During the eighteenth century, capitalism in Europe “took off” in a way it had not done before, and as a result the West surpassed all other areas of the world in economic growth. What led to this transformation? Max Weber offers the most famous answer. In The Protestant Ethic and the Spirit of Capitalism (1905), he traces the new system to the Puritans. Before them, though there were rich merchants, substantial savings and investment by private individuals was unusual. The Puritans changed matters. They viewed the self-disciplined pursuit of wealth without indulgence in luxury consumption as a sign that God had predestined them to salvation.
Murray Rothbard rejects this interpretation. In his History of Economic Thought, volume 1, he says,
There has been considerable dispute over the “Weber thesis”, propounded by the early twentieth century German economic historian and sociologist, Max Weber, which attributed the rise of capitalism and the Industrial Revolution to the late Calvinist concept of the calling and the resulting “capitalist spirit”. For all its fruitful insights, the Weber thesis must be rejected on many levels. First, modern capitalism, in any meaningful sense, begins not with the Industrial Revolution of eighteenth and nineteenth centuries but, as we have seen, in the Middle Ages and particularly in the Italian city-states. Such examples of capitalist rationality as double-entry bookkeeping and various financial techniques begin in these Italian city-states as well. All were Catholic. Indeed, it is in a Florentine account book of 1253 that there is first found the classic procapitalist formula: “In the name of God and of profit”. No city was more of a financial and commercial centre than Antwerp in the sixteenth century, a Catholic centre. No man shone as much as financier and banker as Jacob Fugger, a good Catholic from southern Germany. Not only that: Fugger worked all his life, refused to retire, and announced that “he would make money as long as he could”. A prime example of the Weberian “Protestant ethic” from a solid Catholic! And we have seen how the scholastic theologians moved to understand and accommodate the market and market forces. (p. 142)
Rothbard’s point is decisive, but the question still needs to be addressed: Why did capitalism grow so much in the eighteenth century and after, far exceeding in extent the efflorescence to which Rothbard calls attention?
Ludwig von Mises helps answer our question through a reversal. He says that we shouldn’t look for groups of people who, because of special traits, overcame the reluctance of most people to save and invest. There have always been such people, he contends. In Human Action, he doesn’t mention the Weber thesis, but he calls attention to a similar view advanced by Werner Sombart, a leading member of the German historical school.
What generated the “machine age” was not, as Sombart imagined, a specific mentality of acquisitiveness which one day mysteriously got hold of the minds of some people and turned them into “capitalistic men.” There have always been people ready to profit from better adjusting production to the satisfaction of the needs of the public. (p. 837)
Now comes Mises’s reversal. The question we should be asking isn’t “What group of people wanted to acquire money more than other people did?” Instead, we should try to find out how the obstacles to their doing so were overcome. After pointing out that there have always been acquisitive people, he remarks,
But they were paralyzed by the ideology that branded acquisitiveness as immoral and erected institutional barriers to check it. The substitution of the laissez-faire philosophy for the doctrines that approved of the traditional system of restrictions removed these obstacles to material improvement and thus inaugurated the new age.
The liberal philosophy attacked the traditional caste system because its preservation was incompatible with the operation of the market economy. It advocated the abolition of privileges because it wanted to give a free hand to those men who had the ingenuity to produce in the cheapest way the greatest quantity of products of the best quality. (p. 837)
One more piece of the puzzle is needed to understand in full Mises’s account of the origins of capitalism. It wasn’t enough to end the privileges that allowed only elite groups to enter certain trades. One had also to overcome the ideology of equality, which held that it was wrong for some people to possess markedly more money than others. Although at one time China had a more highly developed economy than the West, the Chinese were never able to overcome this egalitarian dogma.
Mises says of the situation:
Let us compare the history of China with that of England. China has developed a very high civilization. Two thousand years ago it was far ahead of England. But at the end of the nineteenth century England was a rich and civilized country while China was poor. Its civilization did not differ much from the stage it had already reached ages before. It was an arrested civilization.
China had tried to realize the principle of income equality to a greater extent than did England. Land holdings were divided and subdivided. There was no numerous class of landless proletarians. But in eighteenth-century England this class was very numerous. For a very long time the restrictive practices of nonagricultural business, sanctified by traditional ideologies, delayed the emergence of modern entrepreneurship. But when the laissez-faire philosophy had opened the way for capitalism by utterly destroying the fallacies of restrictionism, the evolution of industrialism could proceed at an accelerated pace because the labor force needed was already available. (pp. 836–37)
In other words, capitalist development required workers who were willing to work in factories, but they would not have much incentive to do so if they could cultivate their own plots of land. In China, insistence on equality led to a large number of farmers with small plots of land. Demands for equality were less exigent in England than in China, and many workers, lacking land, found working in factories attractive.
Mises thus responds to a disputed topic by changing the question under consideration, and in doing so, he makes a creative advance.