1 – THE LONG SLOG
We didn’t get rich and comfortable very quickly or easily. The world’s peoples have been very gradually, from caveman days onward, oh-so-slowly, pulling themselves out of poverty. We are lucky to be living now, not back then. These are very different times. Europe and America began the economic development parade and then more countries joined in. Japan and South Korea are now close behind with Brazil, Russia, China and India pushing in. Average wealth per person, world-wide, is now rising exponentially by 1.5 to 2 percent each year, which means that per-capita wealth is doubling every generation or two. The obvious question is: why didn’t everyone get wealthy a long time ago with this rate of growth compounding on itself? What took us so long?
One reason is that the human race started with nothing, not even the clothes on their backs. Things happened very slowly during prehistoric times. It took many centuries to climb up from nothing. Double, or even a thousand times nothing is still nearly nothing. The main reason for the long, long, time was that economic growth was so low for millennia – far below 1 percent – more like 0.0001 percent per year. At that rate, it would take 7000 years to double the average wealth of the human race. Another reason that per-capita wealth did not grow over time was because population increased along with total wealth. When agriculture was invented the growth rate jumped to a much higher number than before. Wealth per person began to accumulate faster than before, yet was still tiny by today’s standards.
Then a big break happened in 17th century Europe. There was an intellectual renaissance: the printing press was invented; a religious reformation and an industrial revolution occurred. Capitalism was born although it didn’t yet have a name. The aristocracy’s influence lessened. Agricultural production increased even further. Peasants were displaced but they found work in factories. Commerce and trade increased. Usury laws were dropped. England became a strong trading nation and other countries joined in. Once begun, the growth rates of the industrialized nations rose to about 3 percent per year and wealth grew on an exponential curve. Wars, depressions and natural disasters were merely blips on this rising curve. Incomes and living standards improved as capital accumulated and was reinvested. Innovations like the steam engine raised productivity by great leaps, keeping growth going. Compared to the previous centuries, growth rates of 2 to 3 percent per year were incredibly, unbelievably high. Because England started earliest she got well ahead of others and became the richest country in the entire world.
Conditions improved and increasing wealth was spread over more people. Even though the population was growing the economic growth rate was about 2 percent per person each year, a fantastic number, which meant that an average person’s income would double in 34 years, about a lifetime. For the first time in history people could believe that their children’s lives would be better than their own; a revolution in expectations. Work gradually changed from a means to stay alive to a way to get ahead. As the Protestant ethic took hold, work could even become a “calling” pleasing to God.
If the history of GDP for the advanced countries for the past 300 years or so were plotted on a graph, it would show steady growth. But population also increased rapidly over this time. When adjusted for population growth, a similar graph of per-capita GDP would still show a steady increase of lesser slope. Tables and charts have been published [1] [2] which show extremely slow per capita growth rate for thousands of years, then the great transition, followed by a remarkably steady growth rate thereafter. Prior to the 17th century the graph is a flat, horizontal line with very low growth but in the 1600s it bends abruptly upward. Economists call it the “hockey stick graph.” This unprecedented change seems to occur with the invention of capitalism. Another graph [3] of per capita growth in the United States economy for the past 200 years shows that deviations from a constant rate are minor. Big events like the depressions of the 1870s and 1930s are visible, but not much else is significant.
It appears that humanity passed a real turning point when capitalism took off in Europe. There was a cultural shift. A new state of mind had formed among those who financed world exploration, inquiry, innovation and capital accumulation. The high and mighty of earlier times and other countries did not have these attitudes. Remarkably, this transformation in economic growth, expectations and living standards has continued and persisted for centuries. Per capita growth in the developed countries kept going at about 2 percent per year.
Locally, wealth is most often accumulated not by steady and patient accumulation but by great leaps. In the early 1500s floods of gold and silver came into Spain from South America. These fortunes went to the Spanish aristocracy who spent it on castles, courtiers and servants. Prices in Spain rose rapidly. But when Sir Francis Drake captured shiploads of Spanish gold and took them to England the booty went into commerce, and earned large profits through trade. There were surges in real wealth in England, not inflation. In the following century both the English and French economies generated tremendous new wealth while the Spanish did not. England became the wealthiest country in the world through imperialism and trade. It built a powerful navy to protect its trading ships, conquered huge areas of the world, built up immense trade surpluses, and became the world’s center of commerce, finance, and power. Its navy literally ruled the waves. The new wealth spread beyond the aristocracy. Merchants and traders got rich. The lower classes still had a hard time but the increase in national wealth was real. John Maynard Keynes, an English economist, suggested that it laid the foundation for the Elizabethan age that followed, a time of stability and wide prosperity in England.
Keynes believed that two factors had produced our present high rate of growth: capital accumulation and technical innovation. Both of them are now proceeding faster than ever and stimulating each other to new heights. Technical progress creates new conditions which change society. Inventions like steam power, automobiles, television and the internet create new jobs which grow the economy. They also change how people think and live their lives. Growth provides new kinds of goods and improves the quality of goods offered. Car engines once needed hand cranks. TV replaced radio. Color TV superseded black & white. Incredible innovations like mobile phones seem to come out of nowhere, unexpected new pathways to growth that change the whole world. A product may cost no more than a few years before, even after inflation, but gives more value per dollar. New goods are created that were never imagined before. The importance of these additions to the standard of living cannot be pinned down. Such improvements increase economic growth but not in measurable ways. Economists invented the awkward term “hedonic” growth in attempting to describe these effects.
The world has now lived with capitalism for over 300 years. Rapid change has been the rule compared to previous centuries. More people have been liberated from poverty, worldwide, than in any comparable period in history. Even the ‘backward’ countries have benefited via imperialism and colonization. The world’s economy has grown faster than its population for many years. Such long-term growth accumulated great wealth. The advancing countries became extremely rich by any previous standard. Keynes, who had become an advisor to the British government, was a wealthy man. He knew that he was living like a king. He wrote in 1920: [4]
“. . . life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarch of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantities as he might see fit, and reasonably expect their early delivery at his doorstep. But most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.”
Since then, millions can enjoy such privileges because the world’s economy has grown by at least eight times and its wealth, per capita, by six-fold. Keynes was aware of the great transformation and what it portended. In his famous essay Economic Prospects for our Grandchildren, he wrote of what such economic growth could bring about in another hundred years. He essentially said that the power of compounded growth would overtake everything else and that the world could become wealthy enough to solve mankind’s “economic problem,” the burden of toiling for mere subsistence, thus freeing most people in the advanced countries from want and opening their lives to leisure. Today’s economists are amazed that Keynes’ predictions on Gross Domestic Product were so accurate, but they note that people still work, work, work, and don’t choose leisure. They miss his point that they no longer toil for a living by the sweat of their brow. Their economic problem has been solved. They have food and shelter and need not store up supplies for the winter. They can choose how to live their lives, and appear to choose work over leisure.