THE BIRTH OF PLENTY

How the Prosperity of the Modern World Was Created

By WILLIAM J. BERNSTEIN

The McGraw-Hill Companies, Inc.

Copyright © 2004 The McGraw-Hill Companies, Inc.
All rights reserved.
ISBN: 978-0-07-174704-2

Contents

PrefaceIntroductionSECTION I—THE SOURCES OF GROWTHChapter One: A Hypothesis of WealthChapter Two: PropertyChapter Three: ReasonChapter Four: CapitalChapter Five: Power, Speed, and LightChapter Six: Synthesis of GrowthSECTION II—NATIONSChapter Seven: The Winners—Holland and EnglandChapter Eight: Runners-UpChapter Nine: The LastSECTION III—CONSEQUENCESChapter Ten: God, Culture, Mammon, and the Hedonic TreadmillChapter Eleven: The Great Trade-OffChapter Twelve: Mammon and Mars: The Winner's CurseChapter Thirteen: The End of Growth?Chapter Fourteen: When, Where, and WhitherNotesIndex

Excerpt

CHAPTER 1

A Hypothesis of Wealth

The bourgeoisie, during its rule of scarce one hundred years, has createdmore massive and more colossal productive forces than have all precedinggenerations together.

—Karl Marx, Manifesto of the Communist Party

It's all too tempting to lament the state of the world, particularly when youfocus on the melodramas of mankind—violent conflicts, large-scalemalfeasance and failure, and the latest installments in the age-old racial andreligious hatreds that permeate the human story.

A paragon of such fashionable pessimism has been journalist Anthony Lewis, who,at the end of a long and distinguished career, was asked whether the world hadgotten to be a better place since he had begun covering it a half centuryearlier:

I have lost my faith in the ideal of progress. I mean that in the sense that itwas used at the beginning of the twentieth century, that mankind is gettingwiser and better and all—how, how can you think that after Rwanda andBosnia and a dozen other places where these horrors have occurred?

Mr. Lewis' problem is that his subjective criterion—that mankind has notachieved moral perfection as defined in Ivy League universities and theeditorial suites of the New York Times—sets the bar too high. Mr.Lewis seems unaware that we can measure the welfare of mankind; in fact,we can do it superbly. Contrary to his gloomy impressions, the second half ofthe twentieth century was far less murderous than the first. Further, theproportion of the world's population subjected to totalitarianism, genocide,starvation, war, and pestilence has been steadily decreasing over the past twocenturies, with most of the improvement coming in the half century that sodepressed Mr. Lewis.

Consider that from 1950 to 1999, average life expectancy in the developed worldincreased from 66 years to 78 years; in the developing world, it increased from44 years to 64 years. The nearly universal Western outcome of living to old age,rather than resulting from the rare stroke of luck, may be the greatestaccomplishment of the past fifty years. Or consider that over the same period,the world's real per capita gross domestic product (GDP)—the amount ofgoods and services produced by the average person, adjusted forinflation—nearly tripled. Or that by the year 2000, real per capita GDP inMexico was significantly greater than that of the world leader in 1900, GreatBritain. And if you're not impressed with mankind's material progress in thelast fifty years, as measured in dollars and cents, you should at least notethat almost any measure of social progress you wish to examine—infantmortality, literacy and mortality rates, or educational levels—hasdramatically improved in all but a few still-benighted corners of the planet.

ESCAPING THE TRAP

The modern world seems to stagger under the load of ever-increasing population,with each year adding scores of millions of new mouths to feed. At the birth ofChrist, Earth supported slightly more than 250 million people, by 1600, about ahalf billion. Sometime around 1800, the one billion mark was reached, the secondbillion was added by 1920, and the third attained in 1960. Presently, there arein excess of six billion souls on our planet. The increasing congestion of urbanlife, particularly in the third world, gives the impression that the world'spopulation is growing far faster than the 1.85% annual rate of the past half-century.

Overcrowding on our planet is a recent phenomenon, an artifact of the world'snewfound prosperity. Before the modern era, famine, disease, and war more oftenthan not overwhelmed the human inclination to procreate. Over the first twomillion years of human history, population growth did not greatly exceed 0.001%per year. After the advent of agriculture 10,000 years ago, the rate ofpopulation growth increased to approximately 0.036% per year, and in the firstcentury A.D., to 0.056% per year. After 1750 the growth rate climbed to 0.5% peryear, passing 1% only in the early twentieth century.

In modern times, the dismal economics of increasing population is virtuallysynonymous with Thomas Malthus. Born of local gentry in 1766, he graduated fromCambridge with honors in 1788. Like many bright young university men of the timein England and Scotland, he fell under the sway of Adam Smith's new science of"political economy" and devoted his life to the quantitative study of humankind.

The England of the aspiring economist's formative years seemed as Hobbesian asSmithian—a time of worsening food shortages and not a little famine,particularly in neighboring Ireland. In 1795–96 and 1799–1801, warand poor harvests combined to cause food riots in England. The root cause of theshortage was obvious to Malthus: "The power of population is infinitely greaterthan the power of the earth to produce subsistence for men." Humans canreproduce rapidly, whereas agriculture is subject to the law of diminishingreturns. The natural tendency, then, is for humanity to outrun its food supply.(The common conception of Malthus's thesis is that population increasesgeometrically, while the food supply increases arithmetically.)

Malthus's infamous "positive checks" were not limited to the classic fama,pestis, et bellum (famine, plague, and war), but also included a host oflesser evils: unhealthy working conditions, backbreaking labor, overcrowded andunsanitary housing, and poor child rearing. If, for a brief moment, food becameplentiful, population would rise rapidly. Soon enough, though, the increasedsupply of workers would drive down wages. This would make food less affordableand, discouraging marriage, would slow population growth. Low wages would theninduce farmers to hire more workers, which would, in turn, bring more land intoproduction, starting the whole process again at a slightly higher level ofpopulation and food production—the notorious "Malthusian Cycle."

In Malthus's harsh world, a nation's food supply—and itspopulation—grew slowly, if at all, so the standard of living was inverselyproportional to the number of mouths to feed. Were population to increase, therewould not be food enough to go around. Prices would rise, while wages, and thestandard of living in general, would fall. If, on the other hand, the populationwere suddenly to plunge, as happened during the Black Death of the mid-fourteenthcentury, the survivors' food supply, wages, and standard of livingwould rise dramatically.

Malthus had observed firsthand the late-eighteenth century famines, which burnedthis sequence of events into his consciousness. Figure 1–1 plotsthe per capita GDP of England from 1265 to 1595 versus population size. Thethin, crescent-shaped distribution of the data points depicts the "MalthusianTrap." Historian Phyllis Deane neatly summarizes the concept:

When population rose in pre-industrial England, product per head fell: and, iffor some reason (a new technique of production or the discovery of a newresource, for example, or the opening up of a new market), output rose,population was not slow in following and eventually leveling out the originalgain in incomes per head.

In this eternal cycle, agricultural production might rise, but populationfollowed in lockstep, dooming mankind to a near-subsistence-level existence.

Paradoxically, soon after Malthus immortalized this grim state of affairs in1798 with his Essay on the Principle of Population, it abruptly came toan end in Western Europe. Figure 1–2 shows that a bulge developedin the crescent sometime around 1600, and as Figure 1–3illustrates, population cleanly broke out of the crescent after 1800, neveragain to return to starvation's edge. The vertical population scale inFigure 1–3 has been broadened so that the original crescentappears as a flattened pancake at the bottom of the graph. The escape from thetrap was made possible not by an increased birth rate but by a 40% decline inthe death rate, the result of rapidly improving living standards that were, inturn, born of skyrocketing economic growth.

The nature of that growth changed dramatically in the centuries following 1600.Initially, the growth was "extensive," consisting of a significant expansion ofthe national economy caused purely by population increase, unaccompanied by realimprovement in the wealth or material comfort of the average citizen. For thefirst time, the British economy mustered enough growth to keep pace withpopulation numbers. By the nineteenth century, however, growth had become"intensive," outpacing even the human urge to reproduce, with advances in percapita income and an increase in material well-being at the individual level.

HOW NATIONS BECOME WEALTHY

Beginning around 1820, the pace of economic advance picked up noticeably, makingthe world a better place to live in. What happened? An explosion intechnological innovation the likes of which had never before been seen. Anapocryphal schoolboy, asked to define the Industrial Revolution, is supposed tohave replied, "In 1760 a wave of gadgets swept over England." That anonymous boywas on to something. New technology is the powerhouse of per capita economicgrowth; without it, increases in productivity and consumption do not occur. Fromfirst principles, then, the question can be asked, "What is needed to developgadgets?" Four things:

* Property rights. Innovators and tradesmen must rest secure that the fruits oftheir labors will not be arbitrarily confiscated, by the state, by criminals, orby monopolists. The assurance that a person can keep most of his just reward isthe right that guarantees all other rights. Note the emphasis on the wordmost. The right to property is never absolute. Even the mosteconomically libertarian governments, such as Singapore and Hong Kong, levy sometaxes, enforce some form of eminent domain, and maintain some restrictions oncommercial freedom of action. Similarly, confiscation can be more subtle thanthat which occurs in feudal or socialist states. A government that fails tocontrol inflation or maintain proper banking controls, such as Brazil's in the1980s or present-day Zimbabwe's, steals from its citizens as surely as EdwardIII and Stalin did. In premodern Europe, government-granted monopolies, whilehighly profitable to those who exercised them, sapped the incentive of the restof the nation.

* Scientific rationalism. Economic progress depends on the development andcommercialization of ideas. The inventive process requires a supportiveintellectual framework—an infrastructure of rational thought, if you will,with a reliance on empirical observation and on the mathematical tools thatsupport technologic advance. The scientific method that we take for granted inthe modern West is a relatively new phenomenon. Only in the last four hundredyears have Western peoples freed themselves from the dead hand of thetotalitarian, Aristotelian mind-set. Even today, particularly in parts ofAfrica, Asia, and the Middle East, honest intellectual inquiry places life andproperty at grave risk from the forces of state and religious tyranny.

* Capital markets. The large-scale production of new goods and services requiresvast amounts of money from others—"capital." Even if property and theability to innovate are secure, capital is still required to develop schemes andideas. Since almost no entrepreneur has enough money to mass-produce hisinventions, economic growth is impossible without substantial capital fromoutside sources. Before the nineteenth century, society's best, brightest, andmost ambitious individuals had scant access to the massive amounts of moneynecessary to transform their dreams into reality.

* Fast and efficient communications and transportation. The final step in thecreation of gadgets is their advertisement and distribution to buyers hundredsor thousands of miles away. Even if entrepreneurs possess secure propertyrights, the proper intellectual tools, and adequate capital, their innovationswill languish unless they can quickly and cheaply put their products into thehands of consumers. Sea transport did not become safe, efficient, and cheapuntil two centuries ago with the development of steam power, and land transportdid not follow suit until about fifty years later.

Not until all four of these factors—property rights, scientificrationalism, effective capital markets, and efficient transport andcommunication—are in place can a nation prosper. These four factorsfirst coalesced, briefly, in sixteenth century Holland but were not securely inplace in the English-speaking world until about 1820. Not until much laterdid the four factors begin to spread over the rest of the globe.

The absence of even one of these factors endangers economic progress and humanwelfare; kicking out just one of these four legs will topple the platform uponwhich the wealth of a nation rests. This occurred in eighteenth-century Hollandwith the British naval blockade, in the world's Communist states with the lossof property rights, and in much of the Middle East with the absence of capitalmarkets and Western rationalism. Most tragic of all, in much of Africa, all fourfactors are still essentially absent.

ECONOMIC HISTORY BY THE NUMBERS

The heroes of this quantitative story are the economic historians who have spenttheir lives uncovering the outlines and contours of human well-being over thecenturies. Chief among them is an obscure Scottish economist named AngusMaddison. Born in Depression-era Newcastle, his upbringing hints at the sourceof his fascination with economic development:

My father had a steady job as a railway fitter but I had two unemployed uncles,and there were many unemployed neighbors. The unemployed were not only poor butdepressed. Many loitered aimlessly at street corners, looked haggard, woremufflers and cloth caps and smoked fag ends. Their children were often sicklyand tubercular.

Maddison excelled in school and spent his formative years in the richintellectual stew that was wartime Cambridge. He fondly quotes one of hisinstructors, Dharma Kumar: "Time is a device to prevent everything happening atonce; space is a device to prevent it all happening in Cambridge." Thedevelopment of each of the above four critical factors connects strongly to thisfabled university. If England was the birthplace of modern prosperity, thenCambridge was its maternity ward, producing many of its principal midwives:Francis Bacon, Isaac Newton, and jurist Edward Coke, as well as dozens of otherscentral to the story of this book.

For a quarter-century after his graduation in 1948, Maddison worked for theOrganization for European Economic Cooperation (OEEC), which was established todirect Marshall Plan funds after World War II, and its successor, theOrganization for Economic Cooperation and Development (OECD). He spent much ofhis time shuttling to and from third-world nations, particularly Brazil, Guinea,Mongolia, Pakistan, and Ghana. Time and again, he was struck by the enormousdifferences in wealth and well-being among nations he found on his journeys. In1978, he accepted a professorship at the University of Groningen in theNetherlands and began to work out a coherent vision of world economicdevelopment.

The portrait that Maddison and others painted was as stunning as it wasunexpected. The lot of the average individual, measured as real per capita GDP,did not change at all during the first millennium after the birth of Christ.Over the next 500 years, between A.D. 1000 and 1500, things did not get muchbetter. Figure 1–4, which plots Maddison's estimates of world percapita GDP since the year A.D. 1, brings the welfare of the average person intosharp focus. Before 1820, there had been only minuscule material progress fromdecade to decade and century to century. After 1820, the world steadily became amore prosperous place.

The data are "noisy" enough that identifying 1820 as the annus mirabilisof world economic growth is more than a little arbitrary. The British data, aswe shall see, put the ignition of growth a bit later; the American data, a bitearlier. Whatever date is chosen, however, it is clear that sometime in thefirst half of the nineteenth century, growth of the global economy took off,bringing prosperity despite the repeated devastation of war, civil strife, andrevolution.

Figure 1–5, which summarizes the average annual growth inworldwide real per capita GDP, displays the breakout that occurred about 1820from a different viewpoint. Once again, prior to 1820, there was littleimprovement in the material welfare of the average person. This picture iscontrary to that commonly taught in the nation's humanities departments. Fromthe perspective of the Romance language expert or the art historian, theRenaissance appears to be the pivotal point of the second millennium. The greatwriters and artists of that period, however, did little to improve nutrition, toaugment transport, or to prevent plague. In an age when the average person neverventured more than a few miles from the place of his birth, the Sistine Chapelfrescoes could do little to uplift the collective human spirit.

Economists have found it easy to criticize Maddison's estimates of income andproduction in centuries long past. After all, how can he be certain that theannual per capita GDP of Japan at the birth of Christ was $400 in currentdollars, rather than $200 or $800? Maddison himself concedes the point: "To goback earlier involves use of weaker evidence, greater reliance on clues andconjecture."

The modern era presents a more basic problem. Even the most accurate economicdata cannot measure the real value of new inventions. How much would J. P.Morgan have paid for even a cheap seat on a jumbo jet from Kennedy Airport toHeathrow? What value would Shakespeare have placed on the ability to churn outfive thousand words a day on a Macintosh and then e-mail them to a few dozenfriends? Even the poorest citizens in the developed West have access to goodsand services, such as reliable automobiles, television, and the Internet, thatwere unavailable at any price a century ago. While many modern goods andservices are of dubious value, others are not. As late as 1940, pneumonia andmeningitis, which today can be prevented with a few dollars' worth ofantibiotics, struck down those at the pinnacle of wealth and power almost asfrequently as they felled the poor. In a different vein, try to imagine what thegreat engineers and physicists of the early twentieth century could have managedwith a personal computer.

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(Continues...)Excerpted from THE BIRTH OF PLENTY by WILLIAM J. BERNSTEIN. Copyright © 2004 by The McGraw-Hill Companies, Inc.. Excerpted by permission of The McGraw-Hill Companies, Inc..
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