The Rational Optimist: How Prosperity Evolves

This is a shame, because the zero-sum mistake was what made so many -isms of past centuries so wrong. Mercantilism said that exports made you rich and imports made you poor, a fallacy mocked by Adam Smith when he pointed out that Britain selling durable hardware to France in exchange for perishable wine was a missed opportunity to achieve the ‘incredible augmentation of the pots and pans of the country (#litres_trial_promo)’. Marxism said that capitalists got rich because workers got poor, another fallacy. In the film Wall Street, the fictional Gordon Gekko not only says that greed is good; he also adds that it’s a zero-sum game where somebody wins and somebody loses. He is not necessarily wrong about some speculative markets in capital and in assets, but he is about markets in goods and services. The notion of synergy, of both sides benefiting, just does not seem to come naturally to people. If sympathy is instinctive, synergy is not.

For most people, therefore, the market does not feel like a virtuous place. It feels like an arena in which the consumer does battle with the producer to see who can win. Long before the credit crunch of 2008 most people saw capitalism (and therefore the market) as necessary evils, rather than inherent goods. It is almost an axiom of modern debate that free exchange encourages and demands selfishness, whereas people were kinder and gentler before their lives were commercialised, that putting a price on everything has fragmented society and cheapened souls. Perhaps this lies behind the extraordinarily widespread view that commerce is immoral, lucre filthy and that modern people are good despite being enmeshed in markets rather than because of it – a view that can be heard from almost any Anglican pulpit at any time. ‘Marx long ago observed the way in which unbridled capitalism became a kind of mythology, ascribing reality, power and agency to things that had no life in themselves,’ said the Archbishop of Canterbury in 2008 (#litres_trial_promo).

Like biological evolution, the market is a bottom-up world with nobody in charge. As the Australian economist Peter Saunders argues (#litres_trial_promo), ‘Nobody planned the global capitalist system, nobody runs it, and nobody really comprehends it. This particularly offends intellectuals, for capitalism renders them redundant. It gets on perfectly well without them.’ There is nothing new about this. The intelligentsia has disdained commerce throughout Western history. Homer and Isaiah despised traders. St Paul, St Thomas Aquinas and Martin Luther all considered usury a sin. Shakespeare could not bring himself to make the persecuted Shylock a hero. Of 1900, Brink Lindsey writes (#litres_trial_promo): ‘Many of the brightest minds of the age mistook the engine of eventual mass deliverance – the competitive market system – for the chief bulwark of domination and oppression.’ Economists like Thorstein Veblen longed to replace the profit motive with a combination of public-spiritedness and centralised government decision-taking. In the 1880s Arnold Toynbee, lecturing working men on the English industrial revolution which had so enriched them (#litres_trial_promo), castigated free enterprise capitalism as a ‘world of gold-seeking animals, stripped of every human affection’ and ‘less real than the island of Lilliput’. In 2009 Adam Phillips and Barbara Taylor argued (#litres_trial_promo) that ‘capitalism is no system for the kind-hearted. Even its devotees acknowledge this while insisting that, however tawdry capitalist motives may be, the results are socially beneficial.’ As the British politician Lord Taverne puts it (#litres_trial_promo), speaking of himself: ‘a classical education teaches you to despise the wealth it prevents you from earning.’

But both the premise and the conclusion are wrong. The notion that the market is a necessary evil, which allows people to be wealthy enough to offset its corrosive drawbacks, is wide of the mark. In market societies, if you get a reputation for unfairness, people will not deal with you. In places where traditional, honour-based feudal societies gave way to commercial, prudence-based economies – say, Italy in 1400, Scotland in 1700, Japan in 1945 – the effect is civilising, not coarsening. When John Padgett at the University of Chicago compiled data on the commercial revolution in fourteenth-century Florence (#litres_trial_promo), he found that far from self-interest increasing, it withered, as a system of ‘reciprocal credit’ emerged in which business partners gradually extended more and more trust and support to each other. There was a ‘trust explosion’. ‘Wherever the ways of man are gentle, there is commerce, and wherever there is commerce, the ways of men are gentle,’ observed Charles, Baron de Montesquieu (#litres_trial_promo). Voltaire pointed out that people who would otherwise have tried to kill each other for worshipping the wrong god were civil when they met on the floor of the Exchange in London. David Hume thought commerce ‘rather favourable to liberty, and has a natural tendency to preserve, if not produce a free government’ and that ‘nothing is more favourable to the rise of politeness and learning, than a number of neighbouring and independent states, connected together by commerce and policy’. It dawned on Victorians such as John Stuart Mill that a rule of Rothschilds and Barings was proving rather more pleasant than one of Bonapartes and Habsburgs, that prudence might be a less bloody virtue than courage or honour or faith. (Courage, honour and faith will always make better fiction.) True, there was always a Rousseau or a Marx to carp, and a Ruskin or a Goethe to scoff, but it was possible to wonder, with Voltaire and Hume, if commercial behaviour might make people more moral.

Coercion is the opposite of freedom

Perhaps Adam Smith was right, that in turning strangers into honorary friends, exchange can transmute base self-interest into general benevolence. The rapid commercialisation of lives since 1800 has coincided with an extraordinary improvement in human sensibility (#litres_trial_promo) compared with previous centuries, and the process began in the most commercial nations, Holland and England. Unimaginable cruelty was commonplace in the precommercial world: execution was a spectator sport, mutilation a routine punishment, human sacrifice a futile tragedy and animal torture a popular entertainment. The nineteenth century, when industrial capitalism drew so many people into dependence on the market, was a time when slavery, child labour and pastimes like fox tossing and cock fighting became unacceptable. The late twentieth century, when life became still more commercialised, was a time when racism, sexism and child molesting became unacceptable. In between, when capitalism gave way to various forms of state-directed totalitarianism and their pale imitators, such virtues were noticeable by their retreat – while faith and courage revived. The twenty-first century, when commercialisation has so far continued to spread, is already a time when battery farming and unilaterally declaring war have just about become unacceptable. Random violence makes the news precisely because it is so rare; routine kindness does not make the news precisely because it is so commonplace. Charitable giving has been growing faster than the economy as a whole in recent decades. The internet reverberates with people sharing tips for free.

Of course, these trends could be nothing more than coincidence: we happen to be becoming nicer as we become more irretrievably dependent on markets and free enterprise. But I do not think so. It was the ‘nation of shopkeepers’ that first worried about abolishing slave trading, emancipating Catholics and feeding the poor. Just as it was the nouveau riche merchants, with names like Wedgwood and Wilberforce, who financed and led the anti-slavery movement before and after 1800, while the old county money looked on with indifference, so today it is the new money of entrepreneurs and actors that funds compassion for people, pets and planets. There is a direct link between commerce and virtue. ‘Far from being a vice, (#litres_trial_promo)’ says Eamonn Butler, ‘the market system makes self interest into something thoroughly virtuous.’ This is the extraordinary feature of markets: just as they can turn many individually irrational individuals into a collectively rational outcome, so they can turn many individually selfish motives into a collectively kind result.

For instance, as evolutionary psychologists confirm, sometimes the motivation behind conspicuous displays of virtue by the very rich are far from pure. When shown a photograph of an attractive man (#litres_trial_promo) and asked to write a story about an ideal date with him, a woman will say she is prepared to spend time on conspicuous pro-social volunteering. By contrast, a woman shown a photograph of a street scene and asked to write about ideal weather for being there, shows no such sudden urge to philanthropy. (A man in the same ‘mating-primed’ condition will want to spend more on conspicuous luxuries, or on heroic acts.) That Charles Darwin’s wealthy spinster aunt Sarah Wedgwood’s funding of the anti-slavery movement (she was the movement’s biggest donor) may have a hint of unconscious sexual motives, is a charming surprise. But it does not detract from the good she did, or from the fact that commerce paid for that good.

This applies among the poor as well as the rich. The working poor give a much higher proportion of their income to good causes than the rich do, and crucially they give three times as much as people on welfare do. As Michael Shermer comments (#litres_trial_promo), ‘Poverty is not a barrier to charity, but welfare is.’ Those of libertarian bent often prove more generous than those of a socialist persuasion: where the socialist feels that it is government’s job to look after the poor using taxes, libertarians think it is their duty. I am not saying that the market is the only source of charity. Clearly not: religion and community provide much motivation to philanthropy too. But the idea that the market destroys charity by teaching selfishness is plainly wide of the mark. When the market economy booms so does philanthropy. Ask Warren Buffett and Bill Gates.

It is not just cruelty and indifference to the disadvantaged that have retreated with the spread of the collective brain. So has illiteracy and ill health. So has crime: your chances of being murdered have fallen steadily since the seventeenth century in every European country (#litres_trial_promo), but once again beginning with the trade-mad Holland and England. Murder was ten times as common before the industrial revolution in Europe, per head of population, as it is today. (#litres_trial_promo) The fall in crime rates turned into a plummet at the turn of the twenty-first century – and use of illegal drugs fell too. So has pollution, which was far worse under communist regimes than in the free-market, democratic West. There is now a pretty well established rule of thumb (known as the environmental Kuznets curve (#litres_trial_promo)) that when per capita income reaches about $4,000, people demand a clean-up of their local streams and air (#litres_trial_promo). Universal access to education came about during a time when Western societies were unusually devoted to free enterprise. Flexible working hours, occupational pensions, safety at work – all of these improved in the postwar West because people were enriching themselves and demanding higher standards (#litres_trial_promo), as much as because higher standards were imposed on recalcitrant firms by saintly politicians; the decline in workplace accidents was just as steep before the occupational safety and health act as after it. Again, some of these trends might have happened anyway, without the commercialisation of life, but don’t bet on it. The taxes that paid for sewers were generated by commerce.

Commerce is good for minorities, too. If you don’t like the outcome of an election you have to lump it; if you don’t like your hairdresser, you can find another. Political decisions are by definition monopolistic, disenfranchising and despotically majoritarian; markets are good at supplying minority needs. The other day I bought a device for attaching a fly-fishing rod to my car. How long would I have had to wait in 1970s Leningrad before some central planner had the bright idea of supplying such a trivial need? The market found it. Moreover, thanks to the internet, the economy is getting better and better at meeting the desires of minorities. Because the very few people in the world who need fishing rod attachments or books on fourteenth-century suicide can now find suppliers on the web, niches are thriving. The ‘long tail’ of the distribution – the very many products that are each wanted by very few, rather than vice versa – can be serviced more and more easily.

Freedom itself owes much to commerce. The great drive to universal suffrage, religious tolerance and female emancipation began with pragmatic enthusiasts for free enterprise, like Ben Franklin, and was pressed forward by the urban bourgeoisie as a response to economic growth. Right into the twentieth century tsars and general secretaries found it an awful lot easier to dictate a tyranny of peasants than a demos of bourgeois consumers. Parliamentary reform began in Britain in the 1830s because of the grotesque under-representation of the growing manufacturing towns. Even Marx was subsidised by Engels’s father’s textile mill. It was the now-unfashionable philosopher Herbert Spencer who insisted that freedom would increase along with commerce (#litres_trial_promo). ‘My aim,’ he wrote in 1842 (anticipating John Stuart Mill by nine years), ‘is the liberty of each limited alone by the like liberty of all.’ Yet he foresaw that the battle to persuade leaders not to believe in coercion was far from over: ‘Though we no longer coerce men for their spiritual good, we still think ourselves called upon to coerce them for their material good: not seeing that the one is as unwarrantable as the other.’ The inherent illiberalism of the bureaucracy, not to mention its tendency to corruption and extravagance, was a threat Spencer warned against in vain.

A century later, the gradual dismantling of apartheid and segregation was helped by commercialisation, too. The American civil rights movement drew its strength partly from a great economic migration (#litres_trial_promo). More African-Americans left the South between 1940 and 1970 than Poles, Jews, Italians or Irish had arrived in America as immigrants during their great migrations. Lured by better jobs or displaced by mechanical cotton pickers, black share-croppers came to the cities of the industrial North and began to discover their economic and political voice. They then began to challenge the system of prejudice and discrimination they had left behind. The first victory along that road was an exercise in consumer power – the Montgomery bus boycott of 1955–6.

The sexual and political liberation of women in the 1960s followed directly their domestic liberation from the kitchen by labour-saving electrical machinery. Lower-class women had always worked for wages – tilling in fields, sewing in sweatshops, serving in parlours. Among the upper-middle classes, though, it was a badge of rank, handed down from the feudal past, to be or to have a non-working (or at least housekeeping) wife. In the 1950s many suburban men, returning from war, found they too could afford such an accessory, and many women were pressured into giving their battleship-welding jobs back to men. In the absence of economic change, that is probably how it would have stayed, but soon the opportunities to work outside the home grew as the time spent on increasingly mechanised housework dwindled, and it was this, as much as any political awakening, that enabled the feminist movement to gain traction in the 1960s.

The lesson of the last two centuries is that liberty and welfare march hand in hand with prosperity and trade. Countries that lose their liberty to tyrants today, through military coups, are generally experiencing falling per capita income at an average rate of 1.4 per cent at the time – just as it was falling per capita income that helped turn Russia, Germany and Japan into dictatorships between the two world wars. One of the great puzzles of history is why this did not happen in America in the 1930s, where on the whole pluralism and tolerance not only survived the severe economic shocks of the 1930s, but thrived. Perhaps it nearly did happen: Father Coughlin tried, and had Roosevelt been more ambitious or the constitution weaker, who knows where the New Deal might have led? Perhaps some democracies were just strong enough for their values to survive. Today there is much argument about whether democracy is necessary for growth (#litres_trial_promo), China seeming to prove that it is not. But there can be little doubt that China would – indeed may yet – see either more revolution or more repression if its growth rate were to fall to nothing.

I am happy to cheer, with Deirdre McCloskey (#litres_trial_promo): ‘Hurrah for late twentieth-century enrichment and democratisation. Hurrah for birth control and the civil rights movement. Arise ye wretched of the earth’. Interdependence through the market made these things possible. Politically, as Brink Lindsey has diagnosed, the coincidence of wealth with toleration has led to the bizarre paradox of a conservative movement that embraces economic change but hates its social consequences and a liberal movement that loves the social consequences but hates the economic source from which they come. ‘One side denounced capitalism but gobbled up its fruits; the other cursed the fruits while defending the system that bore them. (#litres_trial_promo)’

Contrary to the cartoon, it was commerce that freed people from narrow materialism, that gave them the chance to be different. Much as the intelligentsia continued to despise the suburbs, it was there that tolerance and community and voluntary organisation and peace between the classes flourished; it was there that the refugees from cramped tenements and tedious farms became rights-conscious consumers – and parents of hippies. For it was in the suburbs that the young, seizing their economic independence, did something other than meekly follow father and mother’s advice. By the late 1950s, teenagers were earning as much as whole families had in the early 1940s. It was this prosperity that made Presley, Ginsberg, Kerouac, Brando and Dean resonate. It was the mass affluence of the 1960s (and the trust funds it generated) that made possible the dream of free-love communes. Just as material progress subverts the economic order, so it also subverts the social order – ask Osama bin Laden, the ultimate spoilt rich kid.

The corporate monster

Yet for all the liberating effects of commerce, most modern commentators see a far greater threat to human freedom from the power of corporations that free markets inevitably throw up. The fashionable cultural critic sees himself or herself as David slinging stones at vast, corrupt and dehumanising Goliath-like corporations that punish, pollute and profiteer with impunity. To my knowledge, no large company has yet featured in a Hollywood movie without its boss embarking on a sinister plot to kill people (in the latest one I watched, Tilda Swinton somewhat predictably tried to kill George Clooney for exposing her company’s poisoning of people with pesticides). I hold no brief for large corporations, whose inefficiencies, complacencies and anti-competitive tendencies often drive me as crazy as the next man. Like Milton Friedman (#litres_trial_promo), I notice that ‘business corporations in general are not defenders of free enterprise. On the contrary, they are one of the chief sources of danger.’ They are addicted to corporate welfare, they love regulations that erect barriers to entry to their small competitors, they yearn for monopoly and they grow flabby and inefficient with age.

But I detect that the criticism is increasingly out of date, and that large corporations are ever more vulnerable to their nimbler competitors in the modern world – or would be if they were not granted special privileges by the state. Most big firms are actually becoming frail, fragile and frightened – of the press, of pressure groups, of government, of their customers. So they should be. Given how frequently they vanish – by take-over or bankruptcy – this is hardly surprising. Coca-Cola may wish its customers were ‘serfs under feudal brandlords (#litres_trial_promo)’, in the words of one critic, but look what happened to New Coke. Shell may have tried to dump an oil-storage device (#litres_trial_promo) in the deep sea in 1995, but a whiff of consumer boycott and it changed its mind. Exxon may have famously stood out from the consensus by funding scepticism of climate change (while Enron funded climate alarmism (#litres_trial_promo)