Review of Joyce Appleby's  The Relentless Revolution

by Bill Allen

Economists become much too readily obsessed with the products of abstract reasoning - models, theories, principles and so on. They can learn a lot by studying what has actually happened in real life, or in other words by studying history. It has to be accepted that it is often not all that clear what actually did happen in real life, particularly in the economic sphere, but it would be a terrible mistake to confine one’s interest in economic history to the very short period for which comprehensive numerical economic data are available.

There is therefore much to be learned from ‘The Relentless Revolution’, by Joyce Appleby, who is Professor Emerita of History at UCLA. The Relentless Revolution is a history of capitalism. The author defines capitalism as "a cultural system rooted in economic practices that rotate around the imperative of private investors to turn a profit," and comments that:

Capitalist practices represented a radical departure from ancient usages when they appeared on the scene in the seventeenth century. Because they assaulted the mores of men and women in traditional society, it took a very favourable environment for them to gain a footing. After that, the capacity of new capitalist ways to create wealth induced imitation.

Perhaps the biggest question that economic theory has been unable to answer definitively is why economies grow. There has been no generally accepted explanation of why the Industrial Revolution (or ‘Industrial Evolution’, as Professor Appleby would prefer it to be called) began when and where it did, or of why some economies grow while others don’t. Professor Appleby has some interesting ideas of her own.

One of them is that Industrial Revolutions have to be preceded by Agricultural Revolutions. Before the Agricultural Revolution of the sixteenth and seventeenth centuries, in the ‘world of scarcity’, roughly 80% of the labour force had to be employed in agriculture in order to produce enough food for the whole population. Not enough labour was left over for secondary or tertiary industries to develop and grow.  The Agricultural Revolution, according to Professor Appleby, was caused by rising grain prices which "created a powerful incentive to find ways to get bigger yields." Rising grain prices were not a new phenomenon, but this time, for some reason, they led to sustained increases in productivity.

Another of Professor Appleby’s interesting ideas is that England in the seventeenth century was fertile ground for fundamental change. The religious conflicts of that century, including the Civil War, undermined the effectiveness of the forces of established authority, which were the natural source of resistance to change. There was censorship, but in the prevailing chaos, it was weakly enforced. After the Glorious Revolution and the Bill of Rights, censorship lapsed anyway; the Bank of England was founded; and "a new upper class with a mainly progressive attitude towards economic development solidified its power."

The view that weak government left scope for original thought and innovation seems highly plausible. There is surely an inherent and unbridgeable conflict between maintaining the capacity for original thought and innovation and maintaining firm rule, including rule over matters of doctrine and belief. This conflict has echoes in the present day, in which the rise of managerialism and the insistent and overbearing demands of PR for simple and clear ‘messages’ mean that the chaotic process of original thinking is often regarded as too dangerous to be allowed by many public and private institutions.

Once the capitalist cat was out of the bag in England, it was inevitable that other countries would follow. Much of Professor Appleby’s book is an account of how that happened and what the consequences were - good, like prosperity, and evil, like slavery. One of the most important developments was the institution of incorporation of enterprises with limited liability for the owners. It seems pretty obvious that limited liability, by its very nature, entails moral hazard, which economic theorists regard as dangerous. Professor Appleby doesn’t address moral hazard directly but simply describes the advent of limited liability companies and comments that "a great deal of attention has been given to the excellence of the English and American corporation as a vehicle for capitalist expansion." In any cost-benefit analysis of limited liability, the benefits of increased growth would presumably exceed the costs of moral hazard.

In spite of that, it is quite surprising that there has been so little debate in the wake of the financial crisis about whether limited liability is desirable for some kinds of financial companies. Professor Appleby has some harsh things to say about the origins of the crisis, but not about limited liability. The question is nevertheless a real one. Moral hazard has clearly done very serious damage in the past decade in the financial industry. The governments of the world seem to have decided that the way to reform the industry is to make official regulation tighter, but tighter regulation may not be unsustainable. Who can tell at precisely what point the marginal benefits to stability of tighter official regulation are exceeded by the marginal costs of under-used capital, excessive caution and lost opportunities for growth? Advocates of tighter official regulation generally lost the argument during the boom years leading up to the credit crisis, and I think they are always likely to lose the argument when times are good. Would some restriction of limited liability for financial companies lead to better private supervision by shareholders and be an alternative and more productive means of reform? Such a change would probably mean that large complex financial institutions generally would become smaller, and that their brand power would diminish, but it might also deliver a more stable financial industry.

Notwithstanding its current travails, in the final analysis Professor Appleby is optimistic about the durability of capitalism. In Capitalism, Socialism and Democracy, written in the early 1940s, Joseph Schumpeter suggested that capitalism would not survive because it would be undermined by the intellectuals whose lifestyles it made possible. Professor Appleby doesn’t agree. "People do learn from their mistakes. There is no reason to think that societies won’t continue to modify and monitor their economies in pursuit of shared goals." Let’s hope she is right.

The questions that Professor Appleby addresses are much bigger than the ones that economists routinely address in their everyday lives. Her book is all the more interesting for that.