How the world got rich – the historical origins of economic growth

Edvard Munch, 1920
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By FERNANDO NOGUEIRA DA COSTA*

Commentary on the book by Mark Koyama & Jared Rubin.

1.

At first reading How the World Became Rich: The Historical Origins of Economic Growth” is very reminiscent of the neoliberal litany in the style of Deirdre McCloskey – the present is much superior to the pre-capitalist past and there is no talk of perfecting a future system – when interpreting “sustained growth”. They don't even talk about “development”, after all it is a “developmentalist” thing, for which they seem to have the typical anti-communist hatred.

Not surprisingly, the book was recommended in Folha de S. Paul by Marcos Mendes, associate researcher at Insper, organizer of the book Not to forget: public policies that impoverish Brazil. Which? Practically all adopted by the State instead of the supernatural Market, because omnipresent, omnipotent and… omniscient (?!).

For Marcos Mendes, from May 2016 to December 2018, head of the special advisor to the Minister of Finance Henrique Meirelles in the terrible coup government with neoliberal reforms and the infamous Teto dos Gastos, the book confirms: “the protectionist path, on which we have insisted for decades, is wrong.”

The following excerpt highlights: “The economies of East Asia were all relatively small. Therefore, they were forced to depend on international markets. They have not fallen into the trap that many larger developing countries have fallen into, of relying on protective tariffs and subsidies to support domestic industry. (…) Protective tariffs and subsidies seemed plausible in countries with large domestic markets, such as Brazil and India. Such policies might work (as in nineteenth-century North America), but in practice they often freed domestic manufacturers from the threat of international competition and encouraged rent-seeking and corruption” (p. 209).

2.

The book borders on that, but it is not as simplistic as all the supporters of the binary reductionism “+Mises (Market) -Marx/Keynes (State)” appear to be. Mark Koyama is an economic historian at George Mason University whose main research interests lie in the origins of economic growth under neoliberalism and the comparative development of states. Jared Rubin is a colleague of his whose research focuses on the historical relationships between political and religious institutions and their role in economic development.

The objective of the aforementioned book (thematic and conceptual) is to bring together the many social scientific theories on the origins of modern and sustained economic growth. Almost all of these theories focus on one aspect of the origins of growth, such as geography, culture, institutions, colonialism or demographics.

The co-authors say, repeatedly, except their book [laughs], “no existing work summarizes all the advances made by social scientists in recent decades in an unbiased and objective way.” The first half of the book classifies and examines the main strands of literature related to the origins of sustained economic growth: geography, politics, institutions, markets and states, culture, human capital, demography and colonization.

Less attention has been paid to how the various theories are interconnected. A phenomenon as important and widespread throughout the world as the origin of modern economic growth is almost certainly not monocausal.

For example, institutions are legal, political and religious characteristics of a society that determine the “rules of the game”. They dictate the costs and benefits of carrying out certain actions. Some institutions are considered good for economic growth, such as those that protect property rights, encourage investment in public goods and apply laws equally to all people.

Institutions can operate through their impact on culture to affect economic growth. As for demographic conditions, places full of natural resources at the end of the medieval period were also the places most easily explored. As a result, these places tended to worsen (colonial) institutions – and are today largely poorer.

In the final chapters, Koyama and Rubin evaluate the relative strengths and weaknesses of the main arguments and present those considered most convincing to them. The first set of preferred explanations – for both the onset of industrialization and modern economic growth – emphasizes the link between economics and development policy. Such explanations address topics such as institutional change, the growth of state capacity and the rule of law.

The second set of explanations considered convincing highlight the role of culture. They do not refer to Eurocentric explanations or those centered on the North American model, but rather to culture in the way cultural anthropologists use the term: those heuristics used by people to interpret the complex world around them.

In the penultimate chapter, they consider the “great convergence” between many parts of the rest of the world and the West. One of the great stories of the last half century is the lifting billions of people out of extreme poverty in China and India. They compare Japan's growth to that of the Asian Tigers and China.

There insights important in all the theories described in this book. A question as broad as “how the world got rich” almost certainly has many causes. Intelligent – ​​and non-ideologized – people will disagree about the weight to attribute to each of these causes. The important thing is to understand the conditions under which certain causes are important and the conditions under which they are not – without a priori dogmatism.

A statement like “the world is richer than ever” speaks against the intelligence of the authors. The commonplace “more than ever” should never be used.

Neverland is a fictional island from the book Peter Pan. It is the home of Peter Pan, Tinkerbell, and the Lost Boys... More than a fiction it means something immeasurable.

Another vagueness is the generic statement “humanity can increasingly be lifted out of extreme poverty. (…) In the 2020s, we will reach a point where basic comforts will be available to a large fraction of the world’s population – although certainly not to everyone.” More and more?! Where? As?

I agree: understanding where wealth comes from helps with targeted actions, whether governmental or private, to lift more people out of poverty. The self-promoting co-authors boast, “until now there has not been a single place [like their book] where interested readers could go to gain an understanding of these various theories. Nor do most existing accounts seriously consider interactions between the proposed explanation and other theories.”

3.

In the second part of the book, they bring these theories together to explain why the first place to achieve sustained economic growth – Britain – did so. This required explaining some peculiarities of British history. They used this history to understand which preconditions were important for Britain's industrialization and why they mattered.

Certain institutions, capable of encouraging innovation and entrepreneurship and allowing the free circulation of ideas, would have been less important for countries seeking to move closer to the frontier compared to countries on the technological frontier. Latecomers copy it.

Competitive markets are also crucial to sustained economic growth because they provide incentives for innovation. “Episodes of growth like the Industrial Revolution were not planned by political decision-makers. They resulted from a countless number of decisions taken by individuals to experiment with new production methods or to build new factories or to mechanize production.”

Command economies are also able to grow more quickly in the short term than market economies because political decision makers can use coercion to mobilize resources. But labor force and capital investment alone end up generating diminishing returns if there is no innovation and there are no markets to coordinate investment decisions.

The market does not work in a vacuum. Self-interest or market forces only obtain beneficial results if conditioned by the appropriate institutional environment.

Each one, specific to the context, interacts with other variables. For example, small institutional reforms led China to escape extreme poverty in the 1980s: the restoration of private production in agriculture, the creation of special economic zones, and the abandonment of central planning.

At no point did the Chinese Communist Party introduce democratic representative institutions or formal restrictions on the state. This market liberalization occurred when rapid convergence to the economic frontier was possible. Soon, China managed to become the world's largest producer of low-cost manufactured goods. Parts of the successful development project elsewhere have been adapted to the local institutional and cultural context, for example, self-limiting government in the face of the past.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP). [https://amzn.to/3r9xVNh]

Reference


Mark Koyama and Jared Rubin. How the world became rich: the historical origins of economic growth. Cambrige, Polity Press, 2022, 240 pages. [https://amzn.to/4a8OTwk]


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