Spring 2010

The Enterprise of Nations

– David S. Landes

Critics have tried to explain away the West's centuries-long economic domination of the globe; they would do better to study its lessons.

Western entrepreneurship and technological progress go back centuries and have changed the world for the better. That, at least, is one assessment of the historical record—one with which not everyone would agree. There are some scholars who, disapproving of Western triumphalism or solicitous of Asian (mostly Chinese) pride and prowess, would date the Industrial Revolution as a late phenomenon in the history of entrepreneurship and treat it as lucky accident (or unlucky, depend ing on one’s sense of values). It could have happened anywhere, they say; it just fell to Europe or Britain, in large part owing to political fortune, reinforced by overseas dominion. And globalization, in the sense of worldwide diffusion of trade, industry, and technology, came even later, after World War II.

Yet newer research and reflection on comparative world history make it clear that global trade goes back more than a millennium, back to Asian and then European economic development in the later Middle Ages, back to the opening of the world with the turning of Africa, and the penetration of European vessels into Asian waters and the contemporaneous European invasion of the Americas. The centuries that followed saw the West grow richer than other regions of the world, pull away from the onetime leaders, establish empire in distant lands—all on the basis of superior scientific knowledge, industrial technique, and business enterprise. Much of subsequent history has been profoundly influenced by this gap and the reaction to it of lagging areas—these last resentful of patronizing, condescending, charitable and uncharitable, advantageous, and predatory Western dominion.

Poorer areas see the gap between rich and poor as the fault of the rich; they see their own weaknesses and shortcomings as someone else’s doing. In particular, they feel that advanced industrial nations have used their power not to help, but to exploit and plunder the weak. In this scenario, success and empire are forces for evil.

Nonetheless, the gains made by the more precocious industrializing countries incited other, slower nations to imitate and emulate. There was money to be made by these new ways. But wanting was not necessarily doing. Emulation required knowledge, the ability to organize and rationalize production, intelligent and active entrepreneurship, and laws protective of property and change. The countries best equipped to undertake the task were to be found in parts of the West, such as Ireland, Scandinavia, pieces of central and eastern Europe, Canada, and some bits of Latin America—places that had earlier been barred from the pursuit of new ways by political misfortune and cultural impediments.

Yet newer research and reflection on comparative world history make it clear that global trade goes back more than a millennium, back to Asian and then European economic development in the later Middle Ages, back to the opening of the world with the turning of Africa, and the penetration of European vessels into Asian waters and the contemporaneous European invasion of the Americas.

In general, the countries and regions that have done best are precisely those that have taken advantage of the opportunities offered by active trade and entrepreneurial freedom, often in the face of official constraints. These are the countries that have most attracted foreign advances and investment. But they have not done so by fol lowing the formulas proffered or imposed by experts from richer lands. The essence of successful enterprise lies in creative imagination and initiative.

The older centers of hither and farther Asia—the Islamic world, India, and China—lacked the cultural and institutional foundations on which entrepreneurship rested. Worse: They tended to cling to tradition in a world of disturbing and disagreeable challenge. Both China and the Arabic Middle East offer case studies of this resistance to innovation and the subsequent national revenge against those they blamed for the economic disparities that ensued. Both impoverished themselves by insisting on their cultural, moral, and technical superiority over the barbarians around them, by refusing to learn from people they scorned as inferiors, by simply refusing to learn. Pride is poison, and as the proverb puts it, pride goeth before a fall.

China was once the richest and proudest of civilizations. Faced with pretentious, eager, and greedy barbarians, the Chinese did badly, nursing feelings of superiority that blinded them to opportunity. British economist Angus Maddison has shown that as late as 1400 China’s GDP per capita outpaced that of Western Europe. By 1820, however, the trend had been turned on its head, with China’s GDP per capita less than half of Western Europe’s. In 1989, it was just one-seventh.

China’s refusal to exchange ideas with others cost the Chinese some 400 years of potential progress. Western Sinologues (really Sinophiles) try to comfort the Chinese by dating the Western advance as late as possible, by reducing it to happy accident, by minimizing its extent and impact. I emphasize the “Western.” The Chinese themselves know better. Because they know better, they are now doing something about it.

One can tell a similar story about the Muslim Middle East, Arabic and Ottoman. This had once been a world center of economic growth based on scientific and technological priority, a teacher of the West. But religious values confounded with political ideology grievously hurt productivity and justified self-impoverishment, insofar as it was not blamed on others. The result has been an angry ossification and resentment that has led much of Islam to reject the West and turn back to the allegedly superior values of Muhammed’s time.

Thus many Muslim countries and societies have strenuously opposed Westernization, which they see as a process of material corruption, a sacrifice of traditional virtue on the altar of self-­indulgence. This defensive closure has cost them their place in the world. After all, Muslim civilization was once the intellectual and cultural leader—and Muslims the masters—of the Eurasian world. As one wit put it, if there had been Nobel prizes a thousand years ago, just about all of them would have gone to Muslims. (In this sense, the Nobels serve as something of a barometer of current and potential scientific and industrial performance. Look at Japan: four prizes in the last three years.)

To invoke Princeton professor Bernard Lewis, what went wrong with Muslim performance? We have here a case study in defensive refusal to learn, a systematic suppression of curiosity, a pursuit, instead, of revenge and return. To be sure, Islam has its diversity and variety. Muslim Turkey, Malaysia, and Indonesia are very different from the Arab Middle East, Algeria, Pakistan, or northern Sudan. (I shall come back to this.) Yet almost everywhere, rule is autocratic, with little patience for opposition or obstruction. The rulers and the powerful have succeeded in silencing the open-minded dissenters, who have come to realize that their physical safety depends on their discretion or their departure to more open cultures—and sometimes even that’s not enough.

As a result, many Muslim countries and societies, particularly those of the Arab heartland, have found themselves slipping steadily, one might almost say inexorably, backward, in political strength and material wealth. The process is somewhat mitigated and concealed by the accidents of geography, in particular by the possession of major resources of that invaluable engine and motor fuel, petroleum. This resource has given the Arab countries a political role far exceeding what their population and wealth, to say nothing of their behavior, warrant.

The Muslim world’s response to challenge and decline has not only been one of refusal, but also an intensification of the traditionalistic, often crippling aspects of the culture. This has been particularly true of the response to European technological and commercial achievement, which has been seen as a ruthless betrayal of moral justice and an undeserved reversal of proper historical ­relations.

To be sure, the Muslim world does have its bright spots—Indonesia, Malaysia, and Singapore, for example. But their success owes much to the relative looseness of their religious strictures, their multicultural populations, and above all the large presence of non-Muslim Chinese émigré entrepreneurs. They might normally be the object of systematic hostility by way of reserving the economy to good Muslims—the kind of exclusivity that has been a principle of Turkish economic policy, for example. But Asians have learned the value of open and free entrepreneurship. Still, Islam matters, and in Malaysia the tacit understanding is that non-Muslim (Chinese) entrepreneurs shall remain in a position of silent modesty. The economy grows, in large part owing to the Chinese contribution, and the Muslims take the credit.

There remain Latin America and Africa, both laggards. Latin America is a mixed picture. A few countries have done well: Brazil, Argentina (yes and no), Colombia, and Chile. Such successes have been based, as in the Middle East, on nature’s accidental generosity: precious raw materials; prairie lands especially well suited to mass cultivation of cereals; jungle plants of industrial value, rubber particularly. Still, these are nations that have largely failed to combine increasing production with a higher standard of living and a leveling up of incomes. They are countries of a few rich and many poor, stuck in unbalanced arrangements that go back to colonial times, where minorities of privileged white conquerors ruled over the beaten survivors of indigenous peoples and then took in poor immigrants, preferably and often compulsorily Roman Catholic, to do the dirty work of painfully and tediously urbanizing societies. These nations are legally democratic and parliamentary, but practice often diverges from principle, and internal peace and order are precarious. One finds the same discrepancy with the market and entrepreneurship: The recent difficulties in Argentina testify to the intrinsic instability of an economy that was once envied and admired by the world’s advanced industrial nations. Latin America remains a big question mark.

Africa offers the most extreme examples of economic failure. To begin with, the geographical environment is not favorable to work and effort. Air conditioning would make a big difference, might even attract enterprise and labor, but air conditioning costs money. Philanthropic progressives put hope in subsidies by the rich, especially investments in productive capital. Yet such hopes for now have been food for disappointment, in large part owing to political mismanagement and corruption. Africa has been a place of flight and exit; success in Africa is a ticket for departure.

Meanwhile, the more advanced countries, comfortable in their technological and political superiority, have been increasingly tempted by the opportunities to export work to places of cheap labor. This sort of thing happens all the time now, be cause entrepreneurs are in it for the money, and they can make more money with a lower wage bill. Just read the story of James Dyson, inventor of the bagless vacuum cleaner. Dyson’s British company made more than eight million of these machines in less than a decade; had sales of $316 million in the year 2000 alone; had built capital to an estimated value of $700 million. By 2002, however, it was planning to move production of all vacuum cleaners to Asia. Needless to say, the decision brought howls of protest. But, in an interview with The International Herald Tribune, Dyson dismissed such objections as irrational: “I put £40 million of my money into this business to try and make manufacturing work here. But I have to regard the law of economics. If we are to survive as a business, we have to go where manufacturing is economical. I am not betraying anybody.”

Or take the story of Polaroid film, made for years in a factory in Waltham, Mass. This plant closed in the summer of 2002, and the work moved to new plants in Mexico and the Netherlands. The decision to move came from an investment group that bought Polaroid and prefers profits to sentiment. Needless to say, the workers were unhappy. Some had been employed by Polaroid for decades and never dreamed the company would ever leave Massachusetts. The Massachusetts secretary of state began investigating the company program that required employees to buy shares and then sold them without consent. His comment: “I think it’s been fairly sinister the way the company has been cut apart like a stolen car at a chop shop while the employees are left holding the spare tire.”

Nor are the initiatives toward job export limited to the advanced industrial nations of the West. When Honda Motors of Japan announced its intention of building plants in China, to make cars not only for the Chinese market but for export around the world, it defended the action by announcing that quality of product would match that of autos made in Japan, but costs would be 20 percent lower.

This process of job transfer (“outsourcing”) is a central aspect of contemporary entrepreneurship and globalization. This last is a terrifying word for many, to the point of violently negative response. If one were to judge by the recent proliferation of writing on the subject, one would think that globalization was an invention of the late 20th century, a turn of the exploitation screw, an international attack on peace and happiness. Yet as we have seen, it is a process that goes back centuries and varies in intensity with technological and social possibilities, the ups and downs of business enterprise, and the ever-changing uncertainties of war and peace. It is not a cause, not an ideology. It is simply the pursuit of wealth.

We today are living in a period of particularly active globalization of economic activity. This is a good thing, especially for those poor nations that build on these imports of activity to catch up. It is the way the backward learn, the way the poor can escape from poverty. Given these generally (ultimately) beneficent effects, why then the resistance and resentment? Why the angry riots? Why the flood of criticism?

One reason is disappointment with the results. “Poverty,” Harvard professor Dani Rodrik has wisely written, “is the defining issue.” The poorest countries have not done well, in spite of strenuous efforts by economists and government institutions in the rich countries of the West (thus the International Monetary Fund and World Bank) to get them to do the things that are supposed to promote development. Almost all of Africa is sinking into a morass of failure, corruption, and disease. The countries of Latin America have known alternating prosperity and failure and seen growth rates fall below their historical averages. A number of former socialist and communist countries, which might be expected to flourish in newfound freedom, closed out the 20th century with falling income per capita. Even the so-called miracle economies of South and Southeast Asia have met with reverses.

Why the angry riots? Why the flood of criticism? One reason is disappointment with the results. “Poverty,” Harvard professor Dani Rodrik has wisely written, “is the defining issue.”

To be sure, on the global level, poverty has diminished, and this because the two most populous nations in the world have done well. China has averaged almost eight percent annual growth of GNP since the late 1970s; India has gone from 1.5 percent to nine percent in the past twenty years. These two nations hold more than half the world’s poor and make the overall result positive. What do these gains mean for the people of these lands? Just look at life expectancy. In 1960, the average Chinese could expect to live only 36 years; by 1999 this figure had risen to 70 years, almost as high as in the United States.

Many if not most Third World countries see globalization as a device or pretext for imposing post-imperialist domination and exploitation by the West of the Rest. This must be true, for the gap is apparently growing, and who else could be responsible? Even more vexing is the cultural conquest and destruction that accompany material triumphs: the cinema, the music, the art and architecture, the heroes and heroines, the styles, furnishings, fast-food cuisine, and manners. As the Lebanese journalist Abbas Beydoun has put it, globalization swallows all, leaving no place for those outside it.

These reactions are reinforced by the sense that history has done the losers wrong; that where once they were leaders and standard-bearers, they have now been pushed aside, reduced, humiliated. The West, say the self-proclaimed victims, rules the world, does as it pleases, and commits crimes at will. Formal empires may have dissolved, but the school of imperialism has continued to breed war criminals. Witness, they say, the bullying and oppression of Afghanistan, Iraq, Palestine, Lebanon, Syria. Hence an abiding, festering hatred of Americans and Jews (or Israelis, seen as agents of the United States).

What is to be done? We know no foolproof answer, and certainly no single remedy that always works. But part of the answer, if it can be made politically feasible, is the adoption of enhanced incentives for domestic enterprise. Indispensable is enterprise that is prepared to learn from the successes of others, and to adapt appropriate foreign practices and rules of the game to the needs of domestic circumstances and cultures. For it is only by the introduction of more effective mechanisms to enhance domestic productivity and production that poverty can be contained. This, of course, is hardly all that it is needed, but historical evidence suggests that it is not easily dispensed with.

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David S. Landes is professor emeritus of history and economics at Harvard University and the author of several books, including The Wealth and Poverty of Nations (1998). This essay is excerpted from The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times (2010), edited by David S. Landes, Joel Mokyr, and William J. Baumol, published by Princeton University Press. 

Photo courtesy of Flickr/peadar