What caused living standards to dramatically rise in the nineteenth century, after thousands of years of stagnant poverty? And is the world on track to continue this wealth explosion, or are we abandoning course in the name of stability? On this episode, Dr. Stephen Davies joins me to explore these questions.
Stephen Davies is the Head of Education at the Institute of Economic Affairs in London, and was previously a program officer at George Mason University’s Institute for Humane Studies. He has also been a lecturer and a scholar at Manchester Metropolitan University and at Ohio’s Bowling Green State University, where he taught both economic history and social philosophy. He is the author of 2003’s Empiricism and History, as well as the recently released The Wealth Explosion: The Nature and Origins of Modernity.
What follows is a lightly edited transcript of our conversation. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.
Pethokoukis: Your book looks at the issue of how the modern, dynamic, innovative economy really came about. Let me first ask about where it came about. The wealth explosion occurred first in northwestern Europe — why there, of all places?
Davies: That’s a very good question. One of the things you
have to realize is that for most of the history of the world, northwest Europe
is actually a bit of a backwater. The actual hub of the world economy for most
of history — the wealthiest, most dynamic parts of it — is the land around the
Indian Ocean. Particularly, in eastern and southern China.
So, if you had been observing the Earth from galactic space,
you would have to say, “Well, why does it start in northern France, the low
countries, and in Great Britain rather than somewhere else?” I think the answer
is that, relatively recently in history, something happened in that part of the
world — and in Europe more generally — that gave it a quality of dynamism that
other parts of the world lacked.
In particular, it meant that when people did try to introduce innovation, it
wasn’t possible for that innovation to be choked off.
What were the particular factors that were in place in northwestern Europe that, perhaps, were not in place elsewhere?
Just to reframe that slightly: If you look at the course of
history, what you find is that the kind of dynamism and innovation that marks
the modern economy appears to get going several times in various places. In the
Mediterranean lands in the 2nd-century AD, in the Middle-East in the 8th or 9th
century, and most notably in China in the 12th and 13th centuries. But,
crucially, those earlier episodes do not last. What happens is that the fire of
innovation, if you will, doesn’t keep going. It gradually flickers out.
So in northwestern Europe, what happens is that there’s
something there that prevents that from happening — that allows the innovation
to continue. What I think is the crucial thing is that northwestern Europe, or
indeed Western Europe in general, is marked by a system of division into
competing and fairly powerful sovereign states from about the mid-17th century
onwards.
For everywhere else in the world, the military revolution of
the late Middle Ages produced very large hegemonic empires which ruled a large
part of the planet’s surface. Whereas in Europe, you have an equivalently large
area divided up into about a dozen states — all with varying degrees of power,
but none of them in a dominant position to impose their authority on the rest.
And what this does is change the incentives facing rulers.
It means that rulers in Europe, unlike rulers in their past or like rulers in
the contemporary world, do not have an incentive to stop change or reverse it.
Instead, they actually have an incentive to encourage innovation. Because that
gives you a head-start on your competitors, and if you don’t encourage
innovation, the results are pretty unpleasant. The classic example of Poland
shows an entire state actually vanishing from the map thanks to the partitions.
You mentioned some of
these other “false starts,” where we didn’t see an industrial revolution with
the Ancient Greeks or Romans, or in China. If Europe hadn’t been broken up in
the unique way that you mentioned, what do you think would’ve happened to put
out those early “fires” of progress in Europe?
I think the best way of thinking about that is to look at the other case of China. China in the so-called Song Dynasty period, where it was ruled by that particular family from the middle of the 10th to the late 13th century, is the classic counterpoint, if you will.
In that period, China has all of the other conditions that you need for a dynamic and innovative economy: It’s got private property, it has the rule of law, it has complex financial institutions, it has double-entry bookkeeping — it has a whole range of institutions, as the economists call them. Plus, it has an enormously extensive trade network and a highly monetized economy. And all of this produces lots and lots of innovation, so much so that by the middle of the 13th or late 12th century, China is at the same level of technological and economic development as 18th century Europe, to put it in perspective.
The critical difference is that China is dominated by a single state. It is a single state. And what happens is that the whole of China is conquered by the Mongols at the end of the 13th century. Now, the Mongols do not actually change much themselves, but it’s an enormous psychological shock to all of the Chinese elite and the general Chinese mentality.
And in 1368, the Mongols are thrown out by a rebellion from the Han Chinese, led by a man who becomes the Hongwu Emperor and founds the Ming Dynasty. He and the Ming elite blame this catastrophe of conquest by the Mongols on the innovative, open, and mercantile society that the Song had. What they do is quite deliberately and systematically undo that. They quite consciously and knowingly look for things that will make China more conservative, less innovative, and less dynamic.
They actually go to the extent of scrapping and eliminating entire technologies. Most famously, towards the end of the 15th century, they outlawed the building of ships that could sail out of the sight of land. This means that the Chinese merchant fleet, which had been the largest in the world until then, is effectively eliminated.
So that’s an extreme example of what tended to happen in
previous episodes — where elites would typically take action, often with the
support, it has to be said, of large sections of society to stop innovation
from happening. They maintained things the way they were, and prevented people
from trying out new devices, new ways of doing things, new ways of conducting
business.
You can see quite obviously why elites would typically do
this, because why do they want change? They’re at the top of the tree — what
good is change for them? And to the extent that change does take place, it
actually undermines their position, so they’re likely to see it as threatening.
By contrast, in 18th century Europe, although I suspect that many elites would have liked to do what Chinese emperors or Abbasid Caliphs before them had done, they can’t do it because they’re engaged in this enormous struggle for advantage with the other European states. In that struggle, encouraging innovation creates the sinews of war. It creates the wealth and the technology that gives you an advantage in the conflicts between the states that were taking place in Europe at the time.
In the period in
China where there was a lot of innovation happening, and where they had many
institutions that would be familiar to people today, did they have
“capitalism?” And you can define that in any way — but did they have something
that we would recognize as capitalism?
Okay, that does depend on how you define the term “capitalism.” If by capitalism you mean, in very broad terms, an economic system in which productive goods are privately owned, in which there is a free market with goods being produced for sale on the market, and that the results of those sales mean that the market largely determines what is produced, when and where, then yes, China had capitalism at that time. And you could also say that you have capitalism in 2nd century Rome, or in the 9th century Abbasid Caliphate, and a number of other places in world history.
If, on the other hand, by capitalism you mean specifically
the form that the market economy has taken in the last 200 years, which is one
with a large and highly integrated capital market and large firms, then no,
they don’t. But then, for that matter, you could say that Western civilization
has only had capitalism in that form since, roughly, the 1850s.
So it depends on whether you’re talking about capitalism in
the very broad, generic sense — essentially just a market economy — or the very
specific kind of market economy that we’ve had in the last 150 years or so.
Similarly, when
people talk about the Industrial Revolution, they’ll take it back to the late
1700s or the early 1800s. If you’re looking for the real beginnings that lead
to the wealth explosion, where do you begin?
Where do we really
start to see the sorts of progress, scientific innovation, and other things
that led to the great explosion of wealth?
It begins in the mid-18th century, really. You do get certain key technological innovations before then, such as the Newcomen steam engine. But as a number of historians like Joel Mokyr have argued, the real innovations are the ones that begin after about 1750 and start to really accelerate after the 1770s.
These aren’t just technical innovations. It’s not just a
matter of machinery. There are also things like major breakthroughs in
agricultural technique, which includes more use of lime, use of different
crops, and the like. Also, crucially, there were different innovations in
productive management in organization, and the productive process.
So even in parts of the economy that are not marked by significant innovation in, say, machinery, what you often get is innovations in the way that production processes are organized — of the kind that Adam Smith talked about in the famous case of the pin factory. But it’s all basically happening in the British Isles in particular, but also in France, parts of Germany, even parts of Scandinavia, in the period roughly after 1750.
I wonder if modern people
actually have a good feel for what life was really like before that leap
forward that took place in the mid-1700s, which then accelerated in the 1800s.
Life in Western Europe: What was that like, and how did it change over the
period of 150 years?
Life, not just in Western Europe but anywhere on the planet,
was pretty much at the same level. That’s one of the things to realize —
throughout most of human history, there are not really significant differences
in the living standards of ordinary people between one part of the world and
another. And those living standards are, by our level of expectations,
shockingly low.
The World Bank estimates that in 1800, more than 80 percent
of the world’s population was living in abject poverty. They were living on the
then-equivalent of $1.50 a day, which is what the World Bank reckons is a bare
subsistence income. It means you’re just about surviving. So that was the
normal state of affairs.
Now, what did that mean in practical terms? Well, it means,
for example, that it was almost impossible even amongst royalty to reach the
age of 21 without losing a close sibling or a parent to death from accident or
illness. If you were born in a town, you had a one-in-three chance of dying
before your first birthday. If you were born in the countryside, a one-in-four
chance. If you’re a woman and you became pregnant, then you had a one-in-four
or one-in-five chance of dying in childbirth or immediately after childbirth
from puerperal fever.
So, life was incredibly harsh and also extraordinarily restrained and constricted by comparison with what it is for people almost anywhere in the world today — not just in the wealthy parts of the world. One of the things to realize, for example, is that 90 percent of the population of most of the world until, really, the 19th century, were peasant farmers — that’s what you did. 80 to 90 percent of the population of every country lived in the countryside in small villages, and were overwhelmingly engaged in agriculture as their main form of activity.
So, the range of options and opportunities open to people
were extraordinarily restricted compared to what we have today. I wouldn’t go
so far to say that, in the Thomas Hobbes sense, it was “nasty, brutish, and
short,” but it was amazingly less comfortable and far less varied, with far
fewer opportunities than what we have today.
At what point did
people of that era begin to think that something had changed? That their lives
seemed to be very different from the lives of their parents and grandparents?
It seems that when
the Industrial Revolution was going on, at first it didn’t seem like anything
was changing. And obviously some people, including Karl Marx, had missed the
fact that something had changed. When did people really begin to feel that they
were in a new era?
I think that really began to dawn on people in the 1830s and 1840s. It’s about the time that the relatively young Marx wrote the Communist Manifesto, but he was of course only one of many observers at the time. That was when it first really dawned on people that what was happening was something quite unprecedented.
And that’s actually confirmed by the stats — in 1851,
Britain became the first country ever, in the whole history of humanity, to
have the majority of its population living in towns and cities rather than the
countryside. And it was just about 10 to 20 years before then that people
really began to think, “Hey, something really spectacular is going on here.”
We tend to talk about
the inventions, and that this is a history of new and better things, whether it’s the steam engine or
others. But it’s also an intellectual process. I wonder if you could map out
the intellectual or cultural evolution that led to the wealth explosion. Is it
just the Enlightenment?
Yes. With the body of ideas that we commonly call the
Enlightenment, you could again say that, as with the economic growth, there had
been intimations of this before, but they never really got anywhere. There had
been even less of a flicker than in the case of economic innovation, really.
So in the 18th century, what you start to get in Western Europe quite widely is a series of ideas about the relationship of human beings to the world around them. In particular, you get two very important ideas: One is that what really matters for many people is physical and psychological happiness in this world rather than the next world — the afterlife. Secondly, related to that is the idea that you could actually make things better — that it was possible to improve things, to reduce the amount of bad stuff in the world, and increase the amount of good stuff. In other words, it’s the growth of a kind of optimism and a belief that you could actually make things get better.
The third idea that is very closely related to those first
two is that the way to do this is through the use of practical reason. It’s not
so much through abstract philosophy, but rather through the use of applied reason.
Through studying the world, finding out more about it, undertaking experiments,
trying out new stuff, seeing how new things work, and seeing how you could
solve problems — applied science and philosophy, if you will, which is how they
thought of it. Those kinds of ideas had always existed before. There had always
been human beings who had thought about that. But you first really get an
intellectual critical mass of that at this time.
Then there’s the fourth idea, which is the little spice that
really gives life to the other three: That’s the idea that the way to make the
world better, and to make people happier and better off in this world, and the
way to encourage the experimentation with practical science that would do that,
is to basically leave people to their own devices. In other words, not trying
to control people, or to govern them by rules, but rather just let them get on
with what they want to do so long as that doesn’t involve something like
killing people or taking their stuff.
That liberty, in the broader sense of that term, is the fourth ingredient and is the one that is necessary for the other three to actually find their full effect. Those are the four interlinked ideas that you see arising in the European Enlightenment, and of course, over in North America and increasingly spreading to other parts of the world as well in the 19th century.
Of those four ideas,
I think the ideal one is that our life in this world matters, that our
happiness in the here and now is important, not just our happiness in the
afterlife. But for ideas two, three, and four, I wonder about our current
commitment to those ideas. Do you?
Yes, very much so. One of the things I try to argue in my
book is that we should not take the modern world for granted. I think the
history of China shows that you can apparently be set on a route of innovation
and great prosperity, and then it can be reversed.
I think the great risk in the contemporary world is that,
either deliberately or more likely accidentally, we may metaphorically kill the
goose that lays the golden eggs. We may do things that remove that element of
dynamism and innovation.
We certainly don’t seem to have as much of a commitment as
we did to leaving people to their own devices. The idea that we can manage the
world — that the world can be regulated, rule-governed, and controlled by the “best
and the brightest” as somebody once called them — that certainly seems to be
very widespread these days, not least amongst the people who believe themselves
to be the seriously smart people who ought to be running the world, of course.
The others are in trouble as well, but that’s where the main
threat is.
How do you maintain
confidence in applied reason, science, and our ability to make the world better
at the same time that you are showing skepticism toward elites and central
planners? Do those things necessarily go together? How do you maintain one
without the other?
That is the big problem. The challenge, of course, is to
show that being in favor of reason and the use of applied reason to understand
the world to figure out how to do things does not necessarily mean that it’s
something that should lead to planners or the world being governed by rules
laid down from on high.
There is obviously no really incompatibility between
believing in reason and the power of the human mind to understand the world,
and believing in a decentralized, bottom-up sociopolitical order, in which
individuals use their own small parts of reason in cooperation with others both
consciously and unconsciously to improve the world and make it better.
I think that the challenge, really, is simply to explain
that to people, and to make them believe that that is possible. To explain to people
how it is — that you could be strongly committed to rationalism, to the idea of
truth, to the idea that there are things that can be discovered that will
improve the world, while at the same time thinking that this doesn’t
necessarily imply that there’s a group of people who are somehow better
informed or more knowledgeable than the rest of us.
The key insight, I think, is the realization of the wisdom of crowds — that the species as a whole, collectively, are wiser than any individual human being is. Because so much of the knowledge that we have about the world is scattered and spread in tiny little packets in each individual person out there. It’s only through very widespread social cooperation that the “great society,” as Friedrich Hayek famously called it, that you can actually utilize all of that knowledge effectively. That’s the kind of point that has to be explained.
Now, I’m the first to admit that that is quite difficult —
maybe because, as a species, we’ve spent at least 98 percent of our existence
on this planet living in the Paleolithic and Stone Ages in very small
hunter-gatherer bands. It could be that we are biologically or genetically
preprogrammed to think in a certain way which makes it hard for us to grasp
that, but, hey, we’ve done pretty well since we moved on from the
hunter-gatherer phase of human existence. So we have to be confident that we
can actually explain this to people and persuade them. That’s the way to go.
One more contentious
claim you outline in the book is the idea that we’re not living in Western
civilization, or no longer living in it. Why do you think that, and when did we
stop living in Western civilization?
Right — in what sense are we not in Western civilization? Well, to start, what is Western civilization? Western civilization is the body of ideas, practices, symbols, ways of living, and beliefs that gradually grow out of the collapse of the Classical civilization of Ancient Greece and Rome. And you could say that Western civilization first becomes a clear, living entity in the 8th century, broadly speaking.
Now, at that time, if you were living in Gaul as it was
still called at that time, you would obviously have the inheritance of the
ancient civilization of the Roman Empire. If you were educated and a land
owner, you would be able to speak and read Latin. But you were no longer part
of the actual culture of the old Roman emperors, whether Christian or pagan.
You were part of a new civilization.
What I’m arguing is that the modern world first appears
within the historic territory of Western civilization — but the civilization we
now live in is as fundamentally
different from the historic, classical, Western, Christian civilization as the
emergent Western Christian civilization of that Gallic land owner was from the
Classical Roman and Greek civilization that he was the heir to.
So we still have the memory of the classic Western civilization, and we have this enormous inheritance of art, ideas, expressions, and ways of life. But I think that we’ve moved on sufficiently with our life and our ways of thinking. We’ve been sufficiently transformed that we’re now in something new. As to when that happened, I think it was roughly around the turn of the 19th and 20th century. I think it’s the period between 1890s and the 1920s which is the critical transitional point in that regard.
What I’d add, by the way, is that this is not peculiar to
our own civilization, to the West, because what we’re seeing is a similar
process taking place in the other historic civilizations. I think that historic
Chinese or Hindu civilization are also going the same way — they’re also being
transformed in that way. Whether that means that there will be a single,
global, modern civilization is open to doubt. We may well have more than one
because of the various different cultural heritages that different forms of
modernity will have, but I do think that we are no longer living in Western
civilization.
What’s more important
in making that determination? Is it about how I live my everyday life — that I
can become a lot older, I’m healthier, I have more ways to amuse myself, and
this is very different to how people used to live their lives? Or is it about
my belief system? And if that is basically intact, am I not still in the same
civilization?
Two things are important with that. I would say that the
Enlightenment belief system is a part of the modern world, not so much of
classical Western civilization. A lot of that Enlightenment movement in Europe
is in fact an attack upon historic Christian civilization — not all of it, I
must add, but a significant part of it. I think that both are important.
I think that in both you can see a clear division. In terms
of the way we live, it’s not just that we’re more comfortable to live longer
and have more children survive: Things like the way we actually live in terms
of our social structure are quite radically different.
For our ancestors, society was not made up of individuals.
It was made up of households — that’s how they thought of it, and that was also
the legal and social reality. The reason for that was that even if you were a
member of the elite, it was very difficult to live on your own. If you were
going to survive, you had to live as part of a household with other adults and
younger people. That’s why, in the fairy tales, whenever somebody dies, the
father or other immediately marries again.
Nowadays, it is perfectly possible to live on your own, and
we live in a much more highly individuated and individualized society in which
the very intense family ties that used to be a central part of human life have
disappeared. There is a kind of fundamental change in the actual way in which
people live.
The second thing, though, is also about beliefs. I think that, in many ways, our mental world is quite different from that of our ancestors. This is true in terms of things like cultural inheritance. This is something that I’ve actually seen progressing very much in my own lifetime. So, when I was a child — between seven to 10 — people would hear terms or expressions like, “The writing on the wall,” “To take up the mantle,” and they would know immediately that these were biblical allusions. And they would know the passages in the bible that they referred to. They would know, for example, that the term, “The writing on the wall” referred to Belshazzar’s Feast from the Book of Daniel. I doubt that you would find more than about four or five percent of anyone under the age of 30 in Western Europe who was the faintest idea what either of those meant.
So an enormous part of the cultural heritage of Western
civilization, if you like, is as distant to the contemporary world as, say, the
cultural inheritance of Ancient Greece or Rome is. It’s just not part of the
mental furniture anymore. And I think we tend to underestimate — educated
people in particular — just how much of a cultural break there has been.
Again, the title of
the book is The Wealth Explosion. But
there seems to be a skepticism now that we need to keep the wealth exploding
into the future — that economic growth is no longer important, it’s too costly,
and it’s not worth any of the sacrifices that we have to make either for the
environment or in our families. That the dynamism of a society where businesses
rise and fall is one where people lose jobs, and it’s all too much. “It needs
to stop.”
You can find this
everywhere, so it’s not necessarily a socialist thing. You can find it on the
left and the right. Is progress something we should still want?
You’re absolutely right that this is a very widespread
belief, and as you say, it’s wrong to identify it with a particular part of the
political spectrum. In fact, historically, the view you describe has been more
associated with the right than the left, if anything — it’s just a fact of the
moment that it’s associated with the left. But I think it’s very widespread
now.
It’s the idea that we need, as somebody put it, “A timeout
from progress.” That, basically, “Surely, we’ve got enough now. Can’t we just
coast along as we are and not have all this constant innovation and turmoil?”
Well, I’m afraid my answer to that is very categorically, “We can’t do that if
we want to keep the stuff that we have.” In other words, there is no option for
us to simply live the way we are, and continue the way we are at our current
level, without continuing innovation.
The reason for that is this: In order to maintain the way
that we live now, you have to constantly replenish and renew the capital stock
— the physical infrastructure, the machinery, oftentimes literally, that is
needed to sustain the way we live. And because of the way in which a lot of
resources are consumed, the only way you can do that is by continuing to
innovate.
If you stop innovating, what you’ll find is that you will not be able to maintain that capital stock of existing civilization, and it will gradually decay and break down. Not catastrophically, but it will gradually slow, decay, and break down, and as it does, the level of production will of course fall. That makes it even more difficult to maintain, and before you know where you are, you go through what historians call a “simplification process.” That’s what the Roman world, for example, went through in the 5th and 6th centuries, or that the classic Mayan civilization went through in the 12th century. And when that happens, over the space of about 100 to 150 years, you gradually go from a highly urbanized, civilized society to a much more dispersed, rural, poorer, and in many ways more culturally-backwards society.
That kind of thing has happened many, many times
historically. If we don’t keep on innovating — if we don’t keep ahead of the
curve of entropy, if you will — that’s what will happen to us. So if you want
to keep the way we are, and all the good things that modernity has brought,
there’s no alternative to continuing to innovate.
My guest today has
been Stephen Davies, author of The Wealth
Explosion: The Nature and Origins of Modernity. Stephen, thanks for coming
on the podcast.
My pleasure.
The post The origins and future of the wealth explosion: A long-read Q&A with Stephen Davies appeared first on American Enterprise Institute – AEI.