About 200 years ago, the world started getting rich. Why?

We invented fiat currency and then used it to fight Napolion.  This hugely expanded the money supply allowing wage based labor to expand.  This also ultimately made slave labor uneconomic as well.

The old mercantalist model became obsolete and spend then tax became our new system.

This allowed wealth creation to rapidly expand as surplus currency needed a place to be used and new business drew it all in.  It all goes back to the creation of currency.  Initially we had a tax or steal model, then spend which blocked easy money supply expansion.  The insight of trhe time was to actually reverse this while using the banks to manage the loan creation.

We are taught smoke and mirrors.  Instead, available credit super charged successful enterprises.  Imagine Tesla with no access to credit or equity investment.

About 200 years ago, the world started getting rich. Why?

Two economic historians explain what made the Industrial Revolution, and modern life, possible.

By Dylan Matthewsdylan@vox.com Jun 1, 2022, 8:30am EDT

https://www.vox.com/future-perfect/2022/6/1/23138463/how-the-world-became-rich-industrial-revolution-koyama-rubin?SIMPLISAFE-2022_06_02&sponsored=0&position=4&id=806f0994-1f31-48b5-91c0-1a20cb78e0c7

Actors pretend to be in the Industrial Revolution as part of the opening ceremony for the London Olympics in 2012. Harry E. Walker/Tribune News Service via Getty Images

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You can crudely tell the story of our species in three stages. In the first, which lasted for the vast majority of our time on Earth, from the emergence of Homo sapiens over 300,000 years ago to about 12,000 years ago, humans lived largely nomadic lifestyles, subsisting through hunting and foraging for food. In the second, lasting from about 10,000 BC to around 1750 AD, humans adopted agriculture, allowing for a more secure supply of food and leading to the establishment of towns, cities, even empires.

The third period, in which we all live, is characterized by an unprecedented phenomenon: sustained economic growth. Quality of life went from improving very gradually if at all for the vast majority of human history to improving very, very quickly. In the United Kingdom, whose Industrial Revolution kicked off this transformation, GDP per capita grew about 40 percent between 1700 and 1800. It more than doubled between 1800 and 1900. And between 1900 and 2000, it grew more than fourfold.

What today we’d characterize as extreme poverty was until a few centuries ago the condition of almost every human on Earth. In 1820, some 94 percent of humans lived on less than $2 a day. Over the next two centuries, extreme poverty fell dramatically; in 2018, the World Bank estimated that 8.6 percent of people lived on less than $1.90 a day. And the gains were not solely economic. Before 1800, average lifespans didn’t exceed 40 years anywhere in the world. Today, the average human life expectancy is more like 73. Deaths in childhood have plunged, and adult heights have surged as malnutrition decreased.

The big question is what drove this transformation. Historians, economists, and anthropologists have proposed a long list of explanations for why human life suddenly changed starting in 18th-century England, from geographic effects to forms of government to intellectual property rules to fluctuations in average wages.

For a long time, there was no one book that could explain, compare, and evaluate these theories for non-experts. That’s changed: How the World Became Rich, by Chapman University’s Jared Rubin and George Mason University’s Mark Koyama, provides a comprehensive look at what, exactly, changed when sustained economic growth began, what factors help explain its beginning, and which theories do the best job of making sense of the new stage of life that humans have been experiencing for a couple brief centuries.

I interviewed Rubin and Koyama via email; a transcript, lightly edited for length and clarity, follows.

Dylan Matthews

What is economic growth? What is this phenomenon you’re trying to explain?

Jared Rubin

Economic growth occurs when there is a sustained increase in economic prosperity, which we can measure by the total number of goods and services produced in the economy. The world we know today is a direct result of the economic growth that began in Britain in the 19th century, quickly spread to parts of Europe and North America, and has continued unabated since. It has since raised living standards in East Asia, Eastern Europe, and parts of Latin America. There is real hope to believe this will continue into South Asia, the Middle East, and sub-Saharan Africa in our lifetime.

We are trying to explain how this came about in the first place. Why didn’t growth happen before the 19th century? What were the preconditions that Britain had that allowed it to take off first? Why did some countries follow Britain’s lead and others did not? What can this history tell us about how wealth can spread to the rest of the world in the 21st century?

Dylan Matthews

Early in the book you write, “Most people who ever lived — at least, prior to the 20th century — lived in conditions very similar to those of the very poorest in the world today.” This is a common starting point in economic history, but I find it’s rather unintuitive to many laypeople; the people we read about from ancient Rome don’t seem like the poorest people today. There’s even been some claims recently that medieval peasants lived better than 21st-century American workers. How do we know humanity was so poorly off, for so long?

Mark Koyama

Certainly, when we look at the ruins of the Roman Coliseum or Pompeii or indeed read about Cicero’s property investments, it looks like a sophisticated economy and one that generated considerable amounts of prosperity. And in some sense this impression is right. The work of scholars like Kyle Harper, Peter Temin, and Willem Jongman does indicate that the Roman economy was highly commercialized and urbanized (for preindustrial standards).

But this impression is also misleading. The Roman world was extremely unequal, so we can’t infer much about average living standards from reading about the consumption patterns of senators. And as Kyle Harper summarizes in his book The Fate of Rome, commercial prosperity brought with it disease, and all the evidence suggests that ordinary Romans, perhaps living in the tenement flats or insulae, died young, had bad nutrition, and high levels of exposure to epidemic disease.

Now, the example of the medieval peasant is an interesting counterpoint. Unlike ancient Rome, the medieval economy (outside of places like Florence) wasn’t especially commercialized or sophisticated. Levels of urbanization in, say, 15th-century England, were low. So, our impression would be one of widespread poverty.

But the research of economic historians suggests that this impression is wrong on at least some dimensions. Now, the claim that medieval peasants were better off than 21st-century Americans is palpable nonsense. But as measured by proxies such as real wages, an English peasant in 1450 was in all likelihood better off than the median Roman. The English peasant would likely have consumed more meat and alcohol, enjoyed more leisure, and possessed more durable clothes.

One reason for this which we discuss in chapter five of our book was demographic. In a world governed largely by Malthusian forces, shocks like the Black Death — which killed between one-third and one-half of Europe’s population — meant that the survivors had plentiful amounts of land per person.

Dylan Matthews

You try to explain two broad things about sustained economic growth: why it started when it did (in the mid-18th century) and why it started where it did (England). Let’s start with the when. What took so long? Humans invented agriculture maybe 10,000 years ago. Why did it take 9,800 years or so for that to lead to real economic growth?

Jared Rubin

This is one of the key questions in all of economics. Its answer is central to why some countries grew rich while others have not. The simplest answer is that economic growth occurred only after the rate of technological innovation became highly sustained. Without sustained technological innovation, any one-off economic improvement will not lead to sustained growth. Incomes will rise in the short run, but over time people will have more babies and those babies will eat up all the economic surplus. This is known as the “Malthusian trap,” after Thomas Malthus, a British clergyman of the late 18th century. This Malthusian logic explains the pre-industrial world pretty well.

Although there were ebbs and flows in pre-industrial economic growth, no society ever broke through and achieved sustained economic growth. This happened only after the overall rate of technological progress became high enough to more than offset the downward pressure imposed by population growth.

The question is why it took so long for the rate of technological innovation to grow as it did. This is one of the central questions we attempt to answer in this book. And there is not one “silver bullet” answer. For one, sustained innovation requires institutions that limit confiscation by the government (and protect other property rights more generally). But most societies in world history were weak on this dimension.

Sustained innovation also requires cultural values that support innovation and encourage understanding of how the world works. Societies in which work is looked down upon are unlikely to experience sustained innovation.

Ultimately (and this matters for the acceleration in growth we observe from the late 19th to the 20th centuries), it also helps if families limit the number of children they have. This does not necessarily contribute to innovation, but it does mean that innovation will more quickly translate into growth.

Most societies in world history had none of these features, let alone all of them. It took a while for all of these preconditions to coalesce in one nation. But once it did, economic growth took off.

Dylan Matthews

As you note repeatedly, the Industrial Revolution in England happened after centuries of European colonization, and after England and other nations created the international slave trade. Many theories of the revolution give exploitation of New World resources and of enslaved African people a key role in explaining industrialization. You have a rather nuanced view of the matter in your book. How did those cycles of exploitation relate to the eventual development of economic growth?

Mark Koyama

The story of European economic development involved huge amounts of violence and exploitation. And telling that part of the story is important. It would be wrong to focus solely on the positive or benign aspects of economic growth.

The crux of recent controversies and disputes between economic historians and historians is really about the question of necessity and causation. [In our view], the decisive break responsible for industrialization rests on developments that seem to be only indirectly connected to the story of colonial exploitation. But future work might change my opinion on this subject.

Jared Rubin

There is little doubt that the colonizers benefited from colonial exploitation and the colonized suffered. In fact, a large literature has emerged showing just how persistent some of these effects have been on the colonized. The question here, however, is whether colonization was decisive for the onset of modern economic growth. On this, we are less sanguine.

On the one hand, the sugar economy boomed in the 17th and 18th centuries, and cotton was the major input into the textile factories at the center of Britain’s industrialization. These crops were produced with slave and coerced labor.

On the other hand, the evidence is fairly weak of a connection between the products of exploited labor and the innovations that were central to the onset of modern economic growth. This is not to deny a connection between the two, and reasonable people disagree over the relevant counterfactuals. Had there been no slave labor in the New World, would the Lancashire factories have been able to get enough cheap cotton to make innovation worthwhile? Would innovation have been possible with more expensive cotton of different quality from other parts of the world?

Our book leads to the conclusion that there is no silver bullet explanation for why the world became rich. Colonization likely played some role, and it likely played a much greater role in keeping large parts of the formerly colonized world poor. But there are many key features of the onset of growth that cannot really be accounted for by colonization. Most importantly, explaining how the world became rich requires an explanation for why the rate of technological change rose so rapidly. Colonization may have played an indirect role in this process, but there are many other causes we highlight that were much more direct and relevant.

I too would like to note, like Mark, that there is still much work to be done and future work may change my opinion on this topic.

Dylan Matthews

At first, you note, living standards in England did not actually improve much for average people due to the Industrial Revolution. That helps explain why critics like William Blake and Karl Marx were so fiercely critical of the industrialization process. But as of today, you write, the “long life, good health, literacy, education, female empowerment,” and on and on that we enjoy today are “made possible by economic growth.” How did growth go from something primarily benefiting capitalists to something that could broadly benefit humanity?

Jared Rubin

One reason is institutional: Groups like labor unions played a key role in redistributing income more broadly. Another is demographic. During Britain’s early period of industrialization, its population grew rapidly enough to keep wages down. It was only as places went through a “demographic transition” (the movement from large families and high birth and death rates to smaller families with lower birth and death rates) that productivity gains began to be translated into major increases in real wages.

A third has to do with education. Many of the innovations of the first Industrial Revolution were not science-based and thus did not require a highly skilled workforce. Beginning in the middle of the 19th century, science became more important, and a better-educated workforce was desired. States began spending more on education, leading to a better educated workforce. Higher education typically leads to greater income. None of these causes explain why income became more broadly distributed by themselves; it was a combination of these factors that mattered.

Mark Koyama

I agree with everything Jared says. I’d add two points. First, the Industrial Revolution occurred during the Napoleonic Wars. This really repressed living standards for ordinary Britons because it meant that taxes went up, and the price of food soared.

Second, the Industrial Revolution was highly disruptive. It was characterized by the rapid rise of particular industries such as cotton textiles which were centered in the northwest of the country. Some of the most recent research suggests that in the early decades of the Industrial Revolution, wages for workers in the North of England did go up, but this was counterbalanced by economic decline in traditional sectors of the economy (for example, in East Anglia).

Dylan Matthews

Several economists, like Robert Gordon and Thomas Philippon, have worried that the past couple hundred years might be an aberration, and growth might now slow down. Does your research give you hope with regard to those fears? Or does it make them seem more reasonable?

Jared Rubin

I do not agree with these fears, although I understand the logic behind them. I think this is a point on which reasonable people can disagree.

The world became rich because of a massive increase in the rate of technological innovation. I think one thing the history of technology has taught us is that as long as the incentives are there for innovators to innovate, we will continue to be surprised. The most important new innovations are often impossible to foresee. Today, AI offers the possibility of such surprises (with major moral caveats). Three decades ago, it was the internet. There have been many such transformations in the last two centuries due to inventions such as the telegraph, locomotive, automobile, telephone, electrification, steam engine, and much more.

Another way to think about it is like this: Prior to about two centuries ago, most children lived in a world that was technologically similar to the ones their parents inhabited as children. This has not been true for a little over two centuries, at least in the most technologically advanced nations. My children live in a world of very different technology than I did as a child, as did I relative to my parents. I see little reason why this will not be the case over ensuing generations.

Mark Koyama

I find these arguments unconvincing. I am more persuaded by the argument of Jonathan Haskel and Stian Westlake that new technologies are often highly disruptive and need new organizational and institutional arrangements to make them function. They view recent decades as characterized by the rise of intangibles and they argue that growth has been slow because we lack the rules to best exploit the intangible economy. Growth might continue to stagnate, but this will be because of institutional failures and not some inherent features of the growth process.