July 4 was our Declaration of Independence from Britain… the true birth of our country, which is now the largest and most powerful economy in the world… but it is so much more than that.
You see, in the mid-to-late 1700s, scientific thinking and discovery culminated in the Enlightenment. The world saw breakthroughs in countless areas of thought and philosophy, kind of like the breakthroughs Greeks had in the days of Aristotle and the first democratic movement.
The most important economic developments to arise out of the Enlightenment from my research were the invention of the steam engine by James Watt between 1763 and 1775 and Adam Smith’s classic book and treatise, The Wealth of Nations, first published in 1776.
I don’t have to comment much on the massive impacts that powered machinery and the Industrial Revolution has had on our standard of living ever since then. The longer-term stock market chart below makes the case very clearly.
(Note that this is a logarithmic chart that turns exponential trends into linear ones. The brain can better handle the information in this format. On a normal linear graph this acceleration of trends would be much more dramatic.)
But I do have to comment on the essential role Adam Smith played in how we live today.
He was the first economist that truly understood the power of free market capitalism and its “invisible hand.” And his insights still stand today, as governments try to take over this powerful system with little regard for how it made us so rich in the first place.
Think of it this way: On the one hand, the Industrial Revolution and free-market capitalism is half the story… the more male side if you will, which I call Harry (named after me of course).
On the other hand is Sally… the more female side, and other half of the story that is equally as important as Harry. In fact, it was “Sally” that birthed the first real and deeply conceived democracy in history, in America.
Free market capitalism favors the strong, with its “survival of the fittest” and “creative destruction” principles. But with increasing trends toward urbanization and more and more diverse people having to live together in larger cities, a counterbalance was needed.
You can’t have a society that continues to favor the strong while the less fortunate struggle and fall further behind… otherwise they’d revolt, as did the Americans and the French in the late 1700s.
The Declaration of Independence and Constitution that followed was not largely about America breaking from the monarchy of Great Britain. Like the French Revolution, it was about people revolting against total top-down control by such monarchies and favored classes.
Ultimately, the free-market system in all of its creative destruction and innovation does favor the upper rungs of society. It also favors mafias and strong groups who succeed and amass increasing power.
Seems all very testosterone driven… and headed for disaster and failure without some kind of balance.
That’s where democracy came in. It brought the principle of certain inalienable human rights, namely “life, liberty and the pursuit of happiness.” In other words, it ensured that the everyday person got an equal vote, allowing them to feel like they have a say and stake in the system.
As I’ve said in many articles and in my books, it’s the dynamic play of opposites — in this case Harry and Sally — that drives innovation and the unprecedented progress the world has enjoyed since the late 1700s.
The greatest revolution in our standard of living, and the move toward more free and humane lifestyles, didn’t just come with the Industrial Revolution. The Democratic Revolution played a vital role. In short, it came when Harry met Sally.
It was no coincidence that The Wealth of Nations and the Declaration of Independence came to life in the same year… 1776.
And that’s something to celebrate.
It’s also important to note that major political and economic revolutions occur every 250 years… and hence the next one is due just ahead!
There is ever the tendency for the more powerful and more fortunate to reassert their power and rig the free markets… to suppress the democratic urge. Take the Cold War as just one example. But the U.S. and western world won that war and dodged that bullet.
Now China has tried to have a top-down, state-driven capitalistic system without democracy and you know my opinion on the success of that experiment by now! (For those new to Economy & Markets, I believe China’s efforts to operate a state-driven capitalistic system is not only a resounding failure, but a threat to the entire global economy.)
Even today, in the western democracies, governments are corrupting free market capitalism by taking over the markets and preventing failure. You’ve heard much from me on this in the last few years, but soon you can hear it from an even greater source, David Stockman, when he appears as our keynote speaker at our Irrational Economics Summit on June 16 to 18 in Miami. Don’t miss this most informed and passionate of speakers on this topic from his recent book, The Great Deformation.
Something’s going to give… soon.
For today though, celebrate not only our freedom and independence, but the day when Harry met Sally. An unprecedented surge of wealth has occurred throughout the western world, and now in East Asia. But its spark came in America in 1776.
Happy Fourth of July.
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