Mysteries of Economic Growth

The social sciences are always in danger of forgetting the unwelcome fact that they are very much less mature than they think, partly because their subject-matter is extremely difficult, partly because they cannot escape the ideologies, and partly because they are overrun with amateurs claiming to be professionals: politicians, businessmen, journalists, administrators, and the rest. Few presidents would claim to make technical suggestions about the construction of nuclear power-stations; but any fool who can read the financial pages has opinions about the economy and sometimes publishes them in print. The social sciences are therefore littered with theoretical rubbish which ought long ago to have been carted away. This state of affairs justifies books like Professor Kindleberger’s.

Its purpose is to eliminate wrong hypotheses about economic growth rather than to establish right ones. The author is equipped for this task not merely with logic, a good deal of historical reading, and a dry throwaway style, but also with a welcome lack of respect for his colleagues. He is politely puzzled by social psychology, social anthropology, and sociology: “to the extent that he can comprehend the jargon, their theories seem to him either wildly overgeneralized or self-evident.” He has no great hopes of history: “What has been revealed is the virtual impossibility of providing anything positive about theories of growth through the use of history, and the propensity of economic historians, with rare exceptions, to overgeneralize.” His view of economics is short of hero-worship: “As on so many occasions the task of economic analysis was a priestly one, to justify what was taking place for deepseated reasons rather than to determine the direction of movement.” In brief, he makes a good critic. Whether his constructive capacity is equally great is uncertain.

Professor Kindleberger has set out his exercise in skepticism as a comparative study of Britain and France between 1851 and 1950, a choice of countries and dates which is probably justifiable only on the grounds that any two countries, over any reasonably long period, will do to argue that there is at present no general theory of economic development which can also explain their divergences and fluctuations. This may well be so, though the theories which he investigates are of the more simple-minded type—mainly those which derive economic growth from the chief or exclusive operation of some single, often external, factor, such as the availability of natural resources or capital, the rate of population growth, entrepreneurship, “national character,” technological change, the presence or absence of competition, the independent activities of governments, and the like. He has no difficulty in showing that such “single-valued” explanations will not work. He also considers—perhaps more perfunctorily than is warranted—several relationships within the economy: those between the transformation of agriculture and industry, between exports and home industry and between different parts of a country. Actual general theories of development are rather neglected, except for a brief passage about Marxism, with which the author claims no close acquaintance, and a chapter on the “stage-theories” of Hoffman and Rostow. Curiously he believes Rostow’s exercise in historical taxonomy to be the only “unified explanation of the course of economic history,” which may throw light on what he would regard as a satisfactory general model. However, if Professor Kindleberger shoots mainly at sitting birds, the accuracy and elegance of his marksmanship are high and the value of the exercise is undoubted. He has written a valuable though also a frustrating book.

The tricky problem facing the analyst of Anglo-French development is the revival of the French economy since the 1940s. Until then it was possible to devise an explanation of the two countries’ growth in terms of the behavior of moderately rational profit-seeking capitalist entrepreneurs in historically rather different situations.

The British case was and is at first sight fairly straightforward. We have here the pioneer and, for a time, the only industrial power in the world. Inevitably it lost ground relatively when industrialization spread to other countries. Perhaps not so inevitably, but not surprisingly, it developed signs of conservatism, sluggishness, and inflexibility by the end of the nineteenth century. It has not emerged from this phase of relative decline to this day. Exactly how this failure of British capitalism to adapt to new situations happened is open to debate, but instinctively most observers find it comprehensible. Most economic historians would probably agree with H. J. Habbakuk in reducing it, in the last analysis, to the effects of Britain’s “early and long-sustained start as an industrial power.” The late starter begins with a more advanced technology; the early starter is saddled with obsolescent and expensive equipment, industrial organization, location, etc. If, as in Britain, his strength in the world market (and especially in the underdeveloped world) enables him to go on making adequate profits in the old way; if, instead of having to meet his new competitors head on, he has the chance of retreating into inaccessible or as yet undeveloped areas of activity, he may be tempted to postpone modernization until (as in the British cotton industry) it is too late, or (as in the case of British coal and railroads) it is beyond the means of private enterprise. This, broadly speaking, was the situation of Britain in 1940, a situation which was aggravated by the country’s vulnerable balance of payments—which in turn derived from the historically comprehensible structure of Britain’s relations with the rest of the world.

Until 1940 the French case could also be analyzed in a fairly coherent manner, for what all observers had to explain was the generally disappointing record of French industrial expansion. Of all nineteenth-century industrial economies hers was the most sluggish, and even her intermittent spurts were unimpressive. It seemed reasonable to seek the explanation in the peculiar social and political structure which the French Revolution had imposed on the country, and which determined the expectations of its businessmen. French capitalist enterprise was drowning in a sea of peasant cultivators, small artisans, corner grocers, and owners of numerous and ill-named Cafés du Commerce, the triumphant and politically immovable heirs of the Jacobins: an unsatisfactory market for home industries of the modern kind, a reluctant source for their workers. In brief, the Revolution, which set out to provide optimum conditions for capitalist enterprise, and in some respects did so, went too far for this purpose under Robespierre. The rational French businessman therefore shied away from such things as mass production and technological adventure, and followed the precepts of the great Rothschild who held that “there are three ways to ruin: gambling, women, and engineers. The first two are more agreeable, but the last is more certain.” Handicraft luxuries like haute couture, the incidental profits of high finance were better business than the creation of French Detroits.

Unfortunately, while the old British explanation will still work, the old French explanation cannot account for the striking expansion of the French economy since the 1940s. Of course this could be explained in terms of the now large and dynamic public sector which has set the pace in France. But this simply shifts the difficulty to explaining why the British and French public sectors behaved so very differently, or for that matter why the French one changed. And here again the British case is much simpler. To sum it up in the author’s phrase: “An age of great cities required strong government, which the British provided only after the energy of the private sector was beginning to flag and the task was less to direct than to replace”. But the interventions of the French state in the economy have no such simple pattern.

It is therefore natural that Professor Kindleberger, though not claiming to provide explanations, is more helpful on Britain than on France, which interests him more. He does not appear to object to the “early start” model, and adds at least one notable piece of mechanism to it, namely the analysis of the effects of “disintegrated” growth. The typically archaic British method of expansion, by means of a spontaneously interlocking tangle of highly specialized firms, gives tremendous initial advantages, but also builds into itself obstacles to further rationalization. For instance, each individual firm might hesitate to undertake the necessary investments for fear that part of the return on them would accrue to others (though part of the others’ return would accrue to it). Kindleberger shows that in such a situation the forces of private enterprise are helpless. The state, in extreme cases by nationalization, must step in. Thus an excess of laissez-faire in the nineteenth century produced a proportionately greater state intervention from the 1930s. He instances coal and the railways, but could with equal profit have instanced the state-sponsored agricultural revolution of the 1940s.

But France continues to puzzle him, and us. Granted that sometime in the 19’0s, doubtless in some connection with defeat, occupation, and resistance, there was a change in attitudes towards economic progress and other matters, it is possible to explain the technological leap which he regards as primarily responsible for the French economic advance of recent years (though he notes that this was not what the much-praised French planners were actually planning for). The intellectual traditions of lucidity and logic, the revolutionary ones of brilliant technical education, technologically trained administrators, and government planning had “remained vigorous, occasionally smothered by conservatism and business distrust.” Theoretically France was better equipped to cope with systematic modernization than British empiricism. After 1944 the technocrats “already lodged in government” came to the fore, and soon infected private enterprise. But what accounts for the “change in attitude”? We do not know. And even if we did, the explanation, though true, might lack elegance.

It is not Professor Kindleberger’s object to get us out of our theoretical troubles. He is resigned—perhaps a little too proudly resigned—to the conclusion that “it may be enough for the economist to handle partial-equilibrium analysis when he is asked to advise on economic growth,” that is to say to apply common sense stiffened by theoretical argument. Well, of course it is better than nothing, and preferable to platitude or wild generalization, with or without stiffening. But is it enough? Professor Kindleberger’s dismissal of economic history (“Absorbing, beguiling, great fun—but, for scientific problems can it be taken seriously?”) also dismisses economics. The view which emerges from his long and stimulating exercise in skepticism is, that if an economy has made up its mind to grow, it will grow, and if not, it won’t, irrespective of theoretical explanation or intervention. But the prize question about economic growth on which economists are asked to give their opinions is precisely whether the economy has made up its mind to grow, and if not, why not. It is one thing to show that they have not so far answered it in an operationally useful manner. But if it were to be shown that they cannot hope to answer it at all, those who have in recent years turned economics into one of the most fully employed professions, may begin to reconsider its value.