The #1 Historical Question Is Unanswered
by Gary North: The
Federal Reserve Is Playing Defense
I do not refer
here to a historical question raised by a book said to be revealed
by God. I refer to a question that historians have struggled with
for a century without any agreed-upon solution. It is this:
between 1780 and 1820 that produced compound per capita economic
growth in Britain and the United States of approximately 2% per
If you think
this is a matter of no concern to you, consider this question:
Will my grandchildren
live in a more prosperous, more productive world in 50 years?
two centuries, Americans have assumed that the answer to this question
From the beginning
of recorded history until about 1820, the answer was "probably not."
This answer applied to those grandchildren who were born to parents
who survived diseases, famines, and childhood accidents. Most did
after 1820. Why?
For a good
summary of the most recent findings on the extent of this growth,
was a billion in 1800. Today, it is 6.7 billion. Yet most people
in the urban world have far more wealth than anyone had in 1800.
was not much richer than sub-Sahara Africa in 1950. Today, it is
very rich. North Korea is not.
China is experiencing
the fastest economic growth in history for a large nation. Yet it
did not begin to grow until Deng Xiaoping freed up agriculture from
socialist controls in 1978.
been lots of reasons offered by economic historians for this transformation,
but these have all been called into question by economic historian
Dierdre McCloskey, who began working on this issue as Donald McCloskey
three decades ago. In a proposed six-volume set, The Bourgeois
Era, McCloskey is exploring this question in detail. Two volumes
are available. They have presented the problem. In volume 2, Bourgeois
Dignity. McCloskey refutes the prevailing explanations one
Then what did
it? McCloskey's theory, not yet proven: a change in attitude toward
the legitimacy of wealth. This began in the 17th century in the
Netherlands. (McCloskey speaks Dutch.) This spread to Scotland and
I am partial
to the thesis. I have believed it for at least 25 years. But there
is a problem. What motivated people to change their views after
– basically – the history of mankind? These were Calvinist societies
in the 17th century. What changed in Calvinist theology in the century
after Calvin? The 17th-century creeds did not change the theology.
The Synod of Dort (1619) and the Westminster Assembly (1643-47)
did not alter the old Calvinism. So, what was the crucial factor?
I have a suggestion:
their concept of the nature of God's kingdom on earth. The shift
was to what is today called postmillennialism: the belief that the
final judgment only comes after Christ's kingdom has filled the
earth. This transformation involves compound blessings (Deut. 28:1-15)
including economics. This was not held by Lutherans and 16th-century
In both the
Netherlands and Scotland, there were postmillennial theologians.
But McCloskey's research challenge will be to see if the supposed
shift in attitude toward business wealth was associated with this
shift in eschatology. If there was no connection, then what was
of Nations (1776) favored economic wealth. He was a Scot.
He was a liberal Presbyterian. But McCloskey thinks the change in
attitude preceded Smith by 150 years.
Proof is scheduled
for Volume 3. I await it with great anticipation.
co-editor of the American academic journal, The Journal of Economic
History, in the spring of 1982. Beginning 15 years earlier,
the editor had been my professor, Hugh Aitken. I recall the evening
in a graduate seminar, probably in 1966, when Aitken had posed the
#1 question. How did the transformation happen? He said the scholars
did not know.
As far as I
can see, they still do not know.
Niall Ferguson has called the great transformation of the West the
great divergence. Asian nations had about the same wealth per capita
as Western nations in 1800. By 1900, the two societies diverged
continued until 1970, he argues.
In a TED video,
Ferguson attributes this to six factors:
(both political and economic)
- The scientific
rights (not democracy)
- Modern medicine
- The consumer
- The West's
I don't believe
any of this. That is because I have read McCloskey's two volumes
(twice). McCloskey refutes them all, plus a dozen more.
The late medieval
world had political competition. It was highly decentralized. It
also had competing markets. It had carefully defined property rights.
revolution had almost no effect on the West until 1900. The changes
came before 1900 from technology, which was not governed by the
scientific method. The first major use of the scientific method
in economic production was in the German chemical industry in the
late 19th century. The growth of technology before this was the
product of independent tinkerers and inventors who had creative
ideas and who (somehow) got access to the minimal suppliers of capital
available for investing. The secret of success here was retained
earnings, not great infusions of capital, as McCloskey shows.
had no impact on Western populations until the late 19th century.
Until then, the big two factors were (1) separation of latrines
from water wells, known for millennia; (2) the wire mesh screen,
which came after 1860. The smallpox vaccination had been brought
to England from Turkey and Persia in the early 1700s. It had been
used there since the late 1600s.
There is no
evidence that I am aware of that the Protestant West worked longer
hours that rice-paddy families in China.
As for the
consumer society, what changed in the West in 1800? There had been
production for markets for 400 years.
In other words,
Ferguson doesn't know, yet he is a superior historian. He has looked
at this issue for a long time. He is still wandering in the dark.
So are his peers.
We do not know
how the West first achieved compound economic growth two centuries
ago. We know that there were preconditions for this growth. Property
rights were one factor. Reliable courts were another. So was widespread
literacy. Then there was preaching against envy – a factor that
sociologist Helmut Schoeck pointed out 45 years ago. There was optimism
regarding the future. But the two questions remain:
Why did it
take place in the West?
- Why didn't
it take place centuries earlier?
I think it
had more to do with the steam engine than anything else. But that
was not sufficient to explain the transformation. Some previously
ignored combination of factors is missing from our analysis.
We search for
cause and effect in history, as in every other field. We do not
know what was the cause of the incomparable effect that became visible
The East has
surely picked up Western techniques over the last half century.
Japan adopted Western technology after the Meiji Restoration in
1868. Hong Kong followed suit after 1945, Korea after 1950. China's
reform in 1978 launched the so-called miracle. India was still a
low- growth nation until after the free market reforms of 1991.
Then, almost overnight, the nation began to grow rapidly.
The speed with
which Asian nations have been able to adopt Western capitalism has
been unprecedented. The result has been rapid economic growth. There
have been holdouts. Malaysia has discriminated against the Chinese
natives, with predictable results: slow growth. But Singapore is
are now international. The consumer society is becoming universal.
The means of accessing this market is price competition. Innovation
seeks to create demand in mass markets.
The entry into
the middle class of 100 million Chinese and 50 million Indians has
opened up the possibility of more rapid economic growth worldwide.
The crucial economic resource is human creativity. The free market
offers opportunities for innovators. The entrepreneur serves anyone
who can afford to buy the output of his creativity. This offers
tremendous benefits to anyone, anywhere who can afford to buy this
output. The fact that someone lives in India or China has no relevance
for the value of his invention for others living outside his nation's
The free market
rewards creativity that makes life better for customers. By opening
up Asian markets, the importation of capitalist institutions has
opened up a two-way flow of creativity. Specialization of production
will increase. Production costs will decrease. This is the lesson
of capitalism for two centuries.
Will the pace
of change continue? Yes. This we have learned: this process has
been sustained for two centuries, despite war, inflation, and depression.
It has been maintained in the face of a vast expansion of centralized
political power after 1914. That centralization is now reversing.
The financial panic that surely lies ahead will decimate government
A great international
default is coming. It will come in the West. The welfare promises
of national governments will be reneged on by a new generation of
politicians. The present deficits cannot be sustained for a decade
Creveld, Israel's military historian, a dozen years ago wrote a
Rise and Decline of the State. He meant the nation-state.
In the final chapter, he made a forecast.
People or organizations
who used to rest peacefully in the bosom of the state will have
to do, indeed are already doing, more to defend themselves, for
example, by purchasing all kinds of specialized equipment; fortifying
the premises in which they live and operate; mounting their own
guards, whether in or out of uniform; and possibly even setting
up their own armed forces under suitable commanders. . . (p. 419).
In other words,
as the state begins to disintegrate, localism will replace nationalism.
"Compared to what we have witnessed in 1914-45, most of the violence
in question will almost certainly be local, sporadic, and on a rather
small scale." He thinks Bosnia and Sri Lanka are heralds of the
as diverse as government employees and the recipients of social
security (particularly those who hope to receive benefits in the
future), the writing is on the wall. Either they start looking elsewhere
for their economic status and, in some cases, even their physical
protection; or else there is probably no future for them. As was
also the case during previous periods when empires fell apart and
feudal structures emerged, often looking elsewhere will mean losing
their freedom by becoming the clients of the strong and the rich,
whether in the form of individuals or, which is perhaps more likely
for the majority, of corporations of various sorts (p. 419).
will do just fine.
You, on the
other hand, will have major problems.
We are coming
to another turning point. This one will be comparable to the one
the West experienced around 1800. Economic growth began to compound.
So did population – in Asia, where there was no industrial revolution,
as well as in the West. The world of today does not resemble the
world of 1800.
we are nearing the great default. The nation-state will find itself
on the defensive in the West. The state seeks to regulate everything,
but the digital revolution has put tools of innovation and change
into the hands of hundreds of millions of people. Soon, this will
will be short-term setbacks in compound economic growth, just as
were in the 1930s and World War II. But the West's exponential growth
curve returned and extended into Asia. This is the free market's
way. Good ideas are copied. Price competition extends the new products
into new audiences.
will be times of trouble for those who are dependent on the welfare
state. There will be huge losses sustained by those investors who
have assumed that government promises will be met. Wealth will move
from oldsters who trusted the welfare state to younger voters who
have their elected representatives pull the plug.
is a Ponzi scheme. So is Social Security. Both will default. But
that will be liberation for the market, which serves productive
workers, not the beneficiaries of unfunded political promises.
will live in a world in which they have more choices than we do,
just as we have more choices than our parents did. The question
is: How many choices will you have during the transition?
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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