Tuesday, 10 December 2013

The great rise in living standards

If one were to ask a question "What was the greatest achievement of mankind?" what would the logical answer be? The invention of electricity (light bulb)? The internal combustion engine? Penicillin? The internet? Airplanes and cars? The development of the scientific method? Improved methods in agriculture? Or would we say something ancient such as the wheel or learning to control fire? Or the printing press?

All of these are certainly groundbreaking achievements, but if I had to chose I would go for the one thing that links most of these together = the Industrial Revolution.

All the enormous wealth we enjoy today, all the things mentioned above (apart from the wheel, the press and fire) could not have been possible without the onset and the long shadow of the Industrial Revolution. During the relatively short period from 1800s until today, we created a wider variety of goods than ever before, and consequently have achieved tremendous increases in wealth, prosperity, and health; or altogether, tremendous increases in living standards. 
Source: Gregory Clark (2007) A Farewell to Alms: A Brief Economic History
of the World
. Princeton University Press
As can be seen in the figure above, taken from Clark's exciting book A Farewell to Alms (read the intro chapter here), the development of the world economy and by that the human society is characterized by two distinct phases: the pre-Industrial Revolution times, from the dawn of man to the 1800s, also denoted as the Malthusian Trap, and the post-Industrial Revolution period, lasting from the 1800s to the modern age. 

Not until one understands the misery and poverty of the Malthusian Trap, can one truly appreciate the importance and magnitude of the Industrial Revolution. As Clark notices the living standards in the 17th and 18th century, even in the richest countries such as England or the Netherlands, weren't any better for the average person than in the Stone Age. In fact, he argues, at least the hunter-gatherer societies during the Stone Age were egalitarian, which can't be said for the 1700s, where the living standard of the poor majority was arguably lower than 2000 years ago. Not to mention that in the 18th century average life expectancy was around 35 years, the same as it was for the cavemen. 

And then in the midst of the 18th century came a series of events that triggered an unprecedented rise in living standards and wealth. The simple inventions of the First Industrial Revolution (1760-1850) such as the introduction of water- and steam-led machines only set the stage for more advanced inventions and technological progress that happened during the Second Industrial Revolution (1850-1910), from which we got the internal combustion engine and electricity. Innovation unraveled quite rapidly during that time, and has been unstoppable ever since. Just imagine, only 60 years after discovering how to fly (Wilbur brothers in 1903), we send the man to the moon (NASA, 1969). If you put this into perspective of the time lost during the 2000 years of Malthusian stagnation, this seems like only a brief moment in time. And yet so much progress has been achieved.

The Great Divergence 

However, simultaneously with the rapid increase of wealth in the Western world, countries whose rulers succeeded in avoiding the Industrial Revolution fearing change and loss of power were condemned to centuries of stagnation and a persistent Malthusian Trap, thus giving scope to the so called Great Divergence. The alternating paths of the world economies originating from the 1800s created the huge inter-country inequality, and have left the world divided ever since. Until around the last few decades, which saw a huge uplift of China and India (where China succeeded in pulling 600 million people out of poverty from the 1980s till today), and some Latin American economies. Many (too many) parts of the world remain impoverished, trapped in the same poor living standards that societies had 2000 years ago, still living the Malthusian scenario. 

Possibly the greatest contribution towards understanding this great division was done by Acemoglu and Robinson in their often mentioned book on this blog - Why Nations Fail. They explain in particularly detail why the Industrial Revolution started in England, not anywhere else in the world. It developed on the trails of the Glorious Revolution, where the demand for more property rights and a greater political voice set the stage for sustained growth and prosperity. The rising wealth of the merchants and manufacturers overcame the opposition from the elites and the sovereign, thus initiating the beginning of a new historical era. It was the broad coalition of the (albeit richer) people that succeeded in initiating progress. Acemoglu and Robinson call this irreversible political change that ensured constant institutional adaptation and the final switch towards greater political and economic inclusinvess. 

This pattern is not only obvious, but even characteristic of the post-Industrial Revolution period. The very beginning of the Revolution was infused with initially greater inequality and diminishing living standards for the poor. However, the political change for which the stage was set earlier implied that the fight for more political inclusiveness was not going to fade. This is why it was possible for the worker movements in the beginning of the 20th century to fight for more rights and be successful in carrying it out. Against a sovereign or a dictator, this would be impossible, which is something we witness even today. If it hadn't been for this rapid economic progress initiated 200 years ago, the relative abundance we take for granted today would have been impossible to achieve. As for the countries that are still trapped in poverty, the blame falls fully on the extractive elites preventing them from experiencing their own Industrial Revolution. Just like the one China experienced after Mao.  


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