Money and Power: Pondering Economic Growth and Decline

National Interest, The, Summer, 2002 by Richard Rosecrance

Niall Ferguson, The Cash Nexus: Money and Power in the Modern World, 1700-2000 (New York: Basic Books, 2001), 552 pp., $18.

Liah Greenfeld, The Spirit of Capitalism: Nationalism and Economic Growth (Cambridge: Harvard University Press, 2001), 541 pp., $45.

Kenneth Pomeranz, The Great Divergence: China, Europe and the Making of the Modern World Economy (Princeton: Princeton University Press, 2000), 382 pp., $16.95.

ASIDE FROM preventing terrorism, there are two cottage industries in the policy community these days. One aims to develop Third World states-- aspiring to remove at least some of the causes of terrorism. The other, somewhat less in the public eye recently, seeks to prevent the decline of major powers, particularly the United States. These two industries are linked by their concern to understand the relationship between economic structures, motives and performance, on the one hand, and political structures, motives and performance on the other. In other words, both are about the nexus between money and power.

As to the first of these industries, no one quite understands what causes states to grow economically, and if we ever knew--judging by existing outcomes--we may well have forgotten. Max Weber claimed Protestantism created an ethic that fostered capitalist development. But that religion could scarcely be responsible for facilitating growth in Japan or China, or even in Catholic southern Germany and Italy. Recoiling from sociological theory, modern economists have turned to more practical explanations. They argue that superior education, property rights, large social coalitions, abundant capital and technology have been the essential conditions leading to growth. They also stress the economic infrastructure of ports, airfields, communications facilities, canals and highways as well as investment funding by banks and governments as important foundations for development.

But we know that these economic elements of success can be in place and growth may still not occur. What is it, after all, that motivates economic upsurge? Why do individuals in heretofore agrarian societies decide to risk their capital in what might become a foolish gamble? Liah Greenfeld, University Professor at Boston University, argues in The Spirit of Capitalism that "nationalism" provides the key missing ingredient: it is the spark that ignites economic growth. The English had it in the 18th century, but the Dutch did not and therefore underwent only the "commercial" but not the "industrial" revolution. As a result, the Netherlands did not achieve full industrialization until after 1870. On the other hand, nationalistic zeal drove Germany and Japan to match the achievements of west European nations: even though they started only in the mid19th century, these two countries had become powerful industrial economies by 1914.

Greenfeld chronicles the "developers" and their thoughts in a series of countries--Japan, France, Germany, England and the United States, while also occasionally focusing on the Dutch national and economic failure. In each case she finds a constant association between economic growth and nationalism: unless economic developers were imbued with passion for the state or sought to bring all members of an ethnic group into it, they did not succeed in building an industrial society.

All the early developers were rivals with someone else--the English with the Dutch, the French and Germans with the English, and Japan with the West as a whole. The United States also measured itself against England and Germany. As Alexander Gerschenkron showed in his Economic Backwardness in Historical Perspective (1962), the "later" industrializers worked hard because they had the desire to catch up economically. Greenfeld, however, is not offering an economic analysis. Unlike her mentor, David Landes, she does not explain growth by economic factors, nor ask why the German, American and Russian trajectories were more rapid than the early industrializers, Britain and France. She is making a political argument.

Greenfeld does not claim that nationalism and growth were perfectly correlated in time. Sometimes nationalism peaked first (the French case), other times (as in Britain) it crowned economic change already in progress. There was a lot of growth in the German states after the Zollverein (customs union) was formed in 1833, even though full-blown nationalism and consolidation did not flower until later. In general, however, Greenfeld makes a good case that nationalism spurs economic development. It is unfortunate, perhaps, that she did not inquire into Ernest Gellner's conclusions in Nations and Nationalism, that industrialism creates the social interdependence that makes nationalism possible. The two influences may be self-reinforcing: French nationalism in the 18th century appears to antedate industrialism and British industrialism in that same century antedates nationalism. But thereafter the two went hand in hand, suggesting that in more general terms Greenfeld and Gellner share a compatible analysis.