Efficient Frontier
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William J. Bernstein

Bigger Than a Breadbox

The literary wheels are slowly turning at Efficient Frontier. Two years of work will culminate on May 1, 2004 with the publication of The Birth of Plenty, an inquiry into the origins of modern prosperity. With the kind permisison of McGraw-Hill, I lay out the book’s premise here, using excerpts from the Preface and Introduction. ---WB

For those of you interested in preordering, Amazon.com is currently offering a generous discount on first-edition copies.

The Birth of Plenty

When my wife brought P. J. O’Rourke’s Eat the Rich home from the library several years ago, I wasn’t expecting much in the way of historical insight. Mr. O’Rourke aims to amuse, and his lighthearted romp through the world’s economic success and sob stories did not disappoint, most memorably his exposition of credit risk: a junk bond is a loan to your little brother; a high-quality bond is a loan to your little brother by the Gambino family.

Mr. O’Rourke’s frothy prose hides painstaking legwork. Scattered under the quips were some well-researched passages, including one that briefly mentioned data assembled by an obscure Scottish economist named Angus Maddison, who found a startling discontinuity in world economic growth around 1820: before that date, growth was essentially nonexistent, and after, sustained and vigorous.

It took me a while to rustle up a copy of Maddison’s summary work, Monitoring the World Economy 1820-1992. The bound edition looks as dull and as daunting as the densest legal brief, but inside, Maddison’s dry data lay out the greatest story ever told: the economic birth of the modern world. The finest written rendition of Japan’s Meiji Restoration and post-World War II prosperity does not do justice to the raw numbers presented in Maddison’s book: 6% inflation-adjusted growth in Japanese per capita GDP, a doubling of average life span, a near-quadrupling of educational levels, and the rapid disappearance of illiteracy, all in the four decades before World War I.

I became fascinated with this sudden change in the Western world’s fortunes. Maddison himself made a half-hearted stab at explanation, briefly mentioning technologic progress, improvements in trade, finance, and human capital, and exploitation of natural resources, as well as referring to more obscure economic concepts such as "growth accounting." None satisfied me. The commonplace belief that technologic change produces economic improvement explains nothing. Almost by definition, economic growth is the child of technological innovation. Were advances in electronics, transport, and the sciences to suddenly cease, economic growth would almost automatically stop.

The question gnawed at me: Why? Why did world economic growth, and the technologic progress underlying it, suddenly explode when it did? Why didn’t the Florentines invent the steam engines and flying machines that Da Vinci sketched? Why didn’t the Romans, with their metallurgical skills, discover electricity and invent the telegraph? Why didn’t the Greeks, with their expertise in mathematics, describe the laws of probability, without which modern capital markets cannot function? For that matter, why did the Athenians remain desperately poor for the two centuries between their defeat of the Persians and their envelopment by Alexander, when they possessed the commonly recognized conditions for economic growth: democracy, property rights, free markets, and a free middle class? Most important of all, why did Hobbes’s description of life in a state of nature as "solitary, poor, nasty, brutish, and short" disappear from Western Europe less than two centuries after it was set down on paper?

Paul Johnson comes as close as anyone to answering these questions in The Birth of the Modern. His description of the revolutions in the sciences, politics, literature, and the arts at the beginning of the nineteenth century is nonpareil, a wonderful prose counterpart to Maddison’s work—Early Modern Developmental History for Poets, if you will. Johnson, however, remained silent on the ultimate question of why this most important of all historical transitions occurred exactly when it did. In a different vein, Jared Diamond’s Guns, Germs, and Steel asks "Yali’s Question"—Why do white men have all the cargo? (Yali is a New Guinea tribesman, and "cargo" is the local term for all technologically advanced inventions—most notably, steel axes, soft drinks, and umbrellas.) Although Diamond’s book provides a breathtaking overview of the biological and geographic players in human history, it remained silent on the tribesman’s plaintive query.

My task, then, is to uncover the cultural and historical factors that came together during the early nineteenth century and ignited the great economic takeoff of the modern world. Effective nonfiction transcends the mere exposition of facts and narratives, no matter how well told, and provides readers with useful tools for understanding the world around them. Any approach to the origins of world prosperity presents two challenges. First, the story—how the world arrived at its present state—is one of the most intrinsically absorbing any author can tackle. If the author cannot command the reader’s interest with it, he has no one but himself to blame. The second challenge is to provide the reader with a framework capable of explaining why any nation—not just the several covered in this book—is wealthy or poor, democratic or totalitarian, weak or powerful, and perhaps even whether or not its citizens are satisfied with the lives they lead. If the author succeeds, his readers may even be able to catch a glimmer of what the future holds for our planet and its peoples.

This book divides naturally into three parts: why, how, and whither. First, I’ll attempt to define economic growth’s ultimate sources. Next, I’ll describe how these factors played out in various nations. Finally, we’ll focus on the remarkable sociological, political, and military consequences of the modern world’s explosive economic growth. An understanding of the sources of that growth provides powerful insights into the other great questions of our time:

  • In a world that is becoming not only more wealthy but also more complex, fast-paced, and stressful, what is happening to the overall well-being and satisfaction of the average person?

  • What is the relationship between wealth and democratic development? What does economic progress, and the resultant growing inequality of wealth among nations, hold in store for the world’s political future? What are the prospects for successfully exporting democracy to countries like Iraq and Afghanistan?

  • How has the evolution of modern prosperity affected the current balance of power in the world? Is the military ascendancy of the United States a historical accident, and can it be expected to continue? How effectively can non-Westerners, particularly in the Moslem world, wield political and military power?

The great tragedy of the premodern era was that large bodies of knowledge would be lost for millennia. Before Gutenberg and Bacon, inventors lacked two critical advantages that we take for granted today: robust information storage and a firm foundation of scientific theory. The lack of a scientific method meant that technological advances relied purely on trial and error and were thus few and far between. Further, inventors and manufacturers could record their work in only a few places, if at all. Consequently, inventions were frequently "lost," and the technological and economic condition of the ancients retrogressed almost as often as it advanced.

True, beginning about A.D. 1000, there had been improvement in human well-being, but it was of a sort so slow and unreliable that it was not noticeable during the average person’s twenty-five-year life span. Then, not long after 1820, prosperity began flowing in an ever-increasing torrent; with each successive generation, the life of the son became observably more comfortable, informed, and predictable than that of the father.

This book will examine the nature, causes, and consequences of this transformation. The first section will unfold the compelling narrative told by these new data. I will identify the points in both time and space where economic growth sprang alive after millennia of slumber. I will also describe and examine the history of the four factors—property rights, scientific rationalism, capital markets, and improvements in transport and communication—that are the essential ingredients for igniting and sustaining economic growth and human progress.

The second section tells the story of when and how these factors came into play: first in Holland, then in England and its cultural offspring, followed in turn by the rest of Europe, Japan, and, finally, the remainder of East Asia. In each case, I will dissect the takeoff in growth and find that not until all four factors mentioned above are in place can a nation prosper.

Although I try to maintain a global perspective throughout this book, many readers will find its focus overly Eurocentric. Were not the Chinese—the inventors of paper, the printing press, and gunpowder—the great innovative engineers of the premodern world? Were not the early Arab empires oases of learning and culture during a time when Europe was mired in the Dark Ages? Did not mathematicians in India devise a numerical system, incorporating the concept of zero, that was far more advanced than the Greco-Roman letter-based system? To all these questions a resounding yes. Yet not one of these societies was able to turn the modern Western trick of continuously and permanently raising its citizens’ standard of living. Further, the four factors responsible for modern wealth—property rights borne on the common law, scientific rationalism, advanced capital markets, and the great advances in transport and communication—were largely European in origin. Although prosperity has become a global phenomenon, there is no escaping the fact that the nursery of modern wealth lies in the area between Glasgow and Genoa.

Finally, the book’s third section will plumb the sociological, political, economic, and military consequences of the great discrepancies in personal and national wealth that have arisen from this birth of plenty, and what the consequences of growth hold in store for the future.

Recent advances in the social sciences provide us with a fascinating window on the complex interaction of societal values, wealth, and politics. First, the bad news. In a world growing more and more prosperous, people are not necessarily becoming happier, particularly in the West. But the good news is that substantial improvements in individual well-being are occurring in developing nations. As nations pass from the third world to the first, their citizens do indeed become more satisfied. Moreover, it is economic development that produces democracy, not the other way around—"too much" democracy may actually be bad for economic growth. The rule of law is the essential bulwark of a robust system of property rights. Property rights, in turn, are essential to prosperity. Finally, prosperity is the essential fertile soil in which democracy flourishes. Thus, optimism about democratic development in a nation whose traditional cultural values are antithetical to the rule of law—such as Iraq or Afghanistan—is likely to prove costly and dangerous.

I will argue that the destinies of nations are determined far more by their economic dynamism than by the vagaries of war, culture, and politics. The current world hegemony underwritten by American military might is no accident. History teaches that the fate of all great world powers is decay and downfall, but this cannot occur to the United States until another nation both surpasses American economic productivity and takes an interest in projecting power—something that will not likely come to pass anytime soon.

By examining how our world prospered when and where it did, we just may be able to better divine where it is we are going.

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