08 June 2011

The Birth of Plenty

In The Birth of Plenty (paperback, Kindle), William Bernstein proposes a framework to help make sense of how civilizations get on the treadmill of sustained economic growth that has only been attained in the last 200 years. Why was it the English who managed it first, and not, say, the Chinese, or Muslims, both of whom had a tradition of scientific discovery and mathematical inquiry going back a thousand years or more?

Bernstein argues that four factors are necessary for nations to break out of stagnancy:

  • Property rights, including protection both from the government (i.e. rule of law) and from others (robbers, highwaymen, etc.)
  • Scientific rationality
  • Efficient capital markets (easy access to capital)
  • Useful power (for work and transport) and communications

The core of the book is case studies of the four factors and how they were (or weren't) implemented in various countries. It's history and politics and economics but Bernstein makes it very interesting and explains the relationships between the relevant threads of history.

The last part of the book concerns the modern era and the future. It would be really interesting to be able to use this sort of analysis in order to direct policy decisions, but it seems to me that the four-factor story has become, at least in part, a just-so story. After all, one can read about the tenets and method of science anywhere; capital is easy to come by (if not in your home country, you can obtain it from abroad); machines for work, transport, and communications can be shipped to anywhere in the world. With respect to the latter three factors, the cat is out of the bag. The only place in the modern world where any of those are not readily available is, possibly, North Korea. So it may be that no future natural experiment could assign any explanatory role to factors two, three, and four.

Instead, the first factor plays a key role: if we would merely supply the rule of law, says Bernstein— if people believed that they were not in mortal danger and that the fruits of their labor were safe from seizure— then people would have the motive to innovate (with the other three factors guaranteeing the means and opportunity). Not a new idea, but there is a twist. The four factors are logically independent of democracy; they can be present even under totalitarian regimes. And Bernstein cites some evidence that suggests that it's prosperity, borne of the four factors, that makes people ready for democracy. The causality between prosperity and democracy goes the way opposite to what many people assume.

Now, if we take this narrative seriously, then we really have to rethink the way we approach foreign aid and humanitarianism. Promoting (or installing) democracy in a country won't, by itself, lead to prosperity. And just giving money to poor countries is no help at all, if not worse. In both cases the change amounts to planting a seed in infertile soil. What's needed to bootstrap third-world countries today is, almost invariably, the first factor: property rights, considered very broadly. People need to believe that they and their possessions are secure; they need judges and lawyers. The absence of the requisite social institutions is so corrosive that economies cannot thrive without it, no matter how the political leaders are chosen or how much money there is lying around. Conversely, Bernstein suggests that once people have attained some critical level of prosperity they tend to lean towards democracy anyway. But that can lag economic prosperity by years if not decades.

This book is well worth reading, even you take issue with some of Bernstein's analysis. People are becoming increasingly mindful, and they want to know what they can do to make the world a more decent place to live; but no one (except ideologues, I suppose) is so committed to a particular means towards that end that they would persist in advocating something that demonstrably didn't work.

Economic history is complicated, and the scope of this book is very ambitious, but Bernstein manages to make it an easy (and even engrossing at times) read. Recommended.

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