Tuesday 22 January 2013

The Wealth of Nations

Where did wealth begin? In narrow terms, wealth began when human beings made things. These things were traded, prices established, and wealth was created and accumulated. Our ancient ancestors were buried with emblems of their wealth and status. Millenia ago there were wealth disparities, hierarchies and a vivid appreciation that wealth conferred advantages. The clever and industrious prospered and also, for a time, the brutal and rapacious, but only because they stole from hard-working folk.

In broader terms, using the concept more generously, it has been argued that ancient humans were wealthy without realising it, because they had the world at their feet. They had more territory per head than we do. They were wealthy before they knew that things had prices. There was fruit on the trees, and fish in the sea. Some continents were more hospitable than others and so some peoples prospered more, just because of geographical luck. Neither personal industry nor cleverness was involved.

Can one resolve this debate? Traditionally wealth has been estimated by artefacts, housing and life spans. The ancient story is a pretty simple one – a few people at the top of the social hierarchy had considerable wealth compared to the mass of humanity, yet would be considered poor by contemporary standards. The ancient majority lived lives which lacked comforts, were restrained in terms of opportunities, and which were short, mostly because of high infant mortality rates, starvation and diseases.

By 1500 Europe was ahead, being about 5 times wealthier than the rest of the world. Then in September 1825, with the opening of the Stockton and Darlington railway, the world took off. The Industrial Revolution happened in England, and not by chance, and then spread round much of the world. Since the first Census in 1841 English life spans have increased by 2 years every decade. This staggering increase continues to this day, against all predictions that it must peter out. In terms of artefacts, housing, life style and life spans about 3 billion humans are very wealthy, and life is improving fast for the rest.

Was it mostly human wit or mostly geographical luck? History does not admit of random controlled trials, but it is littered with natural experiments. For example, we can compare East and West Germany in the period 1945 to 1990. When the Berlin Wall came down it was revealed that East Germany had barely produced 30% of what was achieved on the Western side. Incidentally, it still lags behind. North Korea initially did better than South Korea, but after a decade the South pulled away, and now the North regularly faces starvation. Hong Kong and Taiwan did far better than mainland China, Singapore far better than Malaysia. Mainland China embraced a market economy, under central political direction, and is now prospering. In terms of wealth, even restricting one’s self to comparisons between the same genetic and cultural groups separated by political boundaries, command economies have not made people rich. That has been achieved by market economies, in their various forms. Market economies are very rarely purely capitalistic, but are bounded by social norms and legal restrictions.

These comparisons, however instructive, in that they indicate that the form of social organisation determines outcomes, do not help us with the long march of history. Our first steps as a species may well have depended on geographic luck. This might have accounted for the move from hunter gathering to agriculture. Conversely, it might have been the increasing scarcity of big game that drove our ancestors to setting seeds in the soil. Has the luck of place been a good explanation for the advances of the last two millennia? The match between geography and wealth  is not all that good. There was very little about the British Isles as a geographical location to suggest that it would lead the world into the industrial age.

In “The Nature and Causes of the Wealth of Nations” Adam Smith showed the means by which wealth was created: the division of labour (each person concentrating on what they do best), the propensity to barter (each exchanging their surplus with another person’s surplus) the extent of the market constrains what can be exchanged (but ease of transport extends the market) the uses of rare metals as money (with the quality assurance of a national mint stamp) the nature of prices (as money or labour inputs) the prices of commodities and labour, and the profits of stock and the returns on investments, are the main topics of this economic history of human development. To my eyes this is a supremely psychological account, in the sense that it is an account of what people have worked out works to their advantage. The much quoted “invisible hand” is the aggregated consequence of individual wishes: personal motivations result in a thriving society. Smith’s account is part psychology, part history, part the new discipline of classical economics, which he founded. It is a story of people who had the wit to work out how to better their condition, even if most of them achieved this noble end with intending it. Unusually, I would propose it as necessary reading for all psychologists, at least in summary form, in that it shows the basic components of our modern economies, and the way in which individuals blend their wishes to the needs of others.

Smith’s account has not been bettered, but it has been extended by many economists. One particular economic historian with a great respect for geography, David Landes dared to update the text (1998) in a scholarly masterpiece which he entitled “The Wealth and Poverty of Nations”. His conclusion, stated with some reluctance, was that the difference between rich and poor countries was based on culture. He went no further than that, and certainly made no mention of differences in intelligence or personality.  However, his key observations were that successful societies innovated, and taught their children how to manage those innovations. This is intellectual problem solving in all but name.

The causes of the industrial revolution are much debated, but one recent hypothesis presents an entirely intellectual reason, which is that England followed an inadvertent eugenic program for many centuries. In “A Farewell to Alms: A Brief Economic History of the World” Gregory Clark (2008) argues that for centuries the wealthy left 4 surviving offspring for every 2 left by the poor. These industrious, restrained and clever children had to move down to modest occupations, and make the most of them by continuous improvement, thus eventually providing a broad base of intellects from which the industrial revolution was born. This accumulated wit produced a wealthy and compassionate society, culminating in 1870 with the Education Act and the very beginnings of the welfare state.

It is very hard to adjudicate between the conflicting hypotheses of “adventitious geography” and “native wit and character”.  The history of wealth creation does not have to be one or the other. The happy circumstance of a mild climate and rich soils may have given our ancestors their first start, long before the invention of agriculture. The loss of big game may have forced them to take up the domestication of plants and animals, with all the problems and risks involved. After that warm and happy stage it may have been geographic harshness, such as that experienced in wintry climates, which brought about the survival of the brightest. The pent up ability of those survivors, having to pit their wits against harsh geographies, may well have triggered the big explosion of innovation which has propelled us into modernity.

Without proofs, we cannot announce a winning hypothesis. As regards the causes of wealth in the last two thousand years, my money is on people and their characteristics being more important that benign geographies.

These are my musings, whilst lying idly on the beach.


  1. 1) "necessary reading for all psychologists": for anyone to consider himself educated, he should read Smith's Wealth of Nations, Darwin's Origin of Species, and Gibbon's Decline and Fall. The old Pelican abridged editions would do perfectly well.

    2) The main thing to explain about the Industrial Revolution is why it didn't start in France. Once you accept that it didn't, England and Scotland were reasonable places for it to begin, though so was Germany.

  2. The Low Countries have an excellent claim, but were probably let down by the wrong sort of coal (which could not get to the high temperatures required for steel) or so Landes argues.