OXFORD, England - Through much of the 20th century, capitalism was clearly dying, and its future came down to two questions: Who would put it out of its misery, and when? Generations of university students heard from their professors the news of its imminent death, and the rest of us could read advance obits written by a multitude of authors, from playwrights to left-wing art critics. Whether they were living in the 1930s or the 1970s, they enjoyed describing their own era as "late capitalism."
All such opinions were shaped by Karl Marx, but also by an idea even larger than Marx -- economic determinism, the doctrine that the health of nations and the fate of humanity is predetermined by relentless economic forces. It is a belief that afflicts equally the political left, right and centre. It inspired Bill Clinton's first presidential campaign, when his advisors, defining their main issue, wrote the words "It's the economy, stupid," on the wall of their war room. It's the same spirit that springs to life every morning in the editorials of the Wall Street Journal, and it determines the attitudes of most democratic governments today. Politicians automatically assume, as Niall Ferguson puts it, that "economic change is the motor of history." This is our era's cherished wisdom: generating wealth is the key to national development, international relations and democracy.
In Mr. Ferguson's view this common belief has one major flaw: So far as he can tell, it's wrong, or at least more often wrong than right. An Oxford historian of striking brilliance, he argues persuasively in The Cash Nexus: Money and Power in the Modern World 1700-2000, published on Saturday, that we should abandon this central belief and replace it with a more complex understanding of reality.
Which is to say that he wants to change the way we think about how the world runs, "we" in this case meaning just about everyone who holds an opinion on public policy and finance. To this end he deploys formidable and shrewdly organized knowledge, but he's up against a theory that looks impregnable. There is nothing more powerful than an idea whose time has come but will not go away.
The evidence produced in the closing years of the 20th century did not weaken the myth. As Mr. Ferguson says, "While Marxism may have suffered a setback in 1989, economic determinism did not. All that has happened is that the signs have been reversed: It was the stagnation of the planned economy which doomed the Soviet system, whereas the success of the capitalist economy ensured the triumph of democracy." But to Mr. Ferguson, that kind of thinking is as narrow-minded and wrong-headed as Marxism.
One word, Yugoslavia, should shatter anyone's faith in the economic gospel. Twenty years ago, Yugoslavia was on the road to success, of all communist states the most prosperous and the one closest to developing a free market. But when communism finally died, Yugoslavia collapsed in chaos and violence. Had economics been the determining factor, Yugoslavia today would be healthier than Poland, the Czech Republic or Hungary. Obviously, something more potent than money shaped its post-communist history. What was it? Race? Religion? The fact that there are people who, in certain moments, would rather kill than eat? A monstrous distortion of leadership? Whatever it was, Mr. Ferguson emphasizes, it was not the economy, stupid. "Man is a social animal," he writes, "whose motivations are inseparable from his cultural milieu."
If he is to change our assumptions, Mr. Ferguson has to deal, at least obliquely, with a persistent strain of modern thought, the belief that the Industrial Revolution was a bad thing, that capitalism perverted human relations, and that a modern economy constitutes a conspiracy against the helpless. This has been as much a literary creation as a product of historians, and it has touched everyone. Mr. Ferguson correctly says, "writers have always been conspicuously ungrateful for the benefits conferred by economic progress." So an entire library, "materialist in conception and romantic at heart," has been based on the assumption that there was a crucial flaw in the capitalist system, that conflicts between classes were irreconcilable, and that eventually a crisis "would bring about a new socialist order." Even the First World War was interpreted as a capitalist catastrophe, "the inevitable consequence of imperialist rivalries."
Few of us think that way now, but we firmly believe that economic success leads to democracy, and vice versa. Unfortunately, this runs against the evidence of our eyes and experience. In the Soviet bloc, after all, a dead economy led toward democracy, or a version of it. At the same moment, China was producing extremely rapid economic growth with few signs of democracy. "The same goes for Singapore," Mr. Ferguson notes. Furthermore, how can economic determinism explain that in the 1960s and 1970s, democracy broke down in relatively prosperous Latin American countries like Argentina, Chile and Uruguay. Mr. Ferguson asks us to consider the long-run development of factory productivity in Britain, Germany, and the United States. During the 20th century, both Germany and the United States outstripped Britain, but if you examined only the economic data you could not guess that for one third of the century, Germany was not a democracy.
Most of us were taught that the Great Depression brought on the Second World War. Desperate populations in Germany and Japan turned in despair to fascism and militarism. But if we want to believe that, Mr. Ferguson would like us also to know that there is no correlation at all between the severity of the Depression and the rise of dictatorships. If these matters were correlated, he argues, Czechoslovakia would have adopted fascism in 1935 and France in 1936.
On the practical level of democratic voting, politicians deceive themselves when they believe a sound economy will satisfy the public. In 1968 Prime Minister Harold Wilson said: "All political history shows that the standing of a government and its ability to hold the confidence of the electorate at a general election depend on the success of its economic policy." Well, no, says Mr. Ferguson, all political history shows nothing of the kind. In Britain there is seldom been a causal link between economic and political success. Mr. Ferguson surveys 50 changes of government in Britain since 1832 and concludes that economic issues caused precisely four of them.
The most recent British election, in 1997, should have undermined everyone's belief in the theory. Unemployment, interest rates and inflation were all down that year, while growth and productivity were up. Yet the voters turfed out the Tories and installed New Labour in their place.
"Cash nexus" sounds like a derogatory term invented by socialists. In fact, Mr. Ferguson takes it from Thomas Carlyle. To Carlyle, the rise of capitalism in the 1840s was unwelcome, not because he was seeing it through leftist eyes but because he regretted the passing of a simpler, less organized and highly romanticized medieval England -- a world apparently doomed by the new economy. Mr. Ferguson chose Carlyle's phrase partly to suggest how widely the theory of economic determinism had spread even 160 years ago.
Mr. Ferguson supported Margaret Thatcher when he was an undergraduate at Oxford in the early 1980s, and much of his journalism has a Thatcherite tone. But The Cash Nexus will not necessarily comfort the political right. Those battling against public debt, for instance, cannot look to Mr. Ferguson for succour. He thinks an apparent mountain of debt may be far from disadvantageous, as long as a country's financial system can manage it. If public debt cripples a society's efforts, he asks, then how do we explain that early in the 19th-century Britain became the first industrial nation while carrying "a public debt burden of unparalleled size and duration?"
Governments that allow their public institutions to rot or wither in the name of debt reduction do not attract Mr. Ferguson's admiration. He approvingly quotes the remark of a 19th-century Oxford economist, G.K. Rickards: "Better to succeed to a mortgaged patrimony than to an exhausted estate." Going further back, he notes the genius of early U.S. finance, Alexander Hamilton, remarked in 1781, "A national debt, if it is not excessive, will be to us a national blessing. It will be a powerful cement to our nation." On the subject of international economic planning, Mr. Ferguson is no admirer of the euro. That kind of thing never works, he says, citing precedents from Austria to Scandinavia. It is a theory that ignores reality: The countries taking part are so economically ill-assorted that a mild shock could quickly wreck the whole project.
Mr. Ferguson first came to international attention as an enthusiast for counterfactual history, the spinning of elaborate theories about what might have happened if Charles I had avoided civil war or John Kennedy had not been assassinated. Some reviewers treated the book he edited, Virtual History: Alternatives and Counterfactuals, as no more than a clever parlour game, but Mr. Ferguson's subsequent writing demonstrates that it was close to the core of his life's work. Mr. Ferguson has been pressing toward a new and perhaps less confident kind of history. He wants historians to see any given period in the past as it was seen by those who lived it, rather than by those who know how it came out. One of his projects has been attacking historical determinism and putting in its place a more realistic (if far more complicated) principle of historical cause.
Mr. Ferguson's literary strategy involves constant reference to the great figures of economics and politics -- in one passage lasting only two pages we encounter David Hume, Adam Smith, David Ricardo, William Ewart Gladstone, John Stuart Mill, Thomas Malthus and several blokes of less stature, such as the current chancellor of the exchequer. Mr. Ferguson makes these heavy thinkers dance through his pages, and follows them with writers like Dickens, Kafka and Tolstoy. Few modern historians show such easy skill in combining history and works of the literary imagination, from War and Peace to The Wizard of Oz.
Much of what he writes can be difficult (there are few literary techniques for making the 18th-century bond market amusing), so he enlivens and softens it with literature and some notable one-liners. When he gets to inheritance taxes, he quotes David Lloyd George: "Death is the most convenient time to tax rich people," a sentiment with which the current president of the United States disagrees. He often uses fiction to make his points with precision and colour: "You can describe the social structure of 19th-century Paris, or you can quote Zola." He prefers to quote Zola.
Mr. Ferguson believes in reason but does not trust its power over the lives of humans. He notes that the greatest genius of his age, Isaac Newton, lost heavily on South Sea stock -- he bought, he sold, and then he re-entered the market just before it collapsed. Newton later reflected: "I can calculate the motions of the heavenly bodies, but not the madness of the people." Mr. Ferguson takes Dostoyevsky's derisive view, expressed in Notes from Underground, of the idea that man acts out of economic self-interest. Dostoyevsky said that man acts in the way he feels like acting and not necessarily in his best interests: "A man may wish upon himself, in full awareness, something harmful, stupid and even completely idiotic ... in order to establish his right to wish for the most idiotic things."
In the 1840s, when outlining the cash nexus, Carlyle feared that business would make all human relations into economic relations. But Mr. Ferguson argues that the true Economic Man, logically maximizing his worth in every transaction, remains a rarity. "Every day, men and women subordinate their economic self-interest to some other motive, be it the urge to play, to idle, to copulate or to destroy. In that sense, the cash nexus is no more than a link in the long and tangled chain of human motivation."
Mr. Ferguson does not want us to ignore economics in history, but he hopes to remind us that nothing in human relations is inevitable and we will know more about the past and the present when we approach them with a heightened sense of their infinite complexity.