How The West Grew Rich by Nathan Rosenberg and L.E. Birdzell, Jr., is a careful, objective, scholarly explanation of the foundations of prosperity. Since the beginning of history, social scientists and their barbarian ancestors have been trying to explain why the west prospers while the rest of the world doesn’t. Don Boudreaux tells a story of an aged economist who was asked “What are the causes of poverty?” The old man harrumphed. “Poverty has no causes. Wealth has causes.” Rosenberg and Birdzell examine the causes.
They begin with the hypotheses of earlier writers: the prevalence of science, the abundance of natural resources in western countries, social psychology, luck, cheating, imperialism, and other proposed explanations. While all these explanations may have some validity,
the underlying source of the West’s ability to attract the lightning of economic revolutions was a unique use of experiment in technology and organization to harness resources to the satisfaction of human wants. The key elements of the system where the wide diffusion of the authority and resources necessary to experiment; an absence of more than rudimentary political and religious restrictions on experiment; and incentives which combined ample rewards for success, defined as the widespread economic use of the results of experiment, with a risk of severe penalties for failing to experiment…. The thematic terms are thus autonomy, experiment, and diversity.
Rosenberg and Birdzell then begin with the Middle Ages, showing how these institutions originated and developed from then, through the eighteenth century, then the age of machines, and the creation of legal institutions favorable to economic progress, such as the corporation. Like Hernando de Soto in his Mystery of Capital, Rosenberg and Birdzell place heavy emphasis on the importance of legal institutions which permit the accrual and transfer of capital: “[L]arge-scale trading in American industrial stocks traces its origins to trading in the trust certificates issued by the trusts of the 1880s.” As this trade increased, investment and capital mobility increased. This and other forms of easily tradable investment extended the foundation for the remarkable decentralized decisionmaking of the free market:
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 their 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. Its importance in Western growth turns on the point that the choice of capital investments includes the selection of the proposals for innovation that are to be funded. The diffusion of authority to select programs for capital expenditure and the diffusion of authority to select projects for innovation thus cover much the same ground.
The rule of law is therefore vital, as Hayek argued, but Rosenberg and Birdzell argue (as does de Soto) that this is not the whole story. Social institutions, from capital mobility to a belief in science, are fundamental also. This latter is especially interesting—as the authors put it, the mere existence of the scientific method was not enough; there also had to be a massive, yet decentralized, scientific apparatus: “The West successfully organized its scientists with very little use of hierarchical management…. The scientific community functioned well without a hierarchy, simply because the organizational tasks normally delegated to a hierarchy were, in science, far better left undelegated. Working toward a shared goal of achieving explanations of natural phenomena truthful by the tests of observation, experiment and reason, individual scientists exercised their own judgment as to the field which they could best contribute to this goal…planned their own work, and…[their] rewards and penalties were not open to allotment by a hierarchy.” Those who think, as Ayn Rand puts it in Capitalism: The Unknown Ideal, were freed from the interference of those who do not.
This, of course, represents a moral proposition also—it means embracing an ethics based not on hierarchy, authoritarianism, and faith, but on reason, curiosity, and mutual respect. This theme is explored beautifully in Jacob Bronowski’s Science And Human Values, which Libertarian Bookworm featured months ago. Unfortunately, Rosenberg and Birdzell don’t spend much time on the issue of philosophy; their inquiry is into the social and economic structures of capitalism. These structures, however, are like canals, which must be filled with the water of human energy before they really function. Without philosophical and ethical explanations, Rosenberg and Birdzell can only explain the shape of the canals, and not the human energy. Transfer western legal and economic institutions to a land that does not share western philosophical underpinnings, and you will end up with Cargo Cults, not economic or social progress. In a culture that does not believe in economic prosperity and human happiness, institutions designed for those purposes will not be received enthusiastically.
How The West Grew Rich is a technical book for those interested in economics and social science, not for the casual reader. But it is a first rate explanation of the importance of the rule of law, and of which laws are necessary to accomplish human happiness.
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