Hayek and His Overcoat
- The Wealth and Poverty of Nations by David Landes
Little, Brown, 650 pp, £20.00, April 1998, ISBN 0 316 90867 3
- The Commanding Heights by Daniel Yergin and Joseph Stanislaw
Simon and Schuster, 457 pp, £18.99, February 1998, ISBN 0 684 82975 4
There was an occasion on which the ruler of Balkh, in Central Asia, went to make war. Nomads, taking advantage of his absence, seized the city. The inhabitants put up a good fight, for themselves and their ruler, but lost. The ruler returned, despatched the invaders, and upbraided his subjects. War, he told them, was his business: theirs was to pay and obey. Their leaders promised not to repeat their lèse-majesté.
David Landes takes the story from the scholar of Islam, Michael Cook. It is, for him, a moral tale. Autocracies squeeze, steal and demean. ‘Only societies with room for multiple initiatives,’ he insists, ‘from below more than from above, can think in terms of a growing pie.’ That is why they become rich. And that is why ‘the very notion of economic development’ was a creation of the West. It was only in Western Europe that rulers were in sufficiently poor control for sufficiently long to allow those who made and traded to pursue their interest. It was only there, once the rulers got a grip, that they learnt it could be in their own interest, not least in competition with others, to let this continue. The curves of learning, it is true, were many and varied, and not a few were flat. Rulers who continued to fear for their power were often averse to energy from below. Many tried simply to protect their economies from the intrusive success of others.
The more conservative were also inclined to encourage those skilled in the arts of propaganda to instruct the people that no good would come from following their mercenary noses. In the years between 1405 and 1431, the Chinese embarked on a series of extraordinary expeditions that reached as far as Africa. Their huge junks, as Landes observes, were probably the largest that anyone had yet seen, five times the size of the three ships in which Columbus and his men were to sail into the western Indies at the end of the century. There were 317 of them on the first expedition, some carrying men, 28,000 of them in all, some horses, some food, some arms, one, fresh water. The object was not entirely clear. The Chinese took silk and porcelain and other fine products as gifts for those they might encounter, and, in what they would have seen as tribute, received jewels, exotic beasts and promising substances for their pharmacies at home. In 1430, however, a new emperor overthrew the old, and put a stop to it all. He ordered the shipyards to be dismantled and penalties to be imposed on anyone who dared to persist: by 1500, it was a capital offence to build a boat of more than two masts. The reason was in part fiscal; the expeditions had emptied the coffers. In part it was a matter of opinion. ‘A new Confucian crowd’, as Landes puts it in his breezy, readable way, had come to power in a new capital at Beijing (itself a cause of great expense), and set itself against the enthusiasm felt by the eunuchs in the old court, as well as by Buddhists and others, for travel and trade. The country turned in on itself. There was growth only in agriculture and that was slow.
In Europe and the United States there was a similar disposition to inwardness in the interwar years of this century and, to an extent, after 1945 also. The collapse of a revived Gold Standard in the Twenties, the stock-market crash in the United States and accelerating runs on weaker currencies prompted protectionism. At the extreme, this produced a politics of one or another kind of ‘national socialism’. In order to avoid a return to such self-defeating strategies, the International Monetary and Financial Conference of the United and Associated Nations at Bretton Woods in 1944 agreed to restore stability with a new kind of gold standard, to recover prosperity by means of freed international trade; by restraining speculative movements of money, it wanted to reassure governments and their citizens that states could nevertheless retain a degree of control over their economies. Only Russia, and China again, chose isolation. In the decolonised territories in Africa and elsewhere in Asia, and in Latin America, which had done well from the war, governments tried to find a line between the two. The order of the day was national capitalism with socialist characteristics. For thirty years, new theories ruled.
That, according to Daniel Yergin and Joseph Stanislaw, was the trouble. Yergin, like Landes, is a gifted narrator. The Prize, his 1991 history of what he called ‘the epic quest for oil, money and power’ in the 20th century, was an excellent read. The Commanding Heights is equally racy. With an army of assistants in Washington, he and Stanislaw have read a decent number of the published sources, talked to many interested people in the United States, and to 88 of the more important protagonists around the world, in order to bring us the epic ‘battle between government and marketplace that is remaking the modern world’. The history of oil was a comparatively easy one to write: greed explained almost everything. This new story has been driven by fear, courage, conviction, inertia, envy, vanity and panic, too. There has also been, as Harold Macmillan remarked when asked to say what had guided his premiership, the force of ‘events, dear boy, events’. It would be an impressive historian who, at this short distance in time, succeeded in mastering the complexity of all this. Yergin and Stanislaw have preferred simplicity.
They suggest, without irony, that the new battle has been started by the theory of a now dead economist, Friedrich von Hayek, and those who since the Sixties have refined it. Hayek’s argument, as Yergin and Stanislaw do not quite say, but as Keynes saw clearly and said very colourfully, strains credulity. He claimed that there is a ‘natural’ rate of interest. This is determined by the balance between people’s decisions to spend or to save. The more they save, the higher it is. Banks interfere with this rate at everyone’s peril. Credit extended below it leads to too much investment, hence slumps. Hence also the likelihood that Keynes’s remedy, predicated on the belief that there was too little investment – the remedy that was applied by the governments of the more advanced economies in the West between the Thirties and Seventies – could only make things worse. The structure of production would become even more unbalanced, and there would be inflation. One must wait for economies to right themselves. (‘Is it your view,’ Richard Kahn asked Hayek when he came to Cambridge to explain his theory in 1931, ‘that if I went out tomorrow and bought a new overcoat, that would increase unemployment?’ ‘Yes,’ was the reply. Keynes, although he greatly disliked Hayek’s argument, saw that to sustain his own, he would henceforth have to make it clear that the price of money, or the incentive people have to save, and the price of capital, or the incentive they have to invest, were two very different things.)