The past two centuries have witnessed more economic growth than any other period in human history, contributing to the alleviation of poverty that still afflicts a significant portion of the world’s population. Consequently, growth has become a focal point of modern studies; however, this does not detract from other aspects of human development such as health, education, women’s empowerment, and the protection of vulnerable groups, all of which are essential for a happy and just society. Yet, all these benefits hinge on economic growth. On the other hand, current global challenges, such as climate change and social polarization, will not see progress without the economic growth that provides the resources and new technologies necessary to address these issues.
In this context, economists Mark Koyama and Jared Rubin sought to affirm these perspectives through their book How the World Became Rich: The Historical Origins of Economic Growth. This book discusses the theories surrounding growth, the stages through which the wealthy part of the world has passed to reach its current level of advancement, and how other areas that did not keep up with the initial waves of transformation during the Industrial Revolution eventually caught up. Finally, the book envisions the future of growth and its spread to the remaining underdeveloped regions of the world.
Paths to Growth:
In the first part of the book, the authors discuss several approaches and theories that can explain the processes of economic growth throughout the phases of modern economic development, among which the following stand out:
Institutionalism: Institutions are central to growth theory as they provide regulatory frameworks and facilitate the economic process by establishing a legal system. An institution defines the formal rules governing the economy’s mechanisms. Societies with the rule of law tend to achieve positive economic outcomes. However, this requires fundamental aspects such as legal equality among individuals, whether rulers or ruled; that laws be prospective, transparent, clear, and stable; and that law-making be open and guided by impersonal rules. Additionally, there must be political independence in the judiciary and accessible courts for all. Lastly, the rules should be general and uniformly applied, reducing uncertainty and thereby increasing investment and stimulating exchange.
Culture: Values play a significant role in stimulating the economic potential of a society. It is challenging for a society to embark on economic growth without values that promote hard work, risk-taking, and wealth accumulation. Researchers argue that these values were crucial for the takeoff of Northwestern Europe in the 17th and 18th centuries. According to the theory linking culture to growth, one of the primary barriers to economic growth throughout history has been the way people think and speak about work and profit. For instance, for ancient Greeks and Romans, labor was among the least valued pursuits, resulting in a lower status for the middle class and the bourgeoisie in the ancient world. A society with such cultural values is unlikely to achieve sustainable economic growth since technological innovation, necessary for long-term growth, requires detailed knowledge of production processes and ways to make production more efficient. Thus, it is difficult for any society that looks down on hard work to have a robust class of innovators.
Another cultural element that may influence economic growth is religion. While sociologists have largely shied away from simplistic or racist theories positing that certain religions are responsible for the advancement of some societies and the backwardness of others, recent research indicates several ways in which religion may impact economic growth, including encouraging education, affecting family formation and organization, and promoting political participation. While Max Weber linked Protestant ethics to economic progress, studies highlight a critical advantage associated with Protestants prioritizing education as a pathway to economic growth.
Beginnings of Growth:
By 1700, no economy in the world displayed evidence of being capable of sustainable economic growth involving structural changes in the economy, characterized by a shift away from agriculture toward industry and services. Then came the Industrial Revolution in Britain, marking a pivotal starting point on the path to modern economies. The book notes that Britain began industrialization in the second half of the 18th century, followed by the United States and a few European countries in the 19th century, considering that many of the preconditions for Europe’s economic rise emerged in the medieval period, laying the groundwork for its renaissance.
In this context, several factors explain the reasons behind the shift in Northwestern Europe compared to the rest of the world, including the emergence of transatlantic trade networks and cultural and religious developments, among which the Protestant Reformation was arguably the most significant aspect contributing to the establishment of representative institutions in Northwestern Europe. Many institutional advances that distinguished modern Europe from other areas can be traced back to the emergence of representative institutions, city-states, the rediscovery of Roman law, the separation of religion and state, along with demographic shifts, women’s entry into the workforce, and a move toward the nuclear family.
The First Industrial Revolution:
The authors assert that the most significant economic change wrought by the Industrial Revolution was the shift in the structure of the economy from agriculture to industry. There is evidence that this transition began even before the Industrial Revolution, as workers left agriculture and traditional crafts to enter manufacturing and industry. By 1851, about 23.5% of English workers were in agriculture compared to 45% in industrial labor. However, the authors discuss two conflicting perspectives regarding these transformations:
The Pessimistic View: Its proponents condemned the inhumane nature of industrial labor and the pollution caused by factories, deeming it a period characterized by “intensive exploitation, insecurity, and human misery.” Advocates of this theory argued that real wages stagnated during the early years of the Industrial Revolution for several reasons: First, due to Malthusian pressures, as population growth exerted downward pressure on real wages. Second, the Anglo-French War, which lasted into the mid-year of the Industrial Revolution, led to rising food prices, thereby reducing the disposable income of workers. Third, technological changes during this period were generally labor-saving, compounded by the absence of labor unions, resulting in a declining share of workers in the GDP during the early years of the Industrial Revolution. The outcome was increased inequality, with the majority of income gains going to landowners and capitalists rather than workers.
The Optimistic View: Its supporters believe that the economic forces initially responsible for inequality and wage stagnation would later yield an economy with sustainably rising living standards for all. These views proved accurate starting from the second half of the 19th century, and discussing the causes of these transformations leads into the discussion of the Second Industrial Revolution.
The Second Industrial Revolution:
The authors note that most major technological developments since the 1870s have been built upon a foundation of scientific knowledge, with scientists referring to this transformation as the “marriage of science and technology” or the Second Industrial Revolution. New inventions in medicine, chemistry, and energy paved the way for further innovations as well as improvements to existing inventions, leading to more scientific discoveries. Consequently, the technologies of the Second Industrial Revolution affected nearly all industries. For instance, transportation underwent a revolution as railroads became more efficient and less expensive due to cheaper, more durable steel.
Unlike the First Industrial Revolution, the authors emphasized that education played a crucial role in the Second Industrial Revolution, accelerating technological diffusion. There is a significant difference between a high percentage of the population being literate and a small proportion being highly educated. The latter is referred to as human capital that drove the acceleration of innovation rates in the late 18th and early 19th centuries. The Second Industrial Revolution was the first period where the integration of capital and skills propelled economic and technological development, as regions with more educated workforces were more inclined to adopt and implement new technologies, while those with lower education levels were less prepared to adapt to the new world.
On another note, the authors considered the Second Industrial Revolution to be responsible for the sustained rise in living standards, in contrast to the First Industrial Revolution. Demography was one of the most important factors that hindered living standards during the first revolution. Increases in fertility rates due to improved economic opportunities and urbanization, coupled with a decline in the age at first marriage, resulted in population growth exerting downward pressure on wages. This aligns with Malthus’s writings about the early years of industrialization, suggesting that economic growth was unable to avert demographic disaster. However, the Second Industrial Revolution revealed the shortcomings of Malthus’s predictions, as he did not fully anticipate how much married couples would seek to limit the number of children they had with women entering the workforce, nor the nature of the cultural modernization process.
Latecomers to Growth:
According to the book, the emergence of modern economic growth created tremendous opportunities for what is termed “catch-up growth” in other non-Western societies. However, seizing these opportunities proved difficult, as not all societies were capable of benefiting from them. Some were colonies and thus unable to implement independent economic policies; others still had institutions that stifled entrepreneurship and markets, or their ruling political institutions were incapable of accommodating rapid technological change.
For these reasons, while the global economy expanded significantly after 1800 and technological innovations spread worldwide, the pace of growth was uneven. India and much of Africa remained close to “Malthusian economies,” wherein GDP growth was absorbed by population growth, resulting in per capita income levels near subsistence. In contrast, in settler colonies such as Argentina, Australia, and New Zealand, which were resource-rich and sparsely populated, there were few signs of sustainable growth in per capita income by the mid-19th century.
Japan was the first non-Western country to achieve rapid economic growth, founded upon a change in political institutions that initially relied on income from international textile markets. However, Japanese companies later shifted toward steel, iron, and manufacturing. Other East Asian countries with similar capabilities, such as South Korea, Taiwan, Singapore, and Hong Kong, were able to follow Japan’s path. After experiencing communist central planning in China, the Japanese model could be implemented on a broader scale with a more prominent role for the government and state-owned enterprises. This shift indicates that Asia, home to approximately 60% of the global population, is on a path toward wealth and development, contrasting with the West, which comprises only about 10-15% of the world’s population and was once the wealthiest.
On another note, the book argues that Western colonialism contributed to delaying some countries’ catch-up efforts in economic development, as many parts of the formerly colonized world remain behind the world’s leading economies, particularly in sub-Saharan Africa, South Asia, and parts of Latin America.
In conclusion, the authors assert that the world is now richer than it has ever been and is likely to become even wealthier in the foreseeable future, suggesting that more people will be lifted out of poverty, especially since around one billion individuals still live in extreme poverty in sub-Saharan Africa, Latin America, Central Asia, and Southeast Asia—making this task one for the next generation.
Source: Mark Koyama, Jared Rubin, How the World Became Rich: The Historical Origins of Economic Growth, Cambridge: Polity Press, 2022.
