When I first saw Los Angeles I realized that no one had ever painted what it looked like.
DAVID HOCKNEY
WHAT HAPPENED IN THE 19TH CENTURY that caused people in some countries to have—for the first time in human history—unbounded growth of their wages, expansion of employment in the market economy, and widespread satisfaction with their work? And what happened to cause many of these nations—by now, all of them, or so it would appear—to lose all that in the 20th century? This book aims to understand how this rare prosperity was gained and how it was lost.
I set out in this book a new perspective on what the prosperity of nations is. Flourishing is the heart of prospering—engagement, meeting challenges, self-expression, and personal growth. Receiving income may lead to flourishing but is not itself a form of flourishing. A person’s flourishing comes from the experience of the new: new situations, new problems, new insights, and new ideas to develop and share. Similarly, prosperity on a national scale—mass flourishing—comes from broad involvement of people in the processes of innovation: the conception, development, and spread of new methods and products—indigenous innovation down to the grassroots. This dynamism may be narrowed or weakened by institutions arising from imperfect understanding or competing objectives. But institutions alone cannot create it. Broad dynamism must be fueled by the right values and not too diluted by other values.
The recognition by a people that their prosperity depends on the breadth and depth of their innovative activity is of huge importance. Nations unaware of how their prosperity is generated may take steps that cost them much of their dynamism. America, judging by available evidence, does not produce now the rate of innovation and high job satisfaction it did up to the 1970s. And participants have a right not to see their prospects of prospering—of self-realization, as John Rawls termed it—squandered. In the past century, governments sought to move the unemployed into jobs so they could prosper again. Now there is a larger task: to reverse losses of prosperity among the employed. That will require legislative and regulatory initiatives having nothing to do with boosting either “demand” or “supply.” It will require initiatives based on an understanding of the mechanisms and mindsets on which high innovation depends. Yet surely governments can do it. Some began clearing paths for innovation two centuries ago. These thoughts were on my mind when I conceived this book. I believed the sole problem was the terrible unawareness.
Eventually I began to sense another kind of problem: a resistance to modern values and modern life. The values that supported high prosperity ran up against other values that impeded and devalued flourishing. Prosperity has paid a heavy toll. Questions are being asked about the sort of life it would be best to have and thus the sort of society and economy to have. There are calls in America for traditionalist goals long familiar in Europe, like greater social protection, social harmony, and public initiatives in the national interest. These were the values that have led much of Europe to viewing the state in traditional, medieval terms—through the “lens of corporatism.” There are calls too for more attention to community and family values. There is little awareness of how valuable modern life, with its flourishing, was. There is no longer in America or in Europe a sense of what mass flourishing was like. Nations with brilliant societies a century back, say, France in the Roaring Twenties, or even a half-century ago, say, America in the early sixties, have no living memory of wide flourishing. Increasingly, the processes of a nation’s innovation—the topsy-turvy of creation, the frenzy of development, and painful closings when the new things fail to take hold—are seen as a pain that upstart materialist societies were willing to endure to increase their national income and national power, but that we are unwilling to endure any longer. The processes are not seen as the stuff of flourishing—the change, challenge, and lifelong quest for originality, discovery, and making a difference.
This book is my response to these developments: It is an appreciation of the flourishing that was the humanistic treasure of the modern era. It is also a plea to restore what has been lost and not to reject out of hand the modern values that inspired the broad prosperity of modern societies.
I first set out a narrative of prosperity in the West—where and how it was won and how to varying degrees it has been lost in one nation after another. After all, much of our understanding of the present comes from trying to put together some pieces of our past. But I also study cross-country evidence of the present day.
At the core of the narrative is the prosperity that broke out in the 19th century, firing imaginations and transforming working lives. Widescale flourishing from engaging, challenging work came to Britain and America, later to Germany and France. The step-by-step emancipation of women there and, in America, the eventual abolition of slavery, widened the flourishing. The making of new methods and products that was part of this flourishing was also the major part of the economic growth that coincided with it. Then, in the 20th century, flourishing ultimately narrowed, and growth slipped away.
In this narrative, the historic run of prosperity—from as early as the 1820s (in Britain) to as late as the 1960s (in America)—was a product of pervasive indigenous innovation: the adoption of new methods or goods stemming from homegrown ideas originating in the national economy itself. Somehow the economies of these pioneering nations developed dynamism—the appetite and capacity for indigenous innovation. I call them modern economies. Other economies gained by following the modern ones in their slipstream. This is not the classic account by Arthur Spiethoff and Joseph Schumpeter of entrepreneurs jumping to make the “obvious” innovations suggested by discoveries of “scientists and navigators.” The modern economies were not the old mercantile economies, but something new under the sun.
Understanding the modern economies must start with a modern notion: original ideas born of creativity and grounded on the uniqueness of each person’s private knowledge, information, and imagination. The modern economies were driven by the new ideas of the whole roster of business people, mostly unsung: idea men, entrepreneurs, financiers, marketers, and pioneering end-users. The creativity and attendant uncertainty was seen through a glass darkly in the 1920s and 1930s by those early moderns, Frank Knight, John Maynard Keynes, and Friedrich Hayek.
Much of the book is occupied with the human experience in the innovation process and the flourishing it brings. The human benefits of innovation are a basic product of a well-functioning modern economy—the mental stimulus, the problems to solve, the arrival of a new insight, and the rest. I have sought to convey an impression of the rich experience of working and living in such an economy. As I considered this vast canvas, I was excited to realize that no one had ever depicted what a modern economy felt like.
My account of the phenomenon of dynamism recognizes that myriad economic freedoms are a key element—freedoms that we have our Western democracy to thank for. So are various enabling institutions, which arose in answer to business needs. Yet the rise of economic modernity required more than the existence and enforcement of legal rights and more than various commercial and financial institutions. My account of dynamism does not deny that science has been advancing but does not link prosperity to science. In my account, attitudes and beliefs were the wellspring of the dynamism of the modern economies. It is mainly a culture protecting and inspiring individuality, imagination, understanding, and self-expression that drives a nation’s indigenous innovation.
Where a country’s economy becomes predominantly modern, I argue, it goes from just producing known, specified goods or services to dreaming up and working with ideas about other things to try to produce—goods or services not known to be producible and perhaps never before conceived. And where an economy is pulled back from the modern—denied its institutions and norms or blocked by curbs or inhibited by opponents—the flow of ideas through it narrows. Whichever direction the economy is pulled, toward the modern or the traditional, the texture of working life is profoundly changed.
Thus the history of the West set out here is driven by a central struggle. That struggle is not between capitalism and socialism—private ownership in Europe rose to the American level decades ago. Nor is it the tension between Catholicism and Protestantism. The central struggle is between modern and traditional, or conservative, values. A cultural evolution from Renaissance humanism to the Enlightenment to existentialist philosophies amassed a new set of values—modern values like expressing creativity and exploring for its own sake, and personal growth for one’s own sake. And these values inspired the rise of modern societies in Britain and America. In the 18th century they fostered modern democracy, of course, and in the 19th century they gave birth to modern economies. These were the first economies of dynamism. This cultural evolution brought modern societies to continental Europe too—societies modern enough for democracy. But the social disruptions brought about by the emergent modern economies in those nations were a threat to traditions. And traditional values—putting community and state over the individual and protection against falling behind over going ahead—were so powerful that, in general, few modern economies made much headway there. Where they made or threatened to make deep inroads, they were forcibly taken over by the state (in the interwar years) or hobbled by restrictions (in postwar years).
Many authors allude to a long struggle to free themselves from received wisdom, and I had to escape from a forest of unrecognizable descriptions and inapplicable theories to be able to talk about the modern economy, its creation, and its value. There was the classic formulation by Schumpeter—innovations are sparked only by exogenous discoveries—and the neo-Schumpeterian corollary that innovation could be increased only by boosting scientific research. These two views assumed as a foregone conclusion that a modern society could do without a modern economy. (No wonder Schumpeter thought socialism was coming.) There was Adam Smith’s concept that people’s “well-being” derived from consumption and leisure alone, and thus their whole business life was for these ends, not for the experience itself. There was the neoclassical welfarism of Keynes, in which failures and fluctuations are the main modern ills to be combated, since the challenges and ventures responsible for them have no human value. This was followed by the neo-neoclassical view, dominant in business schools today, that business is about risk assessment and cost control—not ambiguity, uncertainty, exploration, and strategic vision. There was the Panglossian view that a nation’s institutions are not a concern, since social evolution produces the most needed institutions and every nation has the culture that is best for it. If this book gets at all close to the truth, all these ideas of bygone times were false and harmful.
The book devotes many pages to admiring descriptions of the experience that the modern economy offers participants. It was, after all, the marvel of the modern era. But that tribute invites the question of how this modern life, which the modern economies made possible, compares with other ways of life. In the next-to-last chapter I argue that the flourishing that is the quintessential product of the modern economy resonates with the ancient concept of the good life, a concept on which many variations have been written. The good life requires the intellectual growth that comes from actively engaging the world and the moral growth that comes from creating and exploring in the face of great uncertainty. The modern life that modern economies introduced perfectly exemplifies the concept of the good life. That is a step in the direction of justifying a well-functioning modern economy. It can serve the good life.
Yet a justification of such an economy must address objections. An economy structured to offer prospects of the good life, even to all participants, could not be considered a just economy if it caused injustices in the process or provided the good life in a way deemed unfair. The less advantaged and indeed all participants suffer—from workers who lose their jobs to entrepreneurs whose companies are ruined and families whose wealth takes a huge hit—when a modern economy’s new direction turns out to be ill judged or very close to being a racket, like the housing boom rigged up in the previous decade. Governments fail to govern the distribution of the benefits of a modern economy—the primary one being the good life—in a way that is as favorable to the less advantaged as it could be. (But that may be the fault of the government more than of the modern economy.)
The last chapter sketches a conception of an economy that is modern but also just in going as far as feasible to provide prospects for the good life to the participants whose talent or background renders them less advantaged than the others. I note that a well-functioning economy of the modern kind can be governed in accordance with familiar notions of economic justice, such as focus on the least advantaged. If all are keen on the good life, they will be willing to take the risks of large swings to have that life. I also add that a justly-functioning modern economy is to be preferred to a justly-functioning traditional economy—an economy based on traditional values—under a wide variety of conditions. But what if some participants have traditional values? In an introductory exploration one has to stop at some point. But this much is clear: Those in a nation who want to have economies of their own, based on their traditionalist values, ought to be free to set them up. Yet those who aspire to the good life have the right to be free to work in a modern economy—not to be confined to a traditionalist economy, bereft of change, challenge, originality, and discovery.
It may seem paradoxical that a nation would countenance or even strive to make more effective a kind of economy in which the future is unknown and unknowable, an economy prone to huge failures, swings, and abuses in which people may feel “adrift,” or even “terrified.” Yet the satisfaction of having a new insight, the thrill of meeting a challenge, the sense of making your own way, and the gratification of having grown in the process—in short, the good life—require exactly that.