US President Bill Clinton standing in Red Square during a Moscow summit in January 1994. Photo by Diana Walker/Time Life Pictures/Getty


Economics as a moral tale

The development sector set out to summon the magic of capitalism from the ashes of communism. How is it going?

by John Rapley + BIO

US President Bill Clinton standing in Red Square during a Moscow summit in January 1994. Photo by Diana Walker/Time Life Pictures/Getty

Think of human development as a long journey. At the beginning, we live at the mercy of nature. Dependent on its bounty, we pray for rains and freedom from natural disasters and plagues. At the end of the journey, nature lives at our mercy. We use science and technology to release new wealth and remake the planet. Today, as humans implant themselves with microchips, install artificial organs and plan Mars colonies, we even aim for a ‘singularity’ that will lift us out of nature once and for all.

Economists began to compose the narrative of this odyssey, from subjection to dominion, in the 1700s. Once it became apparent that Europe had broken with millennia of stasis to begin a long period of rising growth – the same through which we are still living – political economists abandoned philosophical reflection to draft roadmaps to development.

Two broad types emerged. One approach described the walk, the other the walker. The first presumed that the context in which we made the journey – the natural environment, the institutions, the culture, the legal and political systems – determined the direction of the path. In this model, the government bore responsibility to build the path so that it could accommodate as many people as possible. Progressive taxation was simply an investment in social prosperity, key to maintaining an ascendant society and a reasonable return payment from those who had most benefitted.

The second approach took a more individualist perspective. It presumed that the walker determined his or her own success in the journey. It concentrated on the moral, intellectual and physical attributes it believed an individual needed to advance. In this model, the task of the government was to sweep aside obstacles impeding the gifted few from embarking on their personal journeys – restraints that ranged from restrictions on labour mobility to usury laws. Thus liberated, gifted individuals would beat the path to prosperity. Progressive taxation on those who had completed the journey would only reduce incentives to make it, ultimately hampering the economic growth of society. The secret to success lay in a minimalist state. Presuming that nature selected some to lead and others to follow, this roadmap was essentially aristocratic – although, given aristocracy’s association with feudalism, sociologists later coined the term ‘meritocracy’ to describe this principle of radical individualism.

Meritocracy loomed large over Victorian capitalism. However, in the course of the 19th century, the free market largely failed to deliver the developmental goods, proving itself to be more adept at generating than distributing wealth. And so, in the early decades of the 20th century, stirred by both political and intellectual developments – the growing appeal of communism to a working class that had tasted comparatively few of the market’s fruits, and the consequent rise of economic schools that aimed to renew capitalism, such as Keynesianism and the German social-market – the state gradually took on a much more active role in both society and the economy. Immediately after the Second World War, with Europe in ruins, the communist threat seemed to reach its peak. To spearhead reconstruction, Western states created institutions such as the World Bank to assist governments in their work, and private charities arose to join this crusade. Oxfam (1942), CARE International (1945) and UNICEF (a joint private-United Nations charity created in 1946) all came into being to provide famine relief to war-torn Europe.

Thus a tremendously successful initiative that would come to be known as the development industry was born. By 1948, Western economies had emerged from crisis, beginning a decades-long period of rising growth and prosperity. Rather than pack up and go home, the development industry now turned its attention to a new frontier. With Europe’s overseas empires breaking up, dozens of new nation-states were coming into being, each of them eager to ‘catch up’ with its erstwhile colonial master. Amid this exciting atmosphere, the development industry could use its expertise to play a clear and prominent role, one captured in the subtitle to the then-Bible of development, Walt Rostow’s Stages of Economic Growth (1960) – ‘a non-communist manifesto’. By now, statist economics was enshrined in theory and sanctified by practice. Turkey had successfully pioneered a mixed economy in the 1920s, and Latin American governments had used protectionist policies to build their industrial sectors to substitute for the loss of imports during the Great Depression. Thus, the conventional model for rapidly moving countries through the stages of which Rostow spoke was for the state to marshal resources and then spur private activity, with the development industry playing a supportive role in this essentially liberal, optimistic crusade.

But when growth slowed in the 1970s, governments began to turn away from state-led approaches and to free up the market. Leaders such as Ronald Reagan in the US and Margaret Thatcher in the UK, early proponents of this new libertarian approach, harkened back to the unbridled individualism of the Victorian age. Reagan told a 1981 development summit in Cancun that Third World countries ought to follow the model set by the US, whose economy, in this telling, had been built by self-sufficient, independent farmers. Reagan elided the roles of slavery and industrialisation behind post-Civil War tariff-walls, major chapters in US history impossible to square with the libertarian ideal. But with a bit of editing of the historical record, the ‘neoliberals’ took a decidedly dim view of the government. They tended to think that those who can, do, while those who can’t, administer, looking for ways to frustrate society’s makers.

The ‘less government, more growth’ approach became orthodoxy, but it brought back – with a vengeance – the challenges of distribution. By the end of the 20th century, social indicators in developing countries were going backwards, just as the tide was turning against conservative politics in the West. Unlike what happened after the Second World War, though, the pendulum this time did not swing back toward the more social roadmap to development. Instead, the development industry asserted its autonomy from government, and assumed a new role. Rather than have the state build the bridge between accumulation and distribution, we now learned that philanthrocapitalism, a radically new approach to development, would offer a whole new way of doing things.

As the state withdrew behind the curtains, the development industry took centre stage

Reagan and Thatcher and other exponents of free-market economics had been social conservatives. By the 1990s, a new generation had come along, represented by leaders such as Bill Clinton in the US and Tony Blair in the UK, who mixed conservative economics with social liberalism. As much as possible, they preferred a progressive politics that channelled private initiative, and the logic of philanthrocapitalism was pleasingly straightforward. Since the rich were getting richer, they had more money to throw around. The lure of yet more lucre could now be used to steer them into sinking some of this new wealth into the poorest communities, something touted by Clinton late in his presidency when he went on a four-day ‘new markets’ tour of deprived American neighbourhoods. Urging the super-rich to do some good with a portion of their rapidly growing prosperity, Clinton told them that a better world would make them richer yet. ‘Every time we hire a young person off the street in Watts and give him or her a better future,’ he said, ‘we are helping people who live in the ritziest suburb in America to continue to enjoy a rising stock market.’

In fact, in the two decades after Clinton took office, the number of charitable foundations doubled. A new problem arose, though. Due to the worsening inequality produced by free-market policies, this growing number of foundations and NGOs found themselves relying on a diminishing pool of wealthy donors. Inevitably, that forced them to cultivate the plutocrats, and reflect their views. However, even this supposed vice could be turned into a virtue. If the free market had in fact sorted the best from the rest, and enabled them to use their ingenuity to enrich themselves, it followed that this same ingenuity could subsequently be applied to the solution of social problems. As the state withdrew behind the curtains, the development industry thus moved beyond its traditional supporting role in tackling social problems to take centre stage. If Rostow’s Stages of Economic Growth had articulated the ideals of a liberal age, Matthew Bishop and Michael Green’s Philanthrocapitalism (2008) did it for a neoliberal one. As Rostow’s subtitle had done, theirs offered a pithy summation of the doctrine: ‘How the Rich Can Save the World’.

Meanwhile, the 1990s offered no shortage of laboratories in which to test this new doctrine of development. The biggest prize of all was Russia, the country that had just chucked the most extensive state ever to build a market economy. After Mikhail Gorbachev’s attempt to reform the communist state and economy finished with the Soviet Union’s collapse, Boris Yeltsin took the reins of the newly independent Russia. Deciding that the only way to revive the economy was to start from scratch, Yeltsin oversaw a programme of ‘shock therapy’. It aimed to release the phoenix of capitalism from the ashes of state communism. Western advisors flooded into Moscow, with the ‘Harvard Boys’, led by the wunderkind economist Jeffrey Sachs, playing a central role. Coupled to crash-privatisation was to be an efflorescence of civil society. Non-state actors would now assume the functions previously performed by a totalitarian state. Private foundations, such as Ford, MacArthur and Soros, pumped tens of millions of dollars into civil-society construction, helping to build political parties, independent media and NGOs. State actors, including the US government, supplemented the efforts.

Russia was merely the most ambitious instance of a trend then spreading globally. In one country after another, governments were withdrawing from the economy and liberalising the environment in which NGOs and private charities worked. Western governments helped to fund the activism. At about the same time that Yeltsin was opting for shock therapy, the Indian finance minister was preparing to dismantle much of Indian dirigisme, abandoning the mixed model that had defined the Indian state since its independence in 1947. India’s civil society, however, was far more vibrant and autonomous than Russia’s had ever been. It proved able to step some way into filling the new gap in social welfare. The Indian government had never before encouraged NGOs, having previously seen them as something of a threat to its authority. But it too adapted, and opted to give them more freedom to manoeuvre and operate.

In Beijing, the Communist leadership watched what was going on in Russia and India with real interest. Like the Russians, the Chinese took the advice of US-based economists, some of them Chinese. But they also looked elsewhere. A broad debate about China’s future direction took place within the leadership. Some called for China to do like Russia and plunge into a more Westernised future. Others insisted that the state needed to tighten its political control in order to provide the stability necessary to absorb the profound economic changes about to occur. The statists looked for insight less to the West than to China’s own neighbourhood – to South Korea, Taiwan and Singapore. In these East Asian ‘tigers’, the market economy was developing under strong state guidance. In the end, the Chinese leadership opted to go with a hybrid: more political control and less democracy than in the tigers, but much less state than with either Maoism or Soviet central planning.

At the time, many assumed that the Chinese ‘developmental state’ approach was doomed to failure. Political science then took as axiomatic that an expanding class of independent businesspeople would demand the same liberties in the political sphere that they enjoyed in the market. It’s true that there was a debate about which came first, democracy or development. But it was in a sense a chicken-and-egg debate, for few scholars saw economic development and political democracy as separable in the long run. The echoes of the Tiananmen Square massacre of 1989 were still sounding. Most analysts had seen Tiananmen as China’s instalment in the 1989 democracy movement. They were confident that, in one form or another, such protests would recur, and recur, and China would eventually democratise.

The story that philanthrocapitalists told was a great one: history marching forward, heroes and villains, and a Hollywood ending. History has a way of surprising us, however, and most of the script ended up on the cutting-room floor, the actors left to ad-lib parts they weren’t expecting to play. Russia’s shock therapy didn’t beget a flourishing capitalist democracy. Chinese autocracy didn’t collapse under the weight of its contradictions – in fact, scholars today wonder if China gives the lie to the long-cherished rule that economic dynamism demands a lean state. As for the rich people who were meant to save the world, almost to a man, they chucked the script in the bin: for every billionaire funding a progressive cause, there would be dozens who used their wealth to support conservative campaigns to further roll back the state’s social provisions.

Most importantly, the newly liberated development industry failed to resolve the tension at the heart of free markets. In short, they produced growth more effectively than development. While the ascent of the developing world has reduced global inequality over the past quarter-century, within countries, it has generally worsened, as a global plutocracy emerges to dominate the world’s economy and politics. A wave of popular anger against disconnected ‘elites’ has resulted, which authoritarian populists have skilfully exploited to launch crackdowns on the development industry. Whether it be the Orthodox chauvinism of Russia’s Vladimir Putin, the Hindu nationalism of India’s Narendra Modi, or the Muslim fundamentalism of Turkey’s Recep Tayyip Erdoğan, they are tapping into disillusionment with the old model to repress ‘globalist elites’. As they decry NGOs for their lack of patriotism, these governments are pushing them to fall into line behind government, or to leave the field altogether (as Hungary, for instance, has done with its notorious ‘Stop Soros’ law).

Although the liberal reflex has been to defend civil society, the populists are addressing a real discontent. Take, for example, Russia, the one-time poster-child for philanthrocapitalism. Putin’s repression of activists, journalists, NGOs and all critics apparently enjoys substantial support, in part because the NGOs of the 1990s had often been considered elitist. Many Russians saw them as closer to global civil society than to ordinary Russians, more loyal to their donors than to their supposed constituents, and too little preoccupied with the day-to-day struggle that was the lot of most Russians in that lost decade. In fact, the model of civil society emerging in today’s Russia has converged somewhat with India’s changing approach. There, the hiatus in the uneasy relationship between the government and civil society proved short-lived. Modi’s government has turned to tightly regulating NGOs, regarding them as political opponents, and subjecting organisations that dissent too loudly to harassment and repression.

And as disturbing as their conspiracy-theories of ‘globalist’ or ‘metropolitan’ elites can sound, the populists might be on to something. In 2011, the Swiss Federal Institute of Technology conducted a network analysis of the global corporate elite. What they found was a small web, made up of a few hundred tightly networked and extraordinarily wealthy individuals, dominated by bankers, and commanding vast pools of capital. If this was Davos man, then meritocracy was arguably its governing ethos – its mission, to replace the narrow, limiting confines of the old nation-state. Through compulsion and cajoling, much of the development industry got drawn into an alliance with this new global elite.

The idea that the rich should be left to solve the world’s problems ignores the science behind success

It might be that the industry suffered more harm than good from this alliance. Human-rights NGOs, in particular, which won hard-fought gains advancing transnational laws and norms, are now being forced to defend the advances they made against the new authoritarians. But rather than just stick up unconditionally for the development industry, liberals could benefit from returning their focus, at least in part, to the old model of NGOs aligning themselves more with national than global goals. Because while the development industry can point to considerable progress, it can’t claim all that much of the credit.

Over the past 30 years, poverty and hunger across the planet have fallen dramatically. Exponents of the free-market model like to remind us that this happens to be the era in which neoliberal governments dismantled much of the social state. But such a correlation holds up only at the most aggregate level. Once you look at what was happening on the ground, the picture turns around. China is thriving under an autocratic state. Russia floundered under a minimalist one in the 1990s. India is doing relatively well at market reform – while pressing civil society to line up behind national rather than transnational goals. All told, the supposedly deadweight state doesn’t look so dispensable after all.

But then, we’ve known that for a long time. On the face of it, it seems puzzling that philanthrocapitalism ever got much of a hearing, because history had surely shown it would never work. If the rapid but unequal economic growth of the Victorian age failed to produce commensurate social development, what made anyone think that the rapid but unequal growth of the contemporary period would do any different? Moreover, the idea that the rich should be left to use their wealth to solve the world’s problems because they have proved their merit in the market ignores the science behind success. Does anyone really believe that, if Steve Jobs had been born into a Bengali peasant family, he would have still created Apple? In fact, economists who’ve actually worked out scientifically what contribution our own initiative plays in our success have found it to occupy an infinitesimally small share: the vast majority of what makes us rich or not comes down to pure dumb luck, and in particular, being born in the right place and at the right time.

At heart, philanthrocapitalism offered not a new science of development, but an old-fashioned moral tale – one in which a hero, who would reveal himself by some magnificent achievement, would come along to save us from some peril. There is no shame in weaving moral tales. Economics has always given us moral narratives by which to live our lives – in fact, that’s arguably its primary reason for being. But if it is to enter our canon, a story needs an audience that finds it rings sufficiently true to then retell it. Philanthrocapitalism failed that test. It will probably end up in history’s remainder bin as a result, while storytellers devote themselves to crafting more compelling narratives.