The Birth of Plenty | William J. Bernstein

Published in: 2010

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For millennia, the road to wealth was to win wars and plunder. Until 1820, world growth per capita was approximately zero. During the century after the fall of the Roman Empire, prosperity in Europe had actually declined and most critical technologies had disappeared – the most important being cement, which would not be rediscovered until much later. But not long after 1820, prosperity began to increase, and for each generation, life became noticeably more comfortable. During the 172 years after 1820, the world’s GDP increased eightfold. During the same 172-year period, GDP in the United Kingdom rose 10x and in the United States 20x. Economic growth is synonymous with increased productivity, which is almost exclusively the result of technological progress.

HUNTER-GATHERER AND FARMING. The hunter-gatherer stage represents more than 99% of human history. During this era, there was no increase in productivity. Ideas spread slowly because sparsely populated areas were a necessity to not compete for food. Man’s next breakthrough was when we entered an agricultural society 12,000 years ago. There was an improvement in efficiency and an opportunity to live closer to each other – up to 500 inhabitants per 1.6 km. But there was no major improvement in prosperity. The harvest was often poor, which led to people starving to death. Man’s degree of improvement on a global basis has been low and uneven during 99.5% of our time on earth.

BLOATED RESERVOIR. At the beginning of the 19th century, the Western European economy began to become more and more like a swollen reservoir where potential was gathered. Between 1500 and 1820, GDP per capita in the region increased by an average of about 0.15% per year. What was missing was the raw physical force needed to run factories and transport goods as well as the communication speed required to coordinate the entire process. The invention of the electric motor and the telegraph broke the dam and created an economic growth that had not been seen. The development was irreversible.

INDUSTRIALIZATION. Improvements in agricultural technology in combination with property rights, capital markets and transport technology meant that many people left the farm in the 16th century to work in manufacturing. In Europe, this usually meant textiles. During the 19th century, in Europe and the USA, great advances was made in technology, which improved productivity and thus prosperity. This meant that even more capital was invested in new technological processes. In 1820, the U.S. employed 70% of the workforce in the agricultural sector. In 1998, the same figure was 2%.

THE FOUR PILLARS OF INDUSTRIALIZATION. The reason why the development of technical tools could accelerate was that (1) the emergence of property rights allowed innovators and businessmen to reap the benefits of their jobs without the state or criminals taking over, (2) scientific rationalism, i.e. the truth is more important than sticking to previous beliefs becomes a relatively new phenomenon, (3) capital markets enable investment and (4) efficient communication and more efficient means of transport was invented. Sea transport did not become safe and cheap until the end of the 19th century. Development of the steam engine and land transport did not follow until 50 years later. Without these, the railway, the telegraph, or the electricity would not have been created.

THE DEVELOPMENT OF IDEAS. Modern civilization is defined by a thirst for scientific process. But before the 17th century, observation, experiments, and theoretical studies of the world were not welcome. Man dealt with insecurity through various “belief systems”, often organized into religions. In most developed western countries, religion is still “untouchable” even among scientists, with most things being allowed to be analyzed and we can change almost anything.

THE SPREAD OF RATIONALISM. From 1730, the world has seen an incomparable technological innovation. But before 1850, few scientists worked in industry; most innovations were created by talented workers and inventors such as Thomas Edison and John Smeaton (reinvented cement after the Romans). The 19th century steel industry was the first with full-time scientists in the laboratory who developed quality, preferably at low cost. Steel Baron Andrew Carnegie said: “Years after we had taken chemistry to guide us (competitors) said they could not afford to employ a chemist. Had they known the truth then, they would have known that they could not afford to be without one”.

2%-ROOF. There is almost a natural law that our civilization can achieve an aggregate productivity growth of 2% per year – no more and no less. However, the introduction of the most basic modern technologies in pre-industrial societies created miracles. At all times, capital has flowed from mature economies to countries that need it for development. When England was transformed from a political laggard to a world leader in the 17th century, money flowed from Amsterdam to London. In the 19th century, the technologically advanced England helped the developing United States with capital. During the 20th century, the United States has been a major source of capital for developing countries.

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