Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.

Tie the Hands of Governments

Winter 2000

Unintended Consequences: The Impact of Factor Endowments, Culture, and Politics on Long-Run Economic Performance by Deepak Lal (MIT Press, 1998 x + 287 pgs.) 

Deepak Lal, a distinguished development economist, might have entitled this book The Rise and Future Decline of the West. In his view, the nations of Western Europe first discovered the secret of economic prosperity. But precisely what enabled them to discover it now threatens them with doom. Asia lacks the fatal flaw our author stresses. It now is in good position to supplant the West.Our author seems to me at his best when he confines himself to economics. He poses a plausible explanation of prosperity, but to understand it, we must first specify his question more exactly. He distinguishes between Smithian and Promethean economic growth. "For much of history, until the rolling Industrial Revolution allowed a substitution of a mineral for an organic economy, the only hope of getting intensive growth was through the increasing division of labor associated with the capitalism of Adam Smith. This I label Smithian growth, as contrasted with the "technologically" based, more modern form I call Promethean growth" (p. 20).

Lal asks: how did the West, unlike any other culture in history, attain Promethean growth? He finds the answer in large part in a simple fact. The economic transformation "in part stemmed from the political changes that accompanied the slowly rolling Industrial Revolution. Briefly, these tied the hands of governments, stemming if not stifling their predatory instincts. Intensive growth followed. [The economic historian Eric] Jones, for one, believes that intensive growth was always bursting to bubble through but was snuffed out by the "rent seeking" of predatory states. Political changes in the West constrained this predatoriness and unleashed the unbound Prometheus that has transformed the world" (p. 18).

Our author does not go so far as to think the state unnecessary: he uses the familiar "public goods" argument to show that a society requires an agency having monopoly control of violence. But the state does not confine itself to this function. Quite the contrary, the state seizes people's resources through taxation and outright confiscation. Absent secure and stable property rights, economic growth can occur only within rigid limits.

What Lal has in mind is illustrated by the history of China. During the Sung dynasty in the eleventh century, "China had intensive growth, and for the first time population exceeded 100 million" (p. 40). Conditions seemed set for Promethean progress. "But the really extraordinary aspect of this medieval Chinese spurt was that it was also associated with remarkable scientific and technological advances such that it had all the technical ingredients . . . [for] the Promethean form of intensive growth" (p. 42).

The Confucian mandarinate stifled this potential development. It despised business; and the very prosperity engendered in the Sung period gave the mandarins the resources to clamp down on the economy. A predatory state of this type will not destroy economic activity entirely; that would be to kill the goose that lays the golden eggs. But its damping effect sufficed to prevent Promethean growth.

Lal, here echoing Mises, notes that attempts by the state to prey on the economy now face a formidable obstacle: the integration of the world capital market. Countries attempting to impose economic controls will provoke a flight of capital. Mises emphasized the other side of the coin: he stressed that governments intent on intervention would be driven to control foreign exchange.

Our author comments: "But it was not until the growing integration of world capital markets . . . that the hands of national governments were tied in the pursuit of various forms of enterprise. In the new LIEO [liberal international economic order] full-blooded Keynesianism is dead . . . when even Sweden has to abandon its "middle way" because Swedish companies fight shy of holding their country's debt instruments, the public-borrowing route to financing government activism is closed" (p. 123).

But our author is not yet satisfied. So destructive is the predatory state of continued economic progress that Lal wishes to constrain it further. Why should government involve itself in the money supply at all? "But the hankering after some form of Keynesian tinkering is likely to persist--as Hayek clearly saw late in his life-- as long as there is a government monopoly of money in a world unable or unwilling to accept the rigors of the nineteenth century gold standard" (p. 122).

Those in the Mises-Rothbard tradition will disagree with Lal's preference for Hayek' s denationalization scheme over a return to the "rigors" of gold. It is clearly cause for celebration, though, that this eminent economist shows himself ready to sever the link between money and the state.

Now for the bad news. Our author, remember, has left us in a quandary. However enterprising people may have been, predatory states always blocked them from achieving Promethean growth. Somehow, though, Britain, followed by other Western European nations, managed to free themselves in the eighteenth century of state control. How were they able to do this, when others before them had failed?

Lal offers us a convoluted answer, the essence of which is this. To develop industrial capitalism, people had to break from economies totally dominated by close kinship ties. Persons had instead to think of themselves as inner-directed individuals. So far, you may say, Lal echoes Max Weber; but he thinks that Weber got the dates wrong. Inner-directed individualism did not stem from John Calvin, as Weber thought: it was the product of the early medieval church.

Our author stands on solid ground in his stress upon the church as a power independent of the state: "The primacy of the church over the state allowed it to acquire temporal power in the West in the eighth century. . . . This claim to an inherent right to political power changed the relation between the secular and the divine. With the divine now claiming to rule the world through the church, the church becomes in-worldly. This was the crucial step in transforming the out-worldly into an in-worldly individual, a process completed by Calvin" (p. 78).

Unfortunately, Lal embeds this excellent point in an elaborate and forced distinction between shame and guilt cultures. As he says, many anthropologists, and some philosophers such as Bernard Williams, have made a great deal of this supposed distinction; but I am unable to see that there is much to it. Readers should judge Lal' s discussion (pp. 13ff) for themselves.

One gathers that guilt-ridden people live in a near-constant state of anxiety; they fear that they have transgressed the will of God. Shame, by contrast, is a social affair: one is ashamed when one is "seen, inappropriately, by the wrong people, in the wrong condition" (p. 13). I quite fail to see the contrast at which Lal is driving. Is he saying that the Greeks, and others who lived in supposed shame-cultures, did not feel upset at doing wrong unless they were caught out? If he is not saying this, why would there not be a fear of being seen by others that would act as guilt does? Is the contrast supposed to be that guilt cultures believe in judgment by God? But did not at least some of the Greeks believe in this also?

Lal's distinction, however impalpable, is vital to the book's argument. In his view, Western morality is based on guilt, and guilt rests on belief in God. But belief in God collapsed in the nineteenth century. "The death of God announced by Nietzsche in 1881 is now apparent in the lives if not the words of most people in the West. This . . . has had enormous consequences for the major socializing force--guilt that the Church has used to check the individualist passions its greed had unleashed" (p. 102). (By "greed" Lal alludes to his odd theory that the Church inaugurated a "family revolution" in order to attract bequests.)

With guilt gone, the West can no longer sustain the internal discipline essential to economic growth. Fortunately, the East is now ready to take the baton of leadership. Eastern culture has never been based on guilt, so the Nietzschean death-of-God leaves it unscathed. Before the eighteenth century, the East's tight kinship networks impeded individualist enterprise; but now that the West has developed capitalism, the East can do so as well.

Lal's account fails to grasp the depth of Nietzsche's assault on morality. Lal assumes that, absent belief in God, some sort of morality based on self-interest can function perfectly well without further foundation. But just this Nietzsche denied. He thought that atheism collapses the whole notion of moral obligation. Lal is at best a halfway Nietzschean. And if he replies that Nietzsche was wrong and that an independent morality based on nothing but social cooperation is exactly what he does wish to affirm, a new problem arises. Why cannot the West also practice such a morality? Lal wishes to use Nietzsche to destroy Western values, while leaving the East immune to his critique. This hardly seems plausible. Lal needs to set forward his philosophical argument much more carefully than he has done. In the meantime, he should stick to economics, at which he is excellent. 


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