Review of Joyce Appleby's The Relentless Revolution
by Bill Allen
Economists become much
too readily obsessed with the products of abstract reasoning – models,
theories, principles and so on. They can learn a lot by studying what has actually
happened in real life, or in other words by studying history. It has to be
accepted that it is often not all that clear what actually did happen in real
life, particularly in the economic sphere, but it would be a terrible mistake
to confine one’s interest in economic history to the very short period for
which comprehensive numerical economic data are available.
There is therefore
much to be learned from ‘The Relentless Revolution’, by Joyce Appleby, who is
Professor Emerita of History at UCLA. The Relentless Revolution is a history
of capitalism. The author defines capitalism as “a cultural system rooted in
economic practices that rotate around the imperative of private investors to
turn a profit,” and comments that:
Capitalist practices represented
a radical departure from ancient usages when they appeared on the scene in the
seventeenth century. Because they assaulted the mores of men and women in
traditional society, it took a very favourable environment for them to gain a
footing. After that, the capacity of new capitalist ways to create wealth
induced imitation.
Perhaps the biggest
question that economic theory has been unable to answer definitively is why economies grow.
There has been no generally accepted explanation of why the Industrial
Revolution (or ‘Industrial Evolution’, as Professor Appleby would prefer it to
be called) began when and where it did, or of why some economies grow while
others don’t. Professor Appleby has some interesting ideas of her own.
One of them is that
Industrial Revolutions have to be preceded by Agricultural Revolutions. Before
the Agricultural Revolution of the sixteenth and seventeenth centuries, in the
‘world of scarcity’, roughly 80% of the labour force had to be employed in
agriculture in order to produce enough food for the whole population. Not
enough labour was left over for secondary or tertiary industries to develop and
grow. The Agricultural Revolution,
according to Professor Appleby, was caused by rising grain prices which “created a powerful incentive to find ways to get bigger yields.” Rising grain
prices were not a new phenomenon, but this time, for some reason, they led to
sustained increases in productivity.
Another of Professor
Appleby’s interesting ideas is that England in the seventeenth century was fertile
ground for fundamental change. The religious conflicts of that century,
including the Civil War, undermined the effectiveness of the forces of
established authority, which were the natural source of resistance to change.
There was censorship, but in the prevailing chaos, it was weakly enforced.
After the Glorious Revolution and the Bill of Rights, censorship lapsed anyway;
the Bank of England was founded; and “a new upper class with a mainly
progressive attitude towards economic development solidified its power.”
The view that weak
government left scope for original thought and innovation seems highly
plausible. There is surely an inherent and unbridgeable conflict between maintaining
the capacity for original thought and innovation and maintaining firm rule,
including rule over matters of doctrine and belief. This conflict has echoes in
the present day, in which the rise of managerialism and the insistent and overbearing
demands of PR for simple and clear ‘messages’ mean that the chaotic process of original
thinking is often regarded as too dangerous to be allowed by many public and
private institutions.
Once the capitalist
cat was out of the bag in England, it was inevitable that other countries would
follow. Much of Professor Appleby’s book is an account of how that happened and
what the consequences were – good, like prosperity, and evil, like slavery. One
of the most important developments was the institution of incorporation of
enterprises with limited liability for the owners. It seems pretty obvious that
limited liability, by its very nature, entails moral hazard, which economic theorists
regard as dangerous. Professor Appleby doesn’t address moral hazard directly
but simply describes the advent of limited liability companies and comments
that “a great deal of attention has been given to the excellence of the English
and American corporation as a vehicle for capitalist expansion.” In any
cost-benefit analysis of limited liability, the benefits of increased growth
would presumably exceed the costs of moral hazard.
In spite of that, it
is quite surprising that there has been so little debate in the wake of the
financial crisis about whether limited liability is desirable for some kinds of
financial companies. Professor Appleby has some harsh things to say about the
origins of the crisis, but not about limited liability. The question is nevertheless
a real one. Moral hazard has clearly done very serious damage in the past decade
in the financial industry. The governments of the world seem to have decided
that the way to reform the industry is to make official regulation tighter, but
tighter regulation may not be unsustainable. Who can tell at precisely what
point the marginal benefits to stability of tighter official regulation are
exceeded by the marginal costs of under-used capital, excessive caution and
lost opportunities for growth? Advocates of tighter official regulation
generally lost the argument during the boom years leading up to the credit
crisis, and I think they are always likely to lose the argument when times are
good. Would some restriction of limited liability for financial companies lead
to better private supervision by shareholders and be an alternative and more
productive means of reform? Such a change would probably mean that large complex
financial institutions generally would become smaller, and that their brand
power would diminish, but it might also deliver a more stable financial
industry.
Notwithstanding its
current travails, in the final analysis Professor Appleby is optimistic about
the durability of capitalism. In Capitalism, Socialism and Democracy, written
in the early 1940s, Joseph Schumpeter suggested that capitalism would not
survive because it would be undermined by the intellectuals whose lifestyles it
made possible. Professor Appleby doesn’t agree. “People do learn from their
mistakes. There is no reason to think that societies won’t continue to modify
and monitor their economies in pursuit of shared goals.” Let’s hope she is
right.
The questions that
Professor Appleby addresses are much bigger than the ones that economists
routinely address in their everyday lives. Her book is all the more interesting
for that.
