Wednesday, May 25, 2005

How the West Grew Rich

Econ 136
International Economics
April 26, 2005

Book Report: How the West Grew Rich

Five hundred years after the birth of Jesus Christ, the most powerful civilization in the world at that time—the Roman Empire—had collapsed. From its ashes, a more powerful civilization would arise. And in the next fifteen hundred years, this civilization would nearly take over the world in its views, its morals and beliefs. This civilization is known as the West.

How did the West gain its power? In a unique book called “How the West Grew Rich,” L.E Birdzell and Nathan Rosenberg claim that the West grew powerful through the gradual incorporation of unique thoughts and ideas of seeking out growth-inducing changes deeply within Western civilization. By incorporating these ideas within the social fabric of Western society, the West could continue to slowly advance economically, socially, and militarily, without any destabilizing changes which may occur in the rise or decline of an empire controlled by a single, charismatic political figure. They start their historical journey of gradual change from the rise and fall of the Middle Ages, through the mercantile system of the 16th century, finally culminating to an analysis of the Industrial Revolution, the Post-Industrial Revolution and development of free market economic systems of the United States and Europe.

Birdzell and Rosenberg start their unique work at the beginning of the Middle Ages. The Roman Empire has fallen, and the West’s wealth and power would germinate from the seeds of feudal society in Europe. Europe was a backwater society. There was no technology, production facilities, transportation systems, communication systems, or even any financial systems. The economy was agricultural—raising food for sustenance. The political and economic system was feudalism. Birdzell (et all) defines feudalism as a “system in which occupants of the land hold it as tenants of the sovereign in exchange for military service,” (41). The sovereign lord would own the land. Peasants, or serfs, would farm the land in a form of slavery. There was no social mobility—your status was defined by birth. There were no incentives to improve agricultural technology or output. Medieval towns and villages were comprised of merchants and artisans, who would trade simple manufactured goods for agricultural products. The contract between the lord and his workers were not based on wages for productivity, “but on a complex of political and social status, loyalty, and duty, reinforced by coercion” (45). Feudal society was complex in that it provided two types of contracts. The first was a social contract between the sovereign and his subjects in a similar manner as a contract between the state and the governed, with the state’s legitimacy dependent on the state of the governed. The second contract was that the institutions were designed to promote security and stability. Feudal society was patterned on the military. Its concept of sovereigns parceling out land to military commanders in exchange for their military services is key to understanding why feudalism survived for so long. What is important about feudalism is that it was a social and economic system, which is the complete opposite of today’s current Western society. Feudalism could not adapt to changes. Feudal armies could not adapt to the introduction of gunpowder in warfare—a trained knight in shining armor could easily be stopped by an infantryman wielding a musket. Heavily fortified castles could not take the pounding of siege canon. As a result, peasant and village armies for defense had to be adapted to new armies of professional soldiers—soldiers who were to be paid with new forms of financing. The simple agricultural system of the sovereign providing defense to his subjects in return for agricultural goods were disrupted with numerous famines, crop failures, wars, and plagues. This disruption had caused a decline in the population of Europe (66). The feudal system had to adapt in providing greater incentives to the serfs in exchange for increased agricultural output. This would provide the serfs more food, increase their health, and that greater amounts of surplus food could be traded in the towns and villages for more manufactured goods, produced by the villagers and artisans. This increase in trade of food for goods gave rise to a new specialization--the merchant. Birdzell defines the role of the merchant as to “intermediate, through money, the underlying local and distant exchanges of goods for goods. The merchant’s products are place, time, liquidity, and risk. They buy here and sell there, buy now and sell later,” (99). The merchant class in feudal society acted as a middleman in exchanging goods between different groups. As merchants were able to travel greater distances between different towns and early medieval cities, they were able to offer a greater variety of goods from differing geographical areas. This provided incentives to landowners and sovereigns to trade with the merchants for raw materials, or more importantly, for the luxury goods brought in from the Middle East and China during the Crusades. Because of this inflexibility to adapt to new changes in technology, society and the environment, that feudalism would be scrapped for new civil and social systems to provide the West with an advanced economy and great wealth.

Why did this change occur in the West and not in the Middle East or China? Both the Islamic Middle Eastern and Chinese societies were far more advanced in their own economic systems and in technology. The Middle East was situated at a prime geographic location where traders could act as middleman, trading raw materials of coal, iron ore, and lumber from Europe, for luxury goods in the Middle East and China. China was a technologically advanced society, which invented gunpowder and paper money. But why did European society advance far beyond either the Islamic or Chinese societies to the point where the greater European powers were carving up the Middle East and China in the 18th and 19th centuries? Within “How the West Grew Rich,” there are two subtle reasons, which answer this question. The first is religion. As feudal society had to adapt itself to the new concepts of trade and commerce, new institutions had to evolve in order to resolve disputes in commerce. Feudal society was based on tradition, custom, loyalty and kinship. This was the basis of trust and morality of feudal society—a morality that was heavily influenced by the church. Birdzell and Rosenberg claim that, “A morality inherited from a medieval economy based on faithful compliance with customary relationship could not have been expected to fit a commercial economy in which individual choice and bargaining had superseded custom as the basis of exchange,” (128). In a commercial economy, trust becomes a complex arrangement between different agents to purchase, sell, deliver or promise the quality of goods being exchanged. How do you resolve disputes stemming from this complex arrangement using custom and kinship? It took the Protestant Reformation to resolve this issue. The Protestant Reformation allowed for the separation of business from religion. “Protestantism emphasized the belief that salvation was intensely individual and personal,” (133). This is a powerful event, for it separates and individual’s desire to further their own self-interest from their moral beliefs. It also separates the church from imposing its own religious views in secular or governmental activities. Religion no longer had the power to decide commercial disputes. Instead, commercial disputes had to be decided within new institutions of which based their decisions on logic, reasoning, and legal precedents. Middle Eastern society has not had anything like the Protestant Reformation occur within the Islamic religion. Business or commercial disputes are not resolved through reasoning or legal precedents, but rather through religious judges interpretation of the Koran. This interpretation is highly subjective, depending on the judge’s knowledge of religion and his own personal beliefs. Disputes regarding complex trade or financial agreements could not be resolved in a logical or reasonable means to the acceptance of either party.

The second reason why China did not change was based on how incentives were received in Chinese society. While Europe was struggling through the Middle Ages, China had developed a technologically and culturally advanced civilization. And yet, Chinese society was very similar to the feudal society of Europe. Birdzell says that “China was ruled by mandarins, a class of civil servants with no prospect whatever of hereditary succession. Thus, Chinese civilization was more rational in the very specific sense that people were admitted to positions of leadership on the basis of ability and not of birth,” (87). The problem was that the mandarin leadership was unable to change. The Chinese had developed an economic system that allowed for a father to pursue commerce and trade for economic gains. Once the father had profited from his gains, the son would aspire, “not to expand or even necessarily to perpetuate the family business, but to prepare for the imperial examinations and to enter and eventually rise in the mandarinate. These values underplayed the importance of bettering the material conditions of everyday life,” (88). Trade and commerce was not pursued for an individual’s own self-interest, but rather as a means to enter the Chinese civil service. Once the individuals were able to enter and rise within the civil service, their own views became hardened and resistant to change. This is also opposite of social systems which evolved in European society. Individuals in the post-feudal and mercantile civilizations also responded to their own self-interests regarding trade and commerce. But they pursued their interests for their own individual reasons—not simply as a social means to gain entrance to a government bureaucracy. Also in China, the civil service was a centralized institution based on merit. The mandarins utilized technology as a means to gain pleasure or to satisfy curiosity. Europe, on the other hand, was decentralized with competing aristocracies and individual centers of economic and political power. Competition between these aristocracies and the individual centers for economic resources and luxury goods resulted in the adaptation of new technologies and the development of economic and commercial systems based on newly discovered knowledge and research. This allowed for the West to change and adapt its political, economic, social and military institutions so that by the 18th century, the West would become more powerful than either China or the Middle East.

Throughout this book, Birdzell and Rosenberg continuously stress the West’s ability to adapt to different changes in history. This adaptation comes from a wide variety of changes—changes in political systems, economic systems, the military, and religion. But there are other changes that Birdzell and Rosenberg also include in their history. There is the evolution of shipbuilding, from the simple one-masted galleys used since the Roman times, to the building of fully rigged ships from the 15th to 19th centuries. There is the development of a banking industry, checking accounts, and lines of credit--all can be traced back to the use of bills of exchange in Italy during the 13th century. Bills of exchange were merchant drafts, drawn from their accounts and used as substitutes for payment of coin. These bills allowed merchants to transfer funds in the same way as modern Western individuals transfer funds between banks. The introduction of guilds, proprietorships, partnerships, and corporations, all stemmed from the need for a group of individuals to form a secularized version of a family to conduct business transactions to the benefit of the group and to the benefit of each individual’s self-interest. There are interesting historical details regarding each of these examples. What is more interesting is that Birdzell and Rosenberg have the ability to weave each of these individual details into a rich tapestry of connecting ideas which cleverly show the gradual evolution of economic history of the West. The West had to change because events in history forced the West to change. After the fall of Rome, Western civilization had to learn that a society based on inflexibility and stagnation would ultimately fail. It is because of those lesions, that the West has learned to become one of the richest and most powerful civilizations in the world today.

Birdzell, L.E. and Rosenberg, Nathan. How the West Grew Rich. Basic Books. 1986.

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