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The Birth of Plenty

William J Bernstein

We always think that the tech advances of our own times are unique and revolutionary. But it's an illusion. To see the full effect of scientific progress on human affairs, we have to look at the tech explosion that occurred in the 120 years between 1730 and 1850 and transformed life from the top to the bottom of society. The speed of transportation increased tenfold, and communication became almost instantaneous. In 1800 nothing moved faster than a horse, but by 1850 steam trains and the telegraph. The latter transformed economic, military and political affairs far more dramatically than advent of airplane and computer in following century.

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Since 1850 the pace of tech progress has been slowing, not accelerating. A 1950 American wd have no trouble grasping the tech of 2000 US. But a man form 1800 wd have been completely bamboozled by everyday life of 1850.

The three centuries of Renaissance and Reformation barely changed the life of the average man.Until about 1820, the per capita economic growth - the single best way of measuring human material progress - registered near zero. In the centuries after the fall of Rome, it actually went backwards as numerous critical technologies simply disappeared. But then, after 1820, prosperity began flowing in an ever-decreasing torrent with each successive generation, the life of the son became observably more comfortable, informed and predictable than that of the father.

The great tragedy of the premodern era was that large bodies of knowledge were lost for centuries. Before Gutenberg and Bacon, an innovator lacked two critical advantages that we take for granted today: robust info storage and the scientific method. Any advances were on trial and error basis, and there was no mechanism to spread the knowledge.

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Some will object that Chinese invented gunpowder paper and the printing press; Arab world oases of learning and culture while West mired in the Dark Ages, and Indian mathematicians invented zero, the concept that made maths useful. All true, but not one of those societies was able to master the trick of continuously raising citizens' standard of living.

It's economic development that produces democracy, not the other way round. Have to start with the rule of law, which buttresses private property rights, which are basis of prosperity (prop owners have an incentive to improve whereas serfs or slaves don't). And prosperity is the soil in which democracy can flourish.

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Commentators try to apply some ideal of moral perfection and conclude that because mankind is nowhere near that, it is 'failing'. But we can measure the progress of mankind. We know that the second half of the twentieth century was far less murderous than the first. The proportion of world's population subject to totalitarian govt, genocide, starvation, war and pestilence has been steadily declining for last two centuries, with most of the improvement coming in last half century.

Life has got much better: 1950-99 av life expectancy in developed world incr from 66 to 78 years; in developing world 44 to 64. The nearly universal Western outcome of living to old age may be the greatest accomplishment of the last 50 years. Over the same period, the world's real per capita domestic product (GDP) - the amount of goods and services produced by the average person, adjusted for inflation - nearly tripled. By 2000 the GDP of Mexico was greater than that of 1900 Britain, the then world leader.

Malthus: Born 1776, formative years shaped by the great famines of 1795-6 and 1799-1801 when war and poor harvests led to food riots in Britain. To Malthus cause was obvious: humanity naturally outran its food supply. When times were good, more children born, but soon the incr popn drove down wages, which then encouraged farmers to hire more workers and bring more land into production, and the cycle perpetuates. (Malthus never actually used the phrase "popn incr geometrically while food supply incr arithmetically) Paradoxically, just after Malthus immortalized this grim state of affairs in Essay on the Principle of Population it abruptly came to an end in Western Europe. The escape from the 'Malthus trap' came not from incr birth rate but from 40% decline in death rate, the result of rapidly improving living standards which in turn came from sky-rocketing economic growth.

National prosperity is rarely based on natural resources. Need:

1. Property rights - for land, ideas and personal liberty

The assurance that a person can keep (most) of fruits of their labours rather than be arbitrarily confiscated by authorities or by monopolists, is the right that guarantees all other rights. Confiscation can be subtle - rank inflation steals from citizens as surely as a gun

A classic comparison came from P.J O'Rourke in his book Eat The Rich "North Korea has a 99% literacy rate, a disciplined hardworking society and a per capita GDP of $900. Morocco has a 43% literacy rate, a society that spends all day drinking coffee and pestering tourists to buy rugs, and a per capita GDP of $3200

2. Scientific method - systematic exam and interp of world

Economic progress depends on the development and commercialization of ideas, and that needs an intellectual framework. Based on empirical observation - basically honest intellectual inquiry, unfettered by religious preconceptions or injunctions.

If there is one thing that sets Western world apart it's the relentless march of scientific progress. It is hard to fathom that there was ever a time when the observational, experimental and theoretical study of the natural world was not welcomed. Yet until abt 400 years ago, the natural world was a terrifying master of humanity, the helpless victim of incomprehensible forces. Even eclipses and comets were frightening.

Mankind combats ignorance and fear by devising belief systems; civilizations amplify these belief systems into organised religions. They explain the calamities that befall mankind, and console them with promises of a better hereafter. The problem was that until very recently, religions rarely tolerated alternative worldviews.

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The success of science had to start with the breaking of the Catholic Church's intellectual monopoly. Science (then called natural philosophy) had to be severed from the ecclesiastical. It was astronomy that broke the yoke. The work of Copernicus, Brahe, Bacon, Gallileo, Kepler and then finally Newton and Halley stripped the Church of authority in matters of the physical world. Gallileo's trial was a pyrrhic victory. It exposed the intellectual dishonesty at the core of its teachings. It lost enormous credibility. The obsession with how the stars moved led inexorably to the triumph of rationalism over religion.

3. Capital market - access to money to develop and produce new inventions

Almost no entrepreneur starts out with enough money to develop and mass produce his ideas. It wasn't until 1800's that smart guys had access to huge sums of money needed to develop ideas.

Information is the key to capital markets. If a lender knows a lot about borrower's financial strength and honesty, crop yields, prevailing interest rates etc, he is happy to lend. But in the premodern world the information was either expensive or non-existent, so any borrowing was at punitive rates, stunting growth.

The Dutch popularised capital markets: anyone with a few extra guilders cd buy govt bonds. And when they said in perpetuity they meant it. In 1624 a woman named Elksen Jorisdochter invested 1200 florins in a bond to finance dyke repair. Free of all taxes, she handed it down to her descendants, and as late as 1957 it was still being presented for payment of interest

Other parts of Europe, partic Germany and France had just as many entrepreneurial brains but no access to capital - citizens didn't trust national financial institutions, so they kept cash 'safe' under their mattresses. But in Britain they banked it, and the banker was able to re-lend that capital out

4. Rapid communication and transport

Need to be able to quickly and cheaply put yr products in hands of consumers. Sea and land transport revolutionised by advent of steam power and the telegraph meant it was possible to share info widely without having to meet face-to-face.

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Absence of any one of these 4 'legs' stops progress. The world's communist states took away property rights, the Middle East doesn't have capital markets or Western rationalism. And Africa doesn't have any of the four.

Once industrialization started in Europe and US in nineteenth century, a 'virtuous circle' began: advances in tech begat improvements in productivity which begat incr wealth which begat more capital to fuel still more tech progress. Growth became self-sustaining and unstoppable.

The Western world did not get here overnight. It took most of the second millennia to correct feudalism's suppression of property rights, throw off the intellectual stranglehold of the church, develop capital markets and provide effective transport and communication.

Why did Moslem world fall behind?

In sixteenth and seventeenth centuries Ottoman Empire seemed poised to gobble up the West. Arab corsairs routinely attacked Britain. In 1627 they raided Iceland for slaves.

But the speed at which Napoleon conquered Egypt in 1798 stunned the Ottomans, tho it was a bumbling assault, and Napoleon was himself easily turfed out by an English force led by Horatio Nelson.

When the Ottomans fanned out across Europe to assess the enemy they were astonished at the huge output fo material coming from Euro factories. They tried to duplicate them, but failed to understand that you needed the institutions in place first. Without clearly defined property rights and limits on the confiscatory powers of the rulers, no sensible businessman wd build a factory, and no rational investor wd lend him the money to do so.

Sometime abt 1500, Moslems froze interpretation of the Koran. No intellectual debate was allowed - the Koran was perfect and the answer to everything. Islam prohibited usury, so nobody lent money. The sultan cd confiscate anything, so no-one stuck their money in a bank.

Even today, the Western concept of property rights is desperately unpopular in the Middle East. Most govts function as police states, and legal rights mean little if the power of the state is unrestrained. The hallmark of the lawless society - high walls topped with barbed wire - are ubiquitous everywhere in the Moslem world.

They won't escape from the eco trap until can move to a trusted secular state. The modern Moslem world is no more backward than Europe was 300 years ago, and they have better access to capital, communications and transport. Beginning in the sixteenth century, Europe slowly overthrew religion as its ruling principle, and began to acquire a civil society.

Abundant natural resources are a curse.

The production of wealth from commercial enterprise based on risk taking and sweat encourages healthy govt institutions and begats greater wealth. The production of wealth from a limited number of holes in the ground, owned or controlled by the govt, begats rent-seeking and corruption.

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Singapore, Holland and Switzerland prime examples of success without natural advantages. True, England sat on a mountain of coal, but she had to import most of her iron ore and all of cotton, the Ind Revn's key raw materials. France had better sources of raw cotton, but couldn't match Britain's pace of innovation and scaling up of factories.

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