Bourgeois Dignity: Why Economics Can’t Explain the Modern World

Bourgeois Dignity is the second in a planned series of six volumes under the collective title The Bourgeois Era. The final volume is to be subtitled The Case for an Ethical Capitalism, and this is the key to Deirdre McCloskey's project. An economic historian and a rigorously schooled economist, she is on a mission to humanise her subject. Much of her work concerns the methodology and rhetoric of economics and its technical sidekick, econometrics. However, the Bourgeois Era series addresses instead the central questions of economics: what makes us better off? What causes growth?

A reader with no knowledge of this context could mistake Bourgeois Dignity for just another book about the causes of the Industrial Revolution. There is no lack of appetite for the experts to say more about this revolution - why it happened, and why it started in Britain. Indeed, it is an emotive subject - recently the normal scholarly calm of Radio 4's In Our Time studio evaporated in a blazing row about just this question. The answer matters, because it would shed light on how to kick-start economic growth in pre-capitalist economies now, and because it speaks to treasured ideas about how societies should be organised. Was Britain the cradle of capitalist dynamism because it was lucky enough to have cheap coal, because it exploited its colonies, or because of its political freedoms and the consequent development of free markets?

Needless to say, historians and economists have not answered these questions definitively. McCloskey has a new theory. Her central claim in Bourgeois Dignity is that: "The North Sea economy, then the Atlantic economy, and then the world economy, grew because of changing forms of speech about markets and enterprise and invention." It became respectable to engage in manufacture and trade: "Trade and investment were ancient routines, but the new dignity and liberty for ordinary people were unique to the age."

McCloskey rejects the conventional explanations put forward by economic historians to account for the huge increase in growth in Britain and then other nations from the late 18th century onwards. The first section of the book sets out to establish the drama of the Industrial Revolution, with the 16-fold (or more) increase in living standards in the space of two centuries after millennia of snail's-pace improvements. We still describe the phenomenon as an "economic miracle", like those that took place in Japan and then South Korea in the 20th century, and the ones now occurring in China and India in the 21st - something at once mysterious and spectacular.

The middle section of the book turns to demolishing at some length the conventional explanations for the British economic miracle of the 18th and 19th centuries. According to McCloskey, it cannot be explained by thrift, or capital accumulation, or transportation, or coal; nor can it be attributed to the slave trade, to imperialism, to institutions or to the legal protection of private property. In each instance her argument is the same: the supposed explanatory variable changed too slowly and its potential effects were too small to account for the scale and speed of the acceleration in growth. The only argument left standing is something less tangible - the power of ideas.

McCloskey goes beyond the argument, made by the American economic historian Joel Mokyr in his book The Enlightened Economy (2009), that innovation holds the key to the miracle. Rather, she believes the principal drivers of this transformation were the power of "rhetoric" and a fundamental change in social attitudes towards worldly wealth. "Ideas are the dark matter of history," she writes.

Her thesis reminds me of that old joke about the number of psychiatrists it takes to change a light bulb: only one, but the light bulb has really got to want to change. This is not to dismiss the argument made in Bourgeois Dignity. The power of ideas should not be underestimated. Indeed, they play a central role in economics, although economists often describe them in other terms, as "expectations", "animal spirits", "tacit knowledge" and "innovation".

Yet McCloskey is wrong to argue that miracles cannot have small beginnings. Both modern growth theory and the non-linear mathematics widely used in the sciences would suggest that tipping points are not unusual. Economic growth miracles might well be phenomena of this kind, when small changes in broadly favourable conditions feed on themselves and eventually gather pace, like an avalanche. In which case, all of the conventional explanations for the Industrial Revolution may have a part to play - just as multiple preconditions must be fulfilled if a modern growth miracle is to take place.

McCloskey is just as harsh in her dismissal of "economics", by which she means not the subject as a whole, but rather the "neoclassical" focus on small shifts in prices set by all-powerful markets. But the "humanistic science of econo­mics" she advocates in place of the neoclassical paradigm is becoming influential in the universities, even if bankers and traders have been regrettably slow to catch up.

McCloskey's laudable aim in this book, and in the series of which it is a part, is to rehabilitate capitalism for those who regard themselves as "progressives", keen to improve the lives of the poor. As one chapter title sums it up, "Opposing the Bourgeoisie Hurts the Poor". She is a compelling advocate for globalisation and markets (in their social-democratic guise).

We ought, she concludes, to redignify the bourgeois, and to recognise that it is only economic growth which lifts people out of poverty and creates the space for intellectual and spiritual development, too. l

Diane Coyle runs the business consultancy Enlightenment Economics. Her new book, "The Economics of Enough: How to Run the Economy As If the Future Matters", will be published by Princeton University Press in April