In his June 2011 essay Metamorphosis, or Why We Should Study the West, Stephen Balch observes that “Western civilization does not represent just another civilization. It represents a metamorphosis in humanity’s estate.” Economic growth through entrepreneurial capitalism, applying science and technology, has created the metamorphosis in humanity’s material prosperity.
The ancient Greeks introduced concepts of private property and economic independence and insights into the importance of a middle class that are applicable today, notes William J. Bernstein in The Birth of Plenty (2004). But it would not be until the early nineteenth century that capitalism would provide sufficient economic growth to raise the standard of living of the ordinary person in the West for the first time in human history.
During the High Middle Ages, the invention and use of technology in monasteries first began to improve the economic lot of common people. During the Renaissance, Italian entrepreneurs pioneered much of what later would become standard capitalist practice: partnership agreements, holding companies, marine insurance, credit transfers, double-entry bookkeeping. Italy was also the first to appreciate the critical importance of protection of intellectual property, through patents. The Dutch prosperity that emerged after 1500 was the product of individual freedom following the Reformation and copious funds for investment. These developments improved individual well-being, but at a glacial pace; between 1500 and 1820, the average Western European Gross Domestic Product grew at a rate of about 0.15% per year, says Bernstein.
In The Wealth of Nations (1776), Adam Smith described the process through which wealth is produced and how it is distributed among the people. The “division of labour”—specialization of the tasks involved in production—increases economic value. Smith used the example of the “trifling manufacture” of a pin; specialization and the specialists’ machinery (property) permitted man’s productivity to be vastly increased, the source of economic growth and greater societal and individual wealth.
While new technology and the Industrial Revolution began to transform England around 1760, it would take until about 1820 before the pace of economic advance would lead to sustained increased economic growth and prosperity in the West. Bernstein explains the four institutionalfactors, in addition to British individual liberties and the rule of law, that were a prerequisite to sustained economic growth: (1) secure property rights, not only for physical property, but also for intellectual property and one’s own person—civil liberties; (2) a systematic procedure for examining and interpreting the world—the scientific method; (3) a widely available and open source of funding for the development and production of new inventions—the modern capital marketplace; and (4) the ability to rapidly communicate vital information and transport people and goods.
By 1800, the Western economy, beginning in England, says Bernstein, “resembled a dam, behind which an increasingly swollen reservoir of potential was accumulating. This ‘reservoir’ contained centuries of advances in English common law…and were capped with the case law and statutes governing monopolies and patents. It also held the dazzling intellectual advancements of the scientific enlightenment.”
The invention of the steam engine, to power manufacturing and transport, and of the telegraph, to speed communication, supplied the final ingredients to breach the dam. Sea transport became safe, efficient, and cheap only after about 1800 with the development of steam power. Land transport and the telegraph followed about fifty years later. This loosed a torrent of economic growth the likes of which had not been seen, and irreversibly altered the way people had lived for thousands of years.
Innovation and growth, uniquely creating new wealth, require outlays of risk capital in advance of obtainable results. In an economy’s sea of credit, there is a ceaseless stream of new issues of equity and debt instruments and commercial paper that, from the uncertainty of their basis, are liable to wide fluctuations in value, from which speculators, sometimes rash, seek to benefit. Risk taking inevitably leads to some failures. And human calculation is subject to flawed judgments and panic in the face of unforeseen events, causing a flight to safety of self-interest, often harming the public good. In America, Alexander Hamilton’s government and banking institutions, modified over time, provided both needed financial liquidity and regulation which sought to avoid and address, not always successfully, the inevitable failures of human nature and abuses in free markets.
Two aspects of law inherited from England and related to business and contracts—ownership of property and the limited liability corporation—further enabled American economic growth through entrepreneurship. Technological inventions, also building largely on the British experience, provided the ability to rapidly communicate vital information (the electric telegraph) and transport people and goods (the steam locomotive and railroads). In the mid-nineteenth century, a “virtuous circle” came into being: Advances in technology begat improvements in productivity, which, in turn, begat increasing wealth, which then begat yet more capital to fuel still more technological progress. Economic growth and prosperity became self-sustaining.
Economic growth provided new, better-paying jobs and produced cheaper goods for the masses—the working class—that they could not previously have afforded (artisans had produced their goods mostly for the aristocracy). As capital was invested in newly-invented machinery, productivity (output per worker) grew and per capita income and the standard of living increased. Although far more new jobs were generated, old jobs with handicraft skills or requiring unskilled labor were lost, creating economic insecurity and the need for skill changes through training and education.
Economists call the period between 1860 and 1890 in America the Second Industrial Revolution. Inventors and entrepreneurs, rather than politicians playing musical chairs, became the nation’s heroes. Within one generation, they developed a new civilization based on machines and more mass production, the world’s greatest industrial economy. They registered hundreds of thousands of new patents for inventions aimed largely at efficiency, spurred by new managerial hierarchies; put reservoirs of risk capital to use; mobilized armies of workers for new jobs; organized arsenals of new machinery; created hitherto undreamed of products; and made them widely available. They generated mountains of new wealth, quadrupling national income.
The New York Times
editorialized on December 31
, 1899 that the nineteenth century had been “marked by greater progress in all that pertains to the material well-being and enlightenment of mankind than all the previous history of the race; and the political, social, and moral advancement has been hardly less striking.” This progress continued over the twentieth century.
In The Moral Consequences of Economic Growth
(2005), Harvard economist Benjamin M. Friedman demonstrates that economic growth, and the benefits it confers, fosters greater opportunity, social mobility, tolerance of diversity, commitment to fairness, and dedication to democracy. And, he notes, the converse is true with economic stagnation. Distinguishing features of the American experience were also classlessness and the Protestant work ethic carried here by the Puritans.
Dr. Balch points out that “a metamorphosis involves profound internal changes that intensify creative powers rather than simply concentrating lucre. It is this Promethean aspect that sets apart the first three Western centuries as something truly extraordinary.” Capitalism provided millions of ordinary people access to goods, services, and leisure on a scale not available to the very richest in pre-modern times. It greatly raised the standard of living for millions and immeasurably expanded their opportunities. Yet, as Dr. Balch writes in Is Our Civilization a Bubble?
we take such a miracle for granted.
Colleges and universities should include the history of economic growth in Western civilization in a restored liberal arts education as NAS has often recommended, to remind each new generation of what their ancestors achieved and what it takes to continue their good fortune.
Next week’s article will discuss the role of corporations in America’s economy.
This is one of a series of occasional articles applying the lessons of Western civilization to contemporary issues relevant to the academy.
The Honorable William H. Young was appointed by President George H. W. Bush to be Assistant Secretary for Nuclear Energy and served in that position from November 1989 to January 1993. He is the author of Ordering America: Fulfilling the Ideals of Western Civilization (2010) and Centering America: Resurrecting the Local Progressive Ideal (2002).