bourgeois dignity.
“Bourgeois Dignity” is both the title of a recent book by the economic historian Deirdre N. McCloskey and, she argues, the attitude that accounts for the biggest story in economic history: the explosion of growth that took northern Europeans and eventually the world from living on about $3 a day, give or take a dollar or two (in today’s buying power), to the current global average of $30 -- and much higher in developed nations. (McCloskey’s touchstone is Norway’s $137 a day, second only to tiny Luxembourg’s.)
That change, she argues, is way too big to be explained by normal economic behavior, however rational, disciplined or efficient. Hence the book’s subtitle: “Why Economics Can’t Explain the Modern World.”
“Economics of a material sort can surely explain why Americans burned wood and charcoal many decades longer than did the forest-poor and coal-rich people of inner northwestern Europe. It can explain why education was a bad investment for a British parlor maid in 1840, or why the United States rather than Egypt supplied most of the raw cotton to Manchester, England,” writes McCloskey, a professor of economics, history, English and communication at the University of Illinois-Chicago, and of economic history at Gothenburg University in Sweden. But the usual stories of utility maximization and optimal pricing “can’t explain the rise in the whole world’s (absolute) advantage from $3 to $30 a day, not to speak of $137 a day.”
Something bigger was at work. McCloskey’s explanation is that people changed the way they thought, wrote and spoke about economic activity. “In the eighteenth and nineteenth centuries,” she writes, “a great shift occurred in what Alexis de Tocqueville called ‘habits of the mind’ -- or more exactly, habits of the lip. People stopped sneering at market innovativeness and other bourgeois virtues.” As attitudes changed, so did behavior, leading to more than two centuries of constant innovation and rising living standards.

Overemphasizing Capital

Most of “Bourgeois Dignity” is devoted to knocking down alternative explanations for the sudden and enormous escalation in living standards. In particular, McCloskey draws on the last half-century of economic-history scholarship to debunk what most people outside the field assume was the critical ingredient: savings and wealth accumulation. We might call this explanation “capital-ism.” Whether derived from Karl Marx, Max Weber, Karl Polyani, or, in a more-recent incarnation, Fernand Braudel, she argues, the emphasis on capital simply gets the facts wrong. It is empirically false.
First of all, savings were high centuries before the economy took off. Given medieval crop yields, just preserving enough grain to plant next year’s crop implied a savings rate of at least 12 percent, compared with no more than 10 percent to 20 percent in modern industrial economies. And, contrary to Weber’s story about a new Protestant Ethic, savings rates were roughly the same in Catholic and Protestant countries or, for that matter, in China.
“Something besides thrifty self-discipline or violent expropriation must have been at work in northwestern Europe and its offshoots in the eighteenth century and later,” she writes. “Self-discipline and expropriation have been too common in human history to explain a revolution gathering force in Europe around 1800.”
Besides, as economic historians discovered in the 1960s, the economic takeoff didn’t actually require large amounts of capital. Early cotton mills, for instance, were relatively cheap to set up. “The source of the industrial investment required was short-term loans from merchants for inventories and longer- term loans from relatives -- not savings ripped in great chunks from other parts of the economy,” McCloskey writes. “Such chunk-ripping ‘capitalism’ awaited the Railway Age.”
There had always been enough capital. What was different, she maintains, is how people thought about new ideas. Creative destruction became not only accepted but also encouraged, as did individual enterprise. “What made us rich,” she writes, “was a new rhetoric that was favorable to unbounded innovation, imagination, alertness, persuasion, originality, with individual rewards often paid in a coin of honor or thankfulness -- not individual accumulation restlessly stirring, or mere duty to a calling, which are ancient and routine and uncreative.”

Radical Claim

This is a radical claim, and one that McCloskey, having dispatched the alternatives, plans to demonstrate further in her next book, “The Treasured Bourgeoisie.” The idea will sound particularly strange if you learned your economic history, as many political intellectuals do, in a diluted version of Marx and Polanyi (on the left) or Weber (on the right) and thus assume that economic growth depends, first and foremost, on some accumulated store of wealth. You might be inclined, therefore, to sneer at innovation -- or even, as Daniel Bell did, to write a book condemning it as a “cultural contradiction” of capitalism -- and at bourgeois virtue. If you think that capital, not insight or innovation, is the critical ingredient, it’s also a short hop to the belief that the entrepreneur doesn’t deserve praise for building the business.
McCloskey’s book is not only a useful survey of how scholars answer the biggest question in economics: What causes growth? It is also a timely reminder that prosperity depends on more than effort or resources or infrastructure or good laws. Attitudes matter, too. You don’t build a wealthy society by deriding bourgeois enterprise -- or the people who take pride in it.

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