Slavery and the Mystery of Capital
I have been getting flak from my assertion in TQE #45 that exploitation was not the principal cause of the economic development of the West. So I want to clarify. I agree that some slave owners profited from their human capital, but slavery was not the principal cause, or even a major cause, of the economic development of the West. One reason is that no kind of capital is ever the major cause of economic development. The major cause is innovation, invention, and promotion of new ideas.
How do I know? Well, I don't really, but this seems to me the most likely. How would an economic historian address that question? He or she would list all the possible causes of economic prosperity, including slavery, colonialism, other exploitation, innovation, invention (and many more). Carefully examine how each coincides historically , or does not coincide, with economic prosperity.
When one does that (I repeat from TQE #45), one finds that the greatest imperialists of twenty centuries were Rome, Russia, Spain, Portugal, Ottoman Turkey, Mongolia, the Incas, the Aztecs, and the Islamic countries. None of these experienced an industrial revolution. Britain and France were also imperialists and slave holders, but to a much lesser degree. Rather, their wealth correlates more closely with inventiveness, innovation, and trade.
Not only is this shown historically, but a recent book by William Baumol, noted economist at Princeton, explains how modern firms build innovation into their systems. In The Free Market Innovation Machine, Baumol argues that "the ability to produce a continuous stream of successful innovations ... makes capitalism the best economic system yet for generating growth." This happens because "innovative activity, which in other types of economy is fortuitous and optional, becomes mandatory, a matter of life and death for the firm" (The Economist, 5/18/02).
Slavery and colonialism were heinous crimes. I detest them as much as anyone. But they did not make their perpetrators wealthy. Wealth came to Britain and France long before they engaged massively in slavery (as I said in TQE #45), and it did not come to other countries that took slaves massively. (I say "massively" because, before a certain period, "everybody" was enslaving. In particular the Africans and Native Americans took slaves.)
A series of articles in The American Economic Review in the 1970s debated the profitability of slavery in the United States. While they did not reach total agreement, the authors recognized that slavery was expensive to society as a whole (not just to the individual slave holder). The cost of maintaining slaves, their low productivity, and the cost of recapturing them when they escaped was too great. Some have argued that the North won the civil war largely because of the greater productivity of free labor.
Furthermore, slavery ended without a war in every European country, and in all the countries of the Western Hemisphere except the United States and possibly Haiti. From this I presume that our slavery ended not because of the civil war or because owners saw the Light, but because it specifically was not profitable in a mechanizing age.
Still more: As I lectured in universities in Asia, Africa, and Latin America, and as I conducted seminars (over ten years) for Marxist students in Latin America, I was struck by the paralysis of victimhood. Students and many others felt that the more developed world was responsible for their underdevelopment. "We are poor because you are rich," President Nyerere of Tanzania once said.
Much beloved by the Left in the Western world, Julius Nyerere was in fact a tyrant. He forced farmers into his socialist (Ujamaa) villages. When they escaped and ran back home, he sent in the army to burn their houses so they would not do it again. He shut down a voluntary cooperative because it did not suit his socialist mould. The Ujamaa villages were a disaster, setting back Tanzanian development probably by a quarter century. We Americans do not encourage the development of the South when we adulate such actions and assume their guilt as our own. (The story is told in full in Powelson and Stock, The Peasant Betrayed.)
The Mystery of Capital
How, then, will the less developed countries advance?
In Asia, Africa, and Latin America the poor own more wealth than the rich. This startling fact was discovered through painstaking research conducted in many countries by a Peruvian, Hernando de Soto, for his latest book, The Mystery of Capital: Why Capitalism Works in the West and Nowhere Else. Of course, one reason they own more wealth is that there are more poor than rich. De Soto counts all the property that the poor effectively possess, through occupation in city slums and on farms. Mostly, they cannot be dispossessed of this property (although the elites often try to drive them out of the slums).
The inability of the poor to convert their assets into capital is a major cause of poverty. In the West, you can mortgage your house to finance a business. The poor of the less developed world cannot use billions of dollars worth of farmland and buildings to form busineeses because they cannot prove ownership. Mostly, no property registry exists. If they cannot prove ownership, they cannot sell, buy, mortgage, or legally inherit property.
By contrast, the West has developed a common set of laws of ownership and financial instruments These include not only property registries but also promissory notes, rules of performance in contracts, intellectual property rights, bank accounts, stockholdings, forward contracts, and the right to sue in court. Once in Kenya, I gave a check to an African friend who wanted to open a bank account in an African bank. To do so, he needed references from a "reliable" person; most Africans could not find such a person.
Knowing that if we borrow we must pay back, or if we lend we will most likely be repaid, or if we violate a contract we might be sued, we can draw on the capital of others to finance our innovations. We can draw on a little bit, or a lot, depending on our financial condition and our needs. On the other hand, we can invest our own assets in projects of others (as through stocks and mutual funds). Thus capital is fungible, like grain and money, whereas raw assets, like a house and a spoon, are not. Fungible capital is essential to economic development.
De Soto tracked the rules of the informal (or extralegal) economy throughout the less developed world. He finds that poor people do possess the concept of property rights. ("You know whose property you are on by whose dog barks," he says). But without proof of ownership, the ability to use banks, enforceable contracts, and legal protections, the poor cannot engage in the kinds of business that lead to advanced economic development.
These protections emerged slowly in the West and Japan, though they need not be so slow in less developed countries today. They did so through the dispersion of power, in which the lower classes captured the ability to negotiate and make the laws, and through trade, whose rules were composed mainly by negotiation and common law. Once the king (or shogun) lost the power to control the lower classes, the poor gained the ability to make their own property laws and financial instruments, and have them stick as the law of the land. This has not yet happened in the less developed world. (All this is explained in my book, Centuries of Economic Endeavor, but you don't need to read it because its 500 pages are summarized in this paragraph.)
All these amount to economic democracy and rule of law and property rights determined by the people and not by the rulers. It is too simple to say that this is all of economic development, but it is a large part. If we in the West assume that our own actions (imperialism and slave holding) have caused the plight of the less developed world, we are not only wrong, but we do them no favor.
Sincerely your friend,
Please send comments on any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.
Economics is not a neutral and value-free discipline. When someone of good training and values figures out how to serve people instead of saying "but that's how the system works" the result is transformative.
Trudy Reagan, Palo Alto (CA) Meeting.
Most of us tend to attribute to a "system" (not usually described) what really reflects our own morality. For those willing to go along with what we call "the system," the economic system responds in one way; to those who buck the conventional wisdom, the economic system responds in a different way. For example, it may be "the system" to discriminate against the poor, against minorities, etc., or it may be "the system" to destroy the environment. However, it is not the economic system, as economists describe it, that does these things. It is the personal morality of people. The economic system explains the reactions of the economy when people of different values and different policies act in different ways. The economic system is therefore neutral, but people are not. One of my purposes in writing TQE is to bring these differences out to Quakers, so that we will take more personal responsibility for our actions instead of blaming them on some undescribed "system." Jack
This is quite up to your usual standards. You are one of the most trenchant thinkers writing today and you write well, to boot. Debunking the Marxist myths of slavery is a welcome contribution to our understanding of the human economy. Bravo!
Michael Schefer, Philadelphia (PA), children in Germantown Friends.
I would like to see an issue devoted to moral concepts that have seemed to escape corporation officers of late: fair treatment of employees (lifetime employment is a fantasy, but truth-telling to employees should not be) and responsibility to shareholders rather than to the officers themselves.
Rick Brooks, Green County Friends Meeting, Tulsa (OK).
I have been thinking along the same lines. Keep tuned! I will write on that subject soon. Jack.
I just want to let you know how much I have enjoyed reading what you have written. As they say; "This friend speaks my mind."
Peter D'Angelo, Oakland (CA).
Jack, you are the most lucid economist I've ever known. Keep it up.
Tom Selldorff, Weston (MA).
Thanks for your thought-provoking article, and one that seems especially not politically correct. I certainly don't know the historical developments as well as you, but I am inclined to agree simply because they make common sense. The most intriguing part of your article for me was the idea of 'victimhood.' As I understand it, 'neurosis' is commonly understood as the inability to move away from being dependent (in some sense) to accepting personal responsibility. What alarms me is how prevalent a sense of 'victimhood' is in the US, not just other parts of the world. What I wonder, and would like your feedback, is what forces internal and external help develop a greater sense of personal responsibility in people? Any ideas?
Bruce Messinger, San Antonio (TX).
Your question is a tough one, because for the most part the ideas must come from the persons concerned, and they must think of them (but historically, they have done so). From the outside, we can open up our trade (steel, textiles) and stop subsidizing agriculture. These subsidies cause people in the less developed world to buy our farm products when theirs would be cheaper to produce (without the subsidies). Our rich farmers gain a bonanza while poor farmers are denied their own national markets. But you know what a problem that is, with selfish people like us! Jack
Another excellent statement. The flak gives us a barometer of how we are doing. More is better, as it engages more folks.
J.D. von Pischke, a Friend from Reston (VA).
British and French prosperity preceded slavery, and our prosperity has continued to grow after slavery was abolished. Further evidence that we should look for a different cause is the failure of other slave-holding countries to become prosperous. If slavery was the cause of our prosperity, then surely slavery would have caused prosperity in other countries.
Look, for example, at Rome's failure to exploit the rich coal resources in Europe. Rome had slaves to dig the coal where Britain never did.
Russ Nelson, St. Lawrence Valley (NY) Friends Meeting.
Peter the Great visited Holland and England to seek the reason for their prosperity. Failing to notice their free labor, he returned to Russia to build identical factories with slave labor. Jack
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PUBLISHER AND EDITORIAL BOARD
Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting
Members of the Editorial Board receive Letters several days in advance for their criticisms, but they do not necessarily endorse the contents of any of them.
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The original title of this letter was "Victimhood and the Mystery of Capital." LC, 19 Feb 2005.