Über die Autorin bzw. den Autor

Deepak Lal is James S. Coleman Professor of International Development Studies at the University of California, Los Angeles, professor emeritus of political economy at University College London, and former Research Administrator at the World Bank. He has advised many governments and international agencies and is the author of numerous books on economic development and public policy, including In Praise of Empires (Palgrave Macmillan), The Poverty of Development Economics, and Unintended Consequences. In 2007, he received the International Freedom Award for Economy from the Società Liberia.

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"What would Adam Smith and David Hume have had to say about globalization, human rights, outsourcing and free trade, capital controls, the WTO, the IMF and the World Bank, Islamic fundamentalism, the rise of China and India, the environment, the welfare state, U.S. foreign policy, and every other major issue if they were alive today? The closest you can ever come to finding out is to read this brilliant and provocative book by the last, but by no means the least, of the classical liberals, Deepak Lal."--Ronald E. Findlay, Columbia University

"This splendidly and subtly argued defense of the classical liberal position makes a highly valuable contribution to the globalization debate."--Harold James, Princeton University, author of The End of Globalization

"Deepak Lal's Reviving the Invisible Hand is a brilliant account of modern economic theory and policy written from a rigorous classical liberal perspective. Lal shows a thorough knowledge of classical liberal theory and an enviable ability to apply it to any economy. Furthermore, he demonstrates that the greatest threat to world economic progress and stability comes not from old-fashioned socialism, but from the recent, fashionable modifications of the classical liberal model. It is remarkable that a technical economist should display such competence and originality in areas seemingly far removed from the diagrams and equations of orthodoxy. And his style is rigorous, well-paced, and just a little cheeky."--Norman Barry, University of Buckingham, England, author of Classical Liberalism in the Age of Post-Communism

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Reviving the Invisible Hand

Princeton University Press

Introduction

The Origins of "Capitalism"

Both economic historians (like Richard Tawney) and sociologists (like Max Weber) have identified the distinctive institutions of capitalism as the midwife of modernity, culminating in the rolling Industrial Revolution. Economists (like Sir John Hicks), however, preferred to talk of the rise of the market economy as the distinctive feature of modernity, in part because of the Marxian connotations of the word "capitalism" and the sundry and unnecessary intellectual baggage it thereby carries. All are agreed that the rise of the West from among a host of (probably richer) ancient Eurasian agrarian civilizations was associated with the rise of capitalism. There are continuing disputes about the nature and timing of this Great Divergence in the relative fortunes of the Eurasian civilizations (see chapter 1).

What Is Capitalism?

But what is capitalism? As the French economic historian Jean Baechler has cogently argued in his important book The Origins of Capitalism, neither Marx's nor Weber's outline of the distinctive features of capitalism allows us to differentiate its essence from the various cited features as they are to be found throughout human history and in many different cultures. For Marx, capitalism was "defined as the conjunction of capitalist ownership of the means of production with the wage laborer who has neither hearth or home." But as Baechler shows, while this might have been true of the full-blown industrial capitalism that was in full flower in Victorian England when Marx was writing, capitalism itself predates this phenomenon.

Nor is capitalism to be identified with markets, profit seeking, banking, bills of exchange, and business firms, for instance. For these are all found in ancient civilizations. Thus

in ancient Mesopotamia there was the Karum ... entrepots and commercial houses where importers, exporters, provisioners, and bankers all conducted their affairs. Occasionally these houses functioned as commercial tribunals ... the Assyrian tablets dating from the 20th and 19th centuries b.c. [from] Cappadocia ... reveal a complete commercial network run by genuine capitalists. In spite of state control, or at least state interference, the Karum had their own commercial activities and developed a series of institutions within which capitalist activity, as defined by Max Weber, took place. Banks undertook and granted loans; large warehouses brought together the merchandise of groups of merchants; bank accounts were opened where most of the operations were made by multilateral balancing of accounts.... By the beginning of the second millennium, at Ur and then at Larsa, capitalism seems to be entirely free of state control. Private entrepreneurs had replaced the temple and palace as disbursers of loans at interest (33 percent per annum); they made advances to wholesale merchants and directed the copper imports.... [By] the sixth to fourth century b.c.... in Nippur and Babylon firms were created through the association of capitalists. They took in money deposits, issued cheques, made loans at interest, and most importantly, participated directly in economic changes by investing in numerous agricultural and industrial enterprises. (Baechler 1975, pp. 37-8)

Similar examples can be multiplied from all the ancient agrarian civilizations.

But these agrarian civilizations looked upon these merchant capitalists as, at best, a necessary evil, as commercial activities were universally held in low esteem. Being intermediaries in the economic process, the merchants produced nothing in a tangible way, and were looked upon as parasites who were satisfying the demands of a tiny urban elite by transferring the rural surplus produced by those who wielded the plough to feed the warriors and priests in the towns. Devoted primarily to profit they became immensely rich, but their wealth was not matched by social acceptance or political power. It was only in the western part of Eurasia in the High Middle Ages that this changed, and the capitalists were eventually able to create an economy where their unceasing search for profit became not only acceptable but the norm. Thus, capitalism as an economic system came about when the merchant and the entrepreneur finally were given social acceptance and protection from the predation of the state.

Who Were the Capitalists?

Before I come to my story of how and why this happened in the western edge of Eurasia, we also need to ask: who were these merchants and why were they universally despised in the ancient agrarian civilizations? The answers are also relevant in explaining the ongoing cultural hatred of capitalism and in particular of its supreme embodiment-the United States of America.

The first point worth noting is that these merchant capitalists were a minority in agrarian economies. Their calling necessarily involved assuming risks and valuing novelty, behavioral characteristics that were not common among the settled agrarian communities, who over the centuries would have learned and adapted to the cyclical risks associated with variations in the climate and other quirks of nature. This learned behavior was fixed through social custom (see chapter 6). Novelty seeking and risk-taking behavior could have endangered these socially accepted ways of making a living. But these are precisely the behavioral attributes that successful capitalists need. This became clear when I was interviewing the aged founder of one of India's leading industrial conglomerates in the late 1960s. He had just chosen his successor from among his heirs to run his business when he died. I asked him how he had made the choice. He told me (probably apocryphally) that a few years before he had given each of his possible successors a large sum of money to set up their own businesses. Nearly all of them made some sort of go of this opportunity, except one grandson who after a year came to see him, crestfallen, saying that he had unfortunately lost all that he had been given on a speculative overseas venture. The old man decided that he was the suitable heir to take over his business!

There is now growing evidence that the behavioral traits which predispose some of us to risky and novelty-seeking behavior have a genetic basis. A recent book, American Mania, by a colleague, Peter Whybrow, director of UCLA's Neuropsychiatric Institute, summarizes this evidence. He begins by noting that human migration is one major form of risky and novelty-seeking behavior. Only a few of our species left their ancestral home in the African savannahs and began that long walk to the ends of the earth which allowed homo sapiens to colonize the world. Who were these earliest migrants? It turns out they had a particular genetic profile. They had a higher percentage of an exploratory and novelty-seeking gene than those remaining behind. As novelty seeking and risk taking "are ... behaviors essential to exploration and migration ... this should be reflected in a distribution pattern of the relevant allele [the D4-7 allele gene] that is similar to the ancient...