Liah Greenfeld, The Spirit of Capitalism: Nationalism and Economic Growth. Cambridge, MA: Harvard University Press, 2001. xi + 541 pp. $45 (hardcover), ISBN: 0-674-00614-3.

Reviewed for EH.NET by Deepak Lal, Department of Economics, UCLA.

I found this prolix book by Liah Greenfeld, a Professor of Political Science and Sociology at Boston University, both confused and confusing. She states that her book attempts to answer two questions: "(1) What was the direct cause of the emergence of modern economy; that is what explains the sustained orientation of this economy, which distinguishes it from all others, to growth? (2) What made the economic sphere so central in the modern, and in particular American, consciousness that our civilization can in truth be called an 'economic civilization'." Her answer is "that the factor responsible for the reorientation of economic activity toward growth is nationalism, and that the unprecedented position of the economic sphere in the modern consciousness is a product of the dynamics of American society, in turn shaped by the singular characteristics of American nationalism" (p. 1).

She tries to establish these claims by extended excerpts from secondary sources concerning economic thought and development in England, Holland, France, Germany, Japan and the United States. In all these cases, she claims, except for Holland, nationalism was the prime mover in creating capitalism, in contradistinction to other sociologists and historians (Gellner and Hobsbawm) who believed nationalism "to be caused by capitalism and industrialization" (p. 4). As she explicitly eschews both the historian's craft as well as the economist's, it makes it particularly difficult to review such a book to an audience of economic historians. Even though many of the excerpts she quotes are interesting in themselves -- and I particularly enjoyed those from Japan and the US -- they do not in themselves provide a substantiation of her thesis. In the circumstances the only recourse is to try and determine her general argument and see how it matches up with the evidence from not only economic history but also the economics of developing countries, which is intimately linked to many of her preoccupations.

The trouble I had with the book starts with the first of the questions she has set herself. She seeks the causes of the emergence of the modern economy, which she sees as its sustained orientation to economic growth. But this definition of modernity would only be applicable at best to the last 150 years. After all, the nineteenth century classical economists were still preoccupied by the stationary state! Moreover, this question is different from the one that Max Weber asked and which is the title of her book, namely about the origins of Western capitalism, which is linked to the question of the great divergence between the ancient agrarian civilizations of Eurasia. This question in turn is different from the subsidiary question: why within Western Europe, England blazed the path to modern economic growth? Greenfeld's book is largely about this second question and not the first. This confusion is responsible for her vacuous definition -- for an economist -- of modern economic growth. Development economists and economic historians distinguish between extensive growth -- which has been ubiquitous through human history -- with output rising pari passu with population, and intensive growth, which results in a sustained rise in per capita income. Moreover, two types of intensive growth need to be distinguished which I like to call Smithian and Promethean (see Lal 1998). The first can and has occurred even in agrarian economies usually with the establishment or extension of empires, which by bringing hitherto autarkic regions with differing resources into a common economic space lead to the gains from trade and specialization emphasized by Adam Smith. But as the primary factor of production in agrarian economies - land -- was ultimately fixed, diminishing returns would set in, which combined with the Malthusian principle would end this spurt of Smithian intensive growth. As E.A. Wrigley (1988) has rightly emphasized, it was the substitution of mineral energy resources, which were in virtually perfectly elastic supply, for the land-based sources of energy in the organic agrarian economy, which led to unbounded intensive growth of the Promethean kind. It is the latter which is the hallmark of modern economic growth.

The spirit of capitalism, which Hicks (1969) emphasized is embodied in the rise of the merchant and a mercantile society, predates the emergence of Promethean growth. The torch of this spirit passed from the Greek city states, the mediaeval Italian city states, the Hanseatic league and Holland to the United Kingdom. Greenfeld recognizes this. So clearly for her, the spirit of capitalism, which she identifies as arising with nationalism in sixteenth-century England, could not be merely the prevalence of this mercantile economy. As regards Weber's question about the date and origins of the great divergence, I have argued (Lal 1998) that it is associated with two Papal medieval revolutions, which generated a value unique to the West - individualism -- and all the legal infrastructure needed for a functioning market economy (see Goody 1983 and Berman 1983). But, though perhaps preconditions, these factors did not by themselves generate Promethean growth. It was the spirit of capitalism allied to the switch from an organic to a mineral energy based economy which did, in Holland and then in England -- even in their agrarian economies -- from the fifteenth and sixteenth centuries and then with the scientific revolution in England in the new industrial economy from the eighteenth century that generated Promethean growth.

On this view, Greenfeld's discussion of the rise and decline of the Dutch mercantile economy will seem perverse. As she rightly notes, the Dutch grew rich through adopting a truly mercantile capitalism (which generated Smithian growth). What she does not emphasize (only noting it in passing) is that they also saw Promethean growth based on using deposits of peat to convert their organic into a mineral energy based economy (see Wrigley). Their relative decline arose as, unlike the much more abundant mineral energy source in England -- coal -- the stock of peat was soon exhausted and the Navigation Acts impeded the importation of English coal. Greenfeld, however, attributes the Dutch decline to a failure to foster nationalism. But here is what Angus Maddison (2001) (whose 13 pages (pp. 75-88) provide a much more succinct and accurate account of the rise and decline of Holland) has to say: After the Dutch revolted against the Hapsburgs in 1580: "they created a modern nation state, which protected property rights of merchants and entrepreneurs, promoted secular education and practiced religious tolerance" (p. 20 emphasis added). But this nation state did not practice economic nationalism -- i.e. mercantilism. And there's the rub.

For Greenfeld asserts: "There was no national consciousness in the Dutch republic, the identity of the Republican Dutch was not national, and the republic was not a nation" (p. 96). By this she means they were not economic nationalists, as becomes clear when she writes: "It is this difference in perspective, in the nature of identity, that explains ... why the Dutch rather consistently ... advocated free trade in the face of perfectly consistent protectionist (or 'mercantilist'), measures their neighbors directed against them" (p. 101). That, in her view, the Dutch decline was due to their not being economic nationalists (i.e. mercantilists) is made clear by the title of the subheading that follows "The Costs of Economic Liberalism" (p. 101). This book is thus ultimately a mercantilist tract.

Greenfeld rightly cites the great Eli Heckscher, who in his magisterial book Mercantilism argued that mercantilism was used by the absolute monarchies in Europe after the Renaissance to consolidate their power by incorporating various feuding and seemingly disorderly groups, which constituted the relatively weak states they inherited from the ruins of the Roman empire into a nation. Its purpose, he argued, was to achieve "unification and power," making the "State's purposes decisive in a uniform economic sphere and to make all economic activity subservient to considerations corresponding to the requirements of the State." But, what Greenfeld fails to mention is that Heckscher (1955) went on to show that, the unintended consequence of mercantilism was that this attempt to use it to establish order bred disorder, as the attendant dirigisme bred corruption, rent-seeking, tax evasion and illegal activities in underground economies. The most serious consequence for the State was an erosion of its fiscal base and the accompanying prospect of the un-Marxian withering away of the state. Economic liberalization was then undertaken to restore the fiscal base, and thence government control over what had become ungovernable economies. In some cases -- as in France -- the change only occurred with revolution (see Aftalion 1990). Paradoxically, as Heckscher noted: "great power for the state, the perpetual and fruitless goal of mercantilist endeavor, was translated into fact in the nineteenth century. In many respects this was the work of laissez-faire. ... The result was attained primarily by limiting the functions of the State, which task laissez-faire carried through radically. The maladjustment between ends and means was one of the typical features of mercantilism, but it disappeared once the aims were considerably limited. ... Disobedience and arbitrariness, unpunished infringements of the law, smuggling and embezzlement flourished particularly under a very extensive state administration. ... It was because the regime de l'ordre bore this impress that disorder was one of its characteristic features" (p. 325).

There is further evidence against the thrust of Greenfeld's main argument that mercantilism is needed for economic growth. We now have the experience of over fifty years of neo-mercantilist policies in the Third World, motivated in large part by the same desire for 'nation-building' -- carried to even further extremes in the former Communist countries. The outcomes have been much the same as with the mercantilist countries of yore. The disorder bred by dirigiste neo-mercantilist policies has led to the recent wave of economic liberalization, which no doubt Greenfeld -- judging from her epilogue -- would deplore. (See Lal and Myint 1996, and Lal 1985 and 2000.) Moreover, nationalism was a common attribute of the ideology of most developing countries after the Second World War. Hence, it in itself could not be an explanation for the manifest differences in their growth outcomes. What differentiated their performance was the extent to which they followed mercantilist policies. Though none apart from Hong Kong followed the classical liberal policy of laissez-faire and free trade (and its performance was perhaps the best (Lal and Myint 1996), the closer they were to this prescription the better the outcome.

Thus neither the distant (as Greenfeld seems to claim) or more recent past (as is implied in her epilogue) provides any justification for what it turns out is really her main message: economic nationalism (a.k.a. 'mercantilism') fosters modern growth. All the evidence is to the contrary. But, having eschewed both history and economics, Greenfeld blithely ignores all this. Weber, the sociologist who took account of both, would I am sure be appalled by this travesty, which the publishers in their publicity leaflet advertise as "Moving Beyond Max Weber"!

References

F. Aftalion (1990), The French Revolution: An Economic Interpretation. Cambridge University Press, Cambridge.

H. J. Berman (1983), Law and Revolution: The Formation of the Western Legal Tradition. Harvard University Press, Cambridge, MA.

J Goody (1983), The Development of the Family and Marriage in Europe. Cambridge University Press, Cambridge.

E. Heckscher (1955), Mercantilism, 2 volumes, revised second edition. Allen and Unwin, London.

J.R. Hicks (1969), A Theory of Economic History. Clarendon Press, Oxford.

D. Lal (1985/2000), The Poverty of 'Development Economics.' Harvard University Press, Cambridge Mass; revised second edition, MIT Press, Cambridge Mass.

D. Lal (1988), Unintended Consequences: The Impact of Factor Endowments, Culture, and Politics on Long-Run Economic Performance. MIT Press, Cambridge Mass.

D. Lal and H. Myint (1996), The Political Economy of Poverty, Equity, and Growth: A Comparative Study. Clarendon Press, Oxford.

A. Maddison (2001), The World Economy: A Millennial Perspective. OECD. Paris.

E.A. Wrigley (1988), Continuity, Chance and Change: The Character of the Industrial Revolution in England. Cambridge University Press, Cambridge.

Deepak Lal is the James S. Coleman Professor of International Development Studies at the University of California -- Los Angeles. His most recent book was Unintended Consequences: The impact of Factor Endowments, Culture and Politics on Long-Run Economic Performance (MIT, 1998). He is currently working on a book on globalization and order.