1: The Sixteen-Page Economic History of the World
The basic outline of world economic history is surprisingly simple: prior to 1800, the income per person (consumable goods) varied a bit among societies and ages, but there was no upward trend. A simple but powerful mechanism, the Malthusian Trap, ensured that any gains in productivity that would increase income overall was counterbalanced by population growth.
In essence, the average person in the world of 1800 was no better off - in terms of the conveniences and luxuries available for his consumption - than the average person of 100,000 BC. Moreover, the bulk of the 1800 world was in fact worse off than their ancestors, as those who inhabited wealthier societies (such as England or the Netherlands) managed a stone-age lifestyle whereas the vast amount of the world eked out a living under conditions "significantly poorer than those of cavemen."
Neither did the quality of life improve on any other observable dimension: life expectancy in 1800 was no better; physical stature (evidence of diet and disease) was no greater, the amount of time devoted to "drudgery" was no less, etc. Some claim is made that the agrarian society created a wealthy class of landowners who enjoyed lives of leisure and luxury while the masses starved, but this is little different than primitive tribes in which the rank-and-file members got by with little while the nobility and warrior class indulged themselves.
The Industrial Revolution, a mere 200 years ago, effected a major shift: industrialization significantly decreased the amount of labor necessary to produce goods, meaning more could he had for less effort. But this is only true of countries that became industrialized. People in the richest modern economies now enjoy ten to twenty times the amount of value per capita than the 1800 average. And the greatest degree of improvement can be seen in the lowest ranks of society. The wealthy owners of land and capital certainly benefitted, but by far lower a ratio than the poor, uneducated, and unskilled members of society.
That's not to suggest prosperity has come to all societies. While those that industrialized benefitted, those that failed to industrialize have not. In fact, there's evidence that the living conditions in some nations have decreased since the industrial revolution. The author lists a few societies in Africa that remain trapped in the lowest material living standards ever experienced, and who have benefitted nothing from technological progress. As a result, "There walk the earth now both the richest people who ever lived and the poorest."
Arguably, a focus on material conditions alone may strike some readers as too narrow - that the possessions of people represents a small and insignificant factor in considering the value of a given lifestyle. However, there is ample evidence that wealth is the critical determinant of quality of life: wealth represents the values that a society produces for its own consumption, and it is only in societies where the needs of the people are met - but the material possessions they have - that they can focus their resources on more frivolous matters.
As such, the author asserts "I make no apologies for focusing on income." It is the most objective criterion by which the welfare of members of a society can be measured, and has proven over the centuries to be more powerful than any religion or ideology in shaping the lives of any people.
The Malthusian Trap: Economic Life to 1800
The first third of this book considers the economic logic of societies before 1800, presenting historical evidence to support the assertion that living conditions underwent very little change until the industrial revolution. During this time, there were technological advancements, but they occurred very slowly, preventing material conditions to significantly improve over time.
During this period, the economy of humans differed little from the natural economy of any animal species, with the same kinds of determining factors. The author refers to the Malthusian economy, as it is a constant struggle between population and resources: soon after a technological advance made more goods available, population growth followed to consume them. In such a system, the kind of even that is regarded as tragic in the present age (plague, natural disasters, wars, etc.) were beneficial, in that they reduced the all-consuming population that impoverished societies.
The author concedes that the claim that material living conditions were the same across all societies seems absurd - when you consider that before 1800, agricultural societies such as England seemed quite civilized and well off compared to tribal societies of Africa and South America who lived at the time - but this is to compare the poorest members of one society to the wealthiest of another.
There is also a Darwinian component to this model: given that the economic laws governing human society were no different to those influencing animal populations, the same processes of evolution apply: chiefly, natural selection. Both individuals and societies that succeeded in adapting became more successful and dominant over those that did not. Regression toward the norm is also evident during this era, in that wealthy people had more children (and more of the children they had survived), thus dividing and consuming their resources and giving the household a downward social mobility in terms of per-capital consumption.
The Industrial Revolution
The inertia of the pre-industrial world was "shattered" by two significant events:
- The industrial revolution dramatically increased individual productivity, with many precipitating effects
- A decline in fertility, which started with the upper classes and gradually encompassed all of society, decreasing the population
The author means to consider the reasons these both seemed to occur in the same place and in the same time - or more aptly, that they could only have occurred there and then. This also sheds some insight on the reasons industrialization has proceeded so unevenly, such that even two centuries later there remain many pre-industrialized nations. A few approaches to explaining these puzzles are:
- The revolution was caused in events outside the economic system, such as changes in political institutions (chiefly, the rise of democracy)
- A shift in equilibrium caused by "some shock"
- A gradual evolution of social conditions in the previous era
It's noted that the first two approaches suggest that the timing and location of the Industrial Revolution is entirely incidental - it could have never happened, or happened a thousand years later, or happened in a different place to where it did. Only the third presents reasons the timing and location were inevitable.
In spite of the dominant role that institutions and large systems have played in economic theory, they are considered to have a minor role in the story the author intends to tell - it is a mistake in cause-and-effect analysis to assume that institutions arose in advance of the need for their existence to effect change, and more rational to consider that the need gave rise to the institution.
That is, a World Bank was not founded to create international trade, but instead it was established because international trade already existed and the participants had need of a central institution to serve their needs. Had the Bank been established two centuries prior, it would have stood in utter disuse - and its existence would not have caused international trade to occur. The author concedes that these institutions did in some instances create conditions that helped to facilitate growth, but only once growth had taken root.
Regardless of the cause, the industrial revolution has had profound effects: a greater proportion of material wealth is given to the laboring class, the value of unskilled laborers who offer only brute strength has been reduced, the population of horses has significantly declined, etc.
The Great Divergence
The last third of the book considers why industrialization has been adopted unevenly among different nations, and has even contributed to a great divergence in economic fortunes. Presently, the world is dominated by a minority of countries that have unprecedented riches, while others have not benefitted at all, and some have even experienced significant declines in wealth and welfare since the industrial revolution.
The divergence of incomes is an intellectual puzzle - as it was generally anticipated at the onset of the revolution that all of mankind would benefit from it, and there does not seem to be a logical reason that some nations would industrialize while others would not.
One explanation is that, while the new technologies of the revolution could easily be transferred to most of the world, the one thing that could not be replicated so widely was the social factors that are necessary for people to cooperate in productive activities. Others suggest that environmental factors such as population, topography, botany, and zoology shaped the destinies of specific nations - though the author isn't entirely satisfied by these arguments.
The productive technologies provided by the industrial revolution are effective only in the hands of labor forces that are disciplined, conscientious, and engaged. The production line requires each worker involved in a process to do his part, and do it correctly, and for the work of several people to be coordinated carefully in order for the final output of their combined effort to be successful. This perspective might help to understand why the same equipment and procedures result in different levels of output in different cultures: hence a textile mill in one country will achieve far inferior quantity and quality of output than it will were the mill located in another.
Economics, as a discipline, arose during the "Malthusian era" and largely described the stable and predictable world of that time - but these theories are insufficient to explain the differences in income across societies during periods of upheaval and rapid change.
The Rise of Wealth and the Decline of Economics
The final "great surprise" that economic history has to offer is that material affluence, equality, the decrease in child mortality, and the extension of adult life "have not made us any happier than our hunter-gatherer forbears."
It's generally true that, within any society, the rich are happier than the poor - material wealth being a buffer against want and the ability to obtain luxury - but it's been found that in countries where the income per capita rises dramatically, happiness is not increased and in some instances is reported to have diminished.
As such, the author considers that there is no absolute effect of income on happiness: people in a poor community are just as likely to be happy as the wealthiest nations of the world today. It also means that more is not always better, and those in less wealthy economies who are content with what they have would not find their outlook much improved if presented the opportunity to gain more.