a key factor because it motivated each person to become more productive,
often through specialization and division of labor. And the greater the productivity,
the greater the prosperity
This led Smith to his most famous turn of phrase: individuals who
compete for private gain, he wrote, act as if "led by an invisible hand" to
promote the public good. The metaphor of the invisible hand, of course,
captured the world's imagination—possibly because it seems to impute a
godlike benevolence and omniscience to the market, whose workings are in
reality as impersonal as natural selection, which Darwin came along and
described more than half a century later. The expression "invisible hand"
does not seem to have been very important to Smith; in all his writings, he
used it only three times. The effect it describes, however, is something he
discerns at every level of society, from the great flows of goods and commodities
between nations to everyday neighborhood transactions: "It is not
from the benevolence of the butcher, the brewer, or the baker, that we expect
our dinner, but from their regard to their own interest."
Smith's insight into the importance of self-interest was all the more
revolutionary in that, throughout history in many cultures, acting in one's
self-interest—indeed, seeking to accumulate wealth—had been perceived
as unseemly and even illegal. Yet in Smith's view, if government simply
provides stability and freedom and otherwise stays out of the way, personal
initiative will see to the common good. Or as he put it in a 1755 lecture:
"Little else is requisite to carry a state to the highest degree of opulence
from the lowest barbarism but peace, easy taxes and a tolerable administration
of justice: all the rest being brought about by the natural course of
things."
Smith succeeded in drawing broad inferences about the nature of commercial
organization and institutions based on remarkably little empirical
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THE UNIVERSALS OF ECONOMIC GROWTH
evidence—unlike economists today he didn't have access to reams of government
and industrial data. Yet over time, the numbers would bear him
out. Throughout much of the civilized world, free-market activity first created
levels of sustenance adequate to enable the population to grow and
later—much later—created enough prosperity to foster a general rise in
living standards and an increase in life expectancy The latter developments
opened the possibility for individuals in developed countries to establish
long-term personal goals. Such a luxury had been remote to all but a sliver
of earlier generations.
Capitalism also made change a way of life. For most of recorded history
people lived in societies that were static and predictable. A young
twelfth-century peasant could look forward to tilling the same plot of his
landlord's soil until disease, famine, natural disaster, or violence ended his
life. And that end often came quickly. Life expectancy at birth was, on average,
twenty-five years, about the same as it had been for the previous millennium.
Moreover, the peasant could expect that his children and their
children would till the same plot. Perhaps such a rigidly programmed life
conferred the sense of security that comes from utter predictability, but it
left little to individual enterprise.
To be sure, improved agricultural techniques and the expansion of
trade beyond the largely self-sufficient feudal manor increased the division
of labor, raised living standards, and allowed populations to expand in the
sixteenth and seventeenth centuries. But the pace of growth was glacial. In
the seventeenth century, the great mass of people still were engaged in the
same productive practices as their forebears many generations earlier.
Smith held that working smarter, not merely harder, was the way to
wealth. In the opening paragraphs of The Wealth of Nations, he underscored
the crucial role played by the expansion of labor productivity. An essential
determinant of a nation's standard of living, he said, was "the skill, dexterity,
and judgment with which labor is generally applied." This flew in the
face of earlier theories, such as the mercantilist precept that a nation's
wealth was measured in troves of gold bullion, or the Physiocrat tenet that
value derived from the land. "Whatever be the soil, climate, or extent of
territory of any particular nation," Smith wrote, "the abundance or scanti
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THE AGE OF TURBULENCE
ness of its annual supply" must depend upon "the productive powers of
labor." Two centuries of economic thought later, little has been added to
those insights.
With the help of Smith and his immediate successors, mercantilism
was gradually dismantled and economic freedom spread widely In Britain,
this process reached its finale with the 1846 repeal of the Corn Laws, a set
of tariffs that for many years had blocked imports of grain, keeping grain
prices and therefore landowners' rents artificially high—and elevating, of
course, the price paid by industrial wage earners for a loaf of bread. The acceptance
of Smith's economics was, by then, prompting the reorganization
of commercial life in much of the "civilized" world.
Yet Smith's reputation and influence eroded as industrialization spread.
He was no hero to many who struggled during the nineteenth and twentieth
centuries against what they saw as the barbarism and injustice that accompanied
laissez-faire market economies. Robert Owen, a successful British
factory owner, believed that laissez-faire capitalism by its very nature could
lead only to poverty and disease. He founded the Utopian movement, which
advocated, in Owen's phrase, "villages of cooperation." In 1826, his adherents
set up New Harmony, Indiana. Ironically, strife among the residents
brought New Harmony to collapse within two years. But Owen's charisma
continued to draw large followings among those struggling to eke out a living
in appalling working environments.
Karl Marx was dismissive of Owen and his Utopians but was no devotee
of Smith's. While Smith's intellectual rigor attracted him—in Marx's view,
Smith and other so-called classical economists had accurately described the
origins and workings of capitalism—Marx thought Smith had missed the
main point, that capitalism was but a step. Marx saw it as a historical stage
in an inevitable progression to the revolution of the proletariat and the triumph
of communism. His followers eventually took a substantial segment
of the world's population out of capitalism's way—for a while.
Unlike Marx, the Fabian socialists of the late nineteenth century were
not looking for revolution. The group named itself after the ancient Roman
general Fabius, who held off Hannibal's invading army with a military strategy
of attrition rather than all-out confrontation. Similarly, the Fabians
aimed not to destroy capitalism but to constrain it. Government, they be
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THE UNIVERSALS OF ECONOMIC GROWTH
lieved, should actively safeguard public welfare from the harsh competitiveness
of the marketplace. They advocated protectionism in trade and the
nationalization of land; and counted among their ranks such luminaries as
George Bernard Shaw; H. G. Wells, and Bertrand Russell.
The Fabians laid the groundwork for modern social democracy and
their influence on the world would end up being at least as powerful as that
of Marx. While capitalism succeeded brilliantly in delivering higher and
higher standards of living for workers throughout the nineteenth and twentieth
centuries, it was the tempering effect of Fabian socialism that many
argued would make market economies politically palatable and keep communism
from spreading. Fabians took part in founding Britain's Labour
Party. They also had a profound influence on British colonies as the colonies
gained independence: in India in 1947, Jawaharlal Nehru drew on Fabian
principles to set economic policy for one-fifth of the world's population.
When I first read Adam Smith after World War II; regard for his theories
was at a low ebb. And for much of the cold war, economies on both
sides of the iron curtain remained either heavily regulated or centrally
planned. "Laissez-faire" was practically a term of opprobrium; the most
prominent advocates of free-market capitalism were iconoclasts like Ayn
Rand and Milton Friedman. The pendulum of economic thinking began to
swing in Smith's favor in the late sixties, just as I began my public career.
The comeback has been long and slow, particularly in his native land. A
U.S. economist looking for Smith's grave in an Edinburgh churchyard in
2000 reported having to clear away beer cans and debris to read the worn
inscription on the stone:
HERE ARE DEPOSITED THE REMAINS OF ADAM SMITH.
AUTHOR OF THE THEORY OF MORAL SENTIMENTS
AND WEALTH OF NATIONS.
Yet Scotland, too, has come around to according Smith the kind of
honor he deserves. The way to the grave is now marked by a newly installed
stone that quotes from The Wealth of Nations, and a college near Kirkcaldy
has been renamed after Smith. A ten-foot-tall bronze statue of him is
planned for Edinburgh's Royal Mile. Appropriately it is being paid for with
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THE AGE OF TURBULENCE
private funding. And, on a personal note, in late 2004 I was delighted to accept
a request from my good friend Gordon Brown, Britain's longtime
chancellor of the exchequer and now prime minister, to deliver the first
Adam Smith Memorial Lecture in Kirkcaldy. That a leader of Britain's Labour
Party, whose roots in Fabian socialism are such a far cry from the tenets
espoused by Smith, would sponsor such an occasion is indeed a
measure of change. As I will discuss, Britain has endeavored to join some of
the tenets of the Fabians with market capitalism—a pattern that repeats itself
to a greater or lesser extent throughout the trading world.
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THIRTEEN
THE MODES OF
CAPITALISM
A
A
mid the remarks of the speakers in the large, crowded meeting
room at IMF headquarters, I could hear the chanting and shouts
of the antiglobalization dissidents on the street. It was April
2000, and somewhere between ten thousand and thirty thousand students,
church group members, unionists, and environmentalists had converged on
Washington to protest the spring meeting of the World Bank and the Inter
national Monetary Fund. While we finance ministers and central bankers in
the room couldn't make out the words of the chants, it wasn't hard to un
derstand the gist. They were protesting what they viewed as the depreda
tions of increased global trade, particularly the oppression and exploitation
of the poor in developing countries. I was, and am, saddened by such events,
since were the protesters to succeed in destroying global trade, those most
harmed would be hundreds of millions of the world's poor, the very people
in whose name the protesters had chosen to speak.
While central planning may no longer be a credible form of economic
organization, it is clear that the intellectual battle for its rival—free-market
capitalism and globalization—is far from won. For twelve generations, capi
THE AGE OF TURBULENCE
talism has achieved one advance after another, as standards and quality of
living have risen at an unprecedented rate over large parts of the globe.
Poverty has been dramatically reduced and life expectancy has more than
doubled. The rise in material well-being—a tenfold increase in real per
capita income over two centuries—has enabled the earth to support a sixfold
increase in population. Yet, for many capitalism still seems difficult to
accept, much less fully embrace.
The problem is that the dynamic that defines capitalism, that of unforgiving
market competition, clashes with the human desire for stability and
certainty. Even more important, a large segment of society feels a growing
sense of injustice about the allocation of capitalism's rewards. Competition,
capitalism's greatest force, creates anxiety in all of us. One major
source of it is the chronic fear of job loss. Another, more deeply felt angst
stems from competition's perpetual disturbance of the status quo and style
of living, good or bad, from which most people derive comfort. I am sure
the American steel manufacturers I advised in the 1950s would have been
quite happy if Japanese steelmakers hadn't improved their quality and productivity
so markedly. Conversely, I doubt that IBM was thrilled to see
computerized word processors upstage the venerable Selectric typewriter.
Capitalism creates a tug-of-war within each of us. We are alternately
the aggressive entrepreneur and the couch potato, who subliminally prefers
the lessened competitive stress of an economy where all participants have
equal incomes. While competition is essential to economic progress, I can't
say I always personally enjoy the process. I never thought kindly of rival
firms seeking to lure clients from Townsend-Greenspan. But to compete, I
had to improve. I had to offer a better service. I had to become more productive.
In the end, of course, I was better off for it. So were my clients, and
I suspect so were my competitors as well. Down deep that is probably the
message of capitalism: "creative destruction"—the scrapping of old technologies
and old ways of doing things for the new—is the only way to increase
productivity and therefore the only way to raise average living
standards on a sustained basis. Finding gold or oil or other natural wealth,
history tells us, does not do that.
There is no denying capitalism's record. Market economies have succeeded
over the centuries by thoroughly weeding out the inefficient and
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