Saturday, March 8, 2008

ACEE March 6, 2008

On March 6, 2008 the ACEE book group meet to discuss Deepak Lal's Reviving the Invisible Hand: The Case for Classical Liberalism in the Twenty-first Century.

In addition to the regular suspects, Kathy Ratte from the FTE joined our group for an animated discussion.

The discussion began and focused on chapter 6 Morality and Capitalism. The initial focus of our conversation was on Lal's assertion of the importance of beliefs of culture to the success of capitalism or liberalism in the 19th century sense. Lal sees two sets of beliefs - material and cosmological as informing the success of the evolution of success market or capitalist outcomes. He further asserts that a society need only integrate or accept the material beliefs of capitalism and not the cosmological views to successful move toward capitalism, citing Japan as an example of a country that modernized without Westernizing.

After an extended discussion of Lal's view of the importance of integration of material beliefs in order to move toward market mechanisms and institutions, our group moved back to chapter 4 in an effort to understand the trilateral delimna revolving around fixed exchange rates, monetary independence and the free flow of capital. While our efforts did not lead to clarification, the time spent was profitable and, over e mail in the days after the discussion the group decided to continue the discussion, either here or elsewhere.

Below find an outline for the book, the table of content and links to reviews.


This is a book about an ancient process (globalization) and a modern set of economic institutions (capitalism) which are transforming the world. It is best to begin with the new.

The Origins of “Capitalism”

Both economic historians (like Richard Tawney) and sociologists (like Max Weber) have identified the distinctive institutions of capitalism as the midwife of modernity, culminating in the rolling Industrial Revolution. Economists (like Sir John Hicks), however, preferred to talk of the rise of the market economy as the distinctive feature of modernity, in part because of the Marxian connotations of the word “capitalism” and the sundry and unnecessary intellectual baggage it thereby carries. All are agreed that the rise of the West from among a host of (probably richer) ancient Eurasian agrarian civilizations was associated with the rise of capitalism. There are continuing disputes about the nature and timing of this Great Divergence in the relative fortunes of the Eurasian civilizations (see chapter 1).

What Is Capitalism?

But what is capitalism? As the French economic historian Jean Baechler has cogently argued in his important book The Origins of Capitalism, neither Marx’s nor Weber’s outline of the distinctive features of capitalism allows us to differentiate its essence from the various cited features as they are to be found throughout human history and in many different cultures. For Marx, capitalism was “defined as the conjunction of capitalist ownership of the means of production with the wage laborer who has neither hearth or home.”1 But as Baechler shows, while this might have been true of the full-blown industrial capitalism that was in full flower in Victorian England when Marx was writing, capitalism itself predates this phenomenon.

Who Were the Capitalists?

Before I come to my story of how and why this happened in the western edge of Eurasia, we also need to ask: who were these merchants and why were they universally despised in the ancient agrarian civilizations? The answers are also relevant in explaining the ongoing cultural hatred of capitalism and in particular of its supreme embodiment—the United States of America.

The Great Divergence

My own story of this Rise of the West is contained in my book Unintended Consequences based on my Ohlin lectures. Part of this story is summarized in chapter 6. It contends that the Great Divergence was due to a legal revolution in the eleventh century due to Pope Gregory VII, who in 1075 put the church above the state and through the resulting church-state created the whole legal and administrative infrastructure required by a full-fledged market economy.

This dating of the Great Divergence to the eleventh century also fortunately meshes with the quantitative evidence Angus Maddison has laboriously assembled for the world economy since the beginning of the Christian era.

“By the end of the fifteenth century,” Joseph Schumpeter in his History of Economic Analysis tells us, “most of the phenomena we are in the habit of associating with that vague word Capitalism had put in their appearance, including big business, stock and commodity speculation and ‘high finance’ to all of which much people reacted much as we do ourselves.”

Changing Material and Cosmological Beliefs

The rise of capitalism also involved changes in the material beliefs (how best to make a living) of the West.

But as the examples of Japan, and increasingly China and India show, acceptance of the West’s material beliefs by joining the global capitalist bandwagon need not entail abandoning their own ancient cosmological beliefs— their own special morality.


Unlike the modernity of capitalism, globalization is an ancient cyclical phenomenon that has been associated with the rise and fall of empires.

The backlash that has arisen against both the nineteenth century and current periods of globalization has led the critics to articulate alternative panaceas. In the nineteenth century, with the rise of socialist thought, the alternative was a planned collectivist economy in contrast to the market-based economy promoted by the British LIEO. This continued to carry resonance in much of the Third World in the post–Second World War era. My The Poverty of “Development Economics” was a critique of the Dirigiste Dogma on which it was based. But, since the collapse of the Second World with its countries of “really existing socialism,” this support for the suppression of the market is no longer plausible. So the critics of global capitalism have now taken a different tack, which can be called the New Dirigisme: to create “capitalism with a human face”—a “third way” between capitalism and socialism. This New Dirigisme is based partly on economic arguments (see chapters 3, 4, 5) but more on ethical, cultural, and environmental claims (see chapters 6, 7, 8). The major purpose of this book is to argue against this New Dirigisme, and also to question the route the current imperial power—the United States—has taken in not wholeheartedly supporting the twin principles of laissez faire and unilateral free trade (correctly upheld by its British predecessor), but instead creating a whole host of international agencies to promote its LIEO. These international institutions, I will argue, no longer serve their initial purpose and are proving to be counterproductive in globalizing capitalism (see chapters 3, 4, 5). But before that we need to see how we got to where we are today.



Introduction: The Origins of "Capitalism" 1
Globalization 9

Chapter 1: Liberal International Economic Orders 17
Mercantilism 20
The Nineteenth-Century LIEO 22
Pax Britannica and Economic Development 32
The End of the First LIEO 36
Recreating a New LIEO 40

Chapter 2: From Laissez Faire to the Dirigiste Dogma 48
Classical Liberalism and Laissez Faire 48
Poverty and Industrialization in Nineteenth-Century Britain 52
"Manna from Heaven" Distributivism 53
Competition and Monopoly 56
The Rise of "Embedded Liberalism" in the United States 59

Chapter 3: The Changing Fortunes of Free Trade 62
The Rise, Fall, and Rise of Free Trade 62
U.S. Economic Policy 65
The New Protectionism 68
The Rise of Preferential Trading Arrangements 71
Another Globalization Backlash? 80
Adjustment Assistance? 85
Whither the WTO? 86

Chapter 4: Money and Finance 95
International Monetary Regimes 97
International Capital Flows 105
The Global Financial Infrastructure 122

Chapter 5: Poverty and Inequality 127
Poverty Head Counts 128
Income Gaps 135
Foreign Aid 139

Chapter 6: Morality and Capitalism 150
Introduction 150
Analytical Framework 151
Changing Material and Cosmological Beliefs 154
Communalism versus Individualism 157
From Victorian Virtues to Modern Values 160
Modernization and Westernization 165
Conclusions 180

Chapter 7: "Capitalism with a Human Face" 182
Introduction 182
Justice and Freedom 183
Rights 185
Social Paternalism and Dirigisme 187
Moral Paternalism and the New Victorians 189
Capitalism and Happiness 192
The Corporation under Attack 195
Conclusions 203

Chapter 8: The Greens and Global Disorder 205
Introduction 205
The Rise of the NGOs 205
Sustainable Development 211
The Greens and Ecological Imperialism 214
Toward World Disorder 227

Chapter 9: Conclusions 231

Notes 237
Bibliography 279
Index 307


Princeton Press
The Independent Institute
Foreign Affairs
Society of Business Economists
Cato Journal