Sunday, August 15, 2010

A Brief Economic History of the World

Book Review

Gregory Clark (2007) A Farewell to Alms: A Brief Economic History of the World, Princeton, Princeton University Press.

This is a big book with a narrow view of world history, economistic in practice, bombastic in tone. I enjoyed it immensely. Clark offers a materialistic view of economic development with an under-developed cultural and genetic explanation. He considers the two major questions of world economic history: why the Industrial Revolution occurred when and where it did, and why the world subsequently diverged so comprehensively between the first and third worlds. Clark promotes the book as “an unabashed attempt at big history, in the tradition of The Wealth of Nations, Das Kapital, The Rise of the Western World, and most recently Guns, Germs and Steel. All these books, like this one, ask: How did we get here? Why did it take so long? Why are some rich and some poor? Where are we headed?” (ix) No shortage of confidence in that assessment of one’s own work, but it is a confidence that is probably warranted, even if many people will find his argument unpersuasive.

The book is divided into three parts: 1) The Malthusian Trap: Economic Life to 1800; 2) The Industrial Revolution; and 3) The Great Divergence. It begins with a quirky “Introduction: The Sixteen-Page Economic History of the World”.

In part one, Clark argues that quality of life in the world of 1800 was no better than life in the stone age. His focus is overwhelmingly on income, for which he makes “no apologies”. (4)

Over the long run income is more powerful than any ideology or religion in shaping lives. No God has commanded worshippers to their pious duties more forcefully than income as it subtly directs the fabric of our lives. (ibid)
Given the amount of time spent working by the average English person in 1800, Clark argues that living standards in early forager societies were probably substantially superior: “A world of leisure for the original foragers had given way to a world of continuous labor by the eve of the Industrial Revolution”. (63)

In part one, Clark outlines the Malthusian Trap – the contention that over time as income rises, birth and/or mortality rates will rise, leading eventually to lower income. The Malthusian world (from the stoneage to 1800) “exhibits a counterintuitive logic” where:

anything that raised the death rate schedule –war, disorder, disease, poor sanitary practices, or abandoning breast feeding – increased material living standards. Anything that reduced the death rate schedule – advances in medical technology, better personal hygiene, improved public sanitation, public provision for harvest failures, peace and order – reduced material living standards. (27)
In other words, vice equals virtue and virtue equals vice. Even the gradual improvements in technology helped to increase population and did not lead to lasting increases in living standards. Hobbes, Clark contends, was wrong, man was better off in his natural state.

As befits an economic determinist, he allows no real substantive role for politics in the Malthusian era – the long lead up to 1800: “Good government could not make countries rich except in the short-run, before population growth restored the equilibrium”. (35) But as another economist warned us some time ago “in the long-run we are all dead”. Despite his long-run analysis, Clark concedes that “living standards did vary substantially across societies before 1800”. (70) The Black Death, which reduced the population of Europe from six million to two million increased living standards in Europe enormously. Polynesia before European contact was also remarkably prosperous, but China, India and Japan were “very poor”. (ibid)

The book contains some gems on preindustrial life pointing out the regular misinterpretation of life expectancy: “there were plenty of elderly people” (92), what mattered was getting through birth and childhood: “In England from 1580 to1800 18 percent of infants died within the first year. Only 69 percent of newborns made it to their fifteenth birthday. But those lucky enough to celebrate a fifteenth birthday could expect to celebrate thirty-seven more”. (ibid)

In part one, Clark sets up his case for why the Industrial Revolution occurred in England outlining that the rich had more children than the poor. This led to: “a world of constant downward mobility. Given the static nature of the economy and of the opportunities it afforded, the abundant children of the rich had to, on average, move down the social hierarchy.” (113) With the children of the rich increasingly spread amongst the general population, the values necessary for capitalist growth were spread through the English population.

Stasis before 1800 transformed itself into dynamism after due to “profound changes in basic features of the economy within the Malthusian era”. (166) These changes were lower real interest rates, improved literacy and numeracy, increased work hours and a decline in interpersonal violence. These changes show that “societies becoming increasingly middle class in their orientation. Thrift, prudence, negotiation and hard work were becoming values for communities that had previously been spendthrift, impulsive, violent and leisure loving”. (ibid)

Clark gives short shrift to the idea that institutions and economic incentives were necessary preconditions for the Industrial Revolution. He argues that the incentives many economists believe to be necessary for growth were present in medieval England. Citing Peter Lindert he notes that “there is no evidence that the heavy taxes and transfers of modern states have any effect on output”. (152) Clark argues that many explanations for the Industrial Revolution such as the Protestant Reformation or the Scientific Revolution “merely push the problem back one step”. (183) The real question is why these events occurred when they did and not earlier? Instead, Clark is explicit about his social Darwinist view of world history:

While living standards were not changing, the culture, perhaps even the genes, of the people subject to these conditions were changing under the selective processes they exerted. All Malthusian societies as Darwin recognized, are inherently shaped by survival of the fittest. They reward certain behaviors with reproductive success, and these behaviors become the norm of the society. (186)
Part two deals with the Industrial Revolution itself, which Clark asserts is mislabeled. Agricultural productivity growth he suggests has been every bit as important and without these gains the Industrial Revolution could not have occurred. The most remarkable feature of the Industrial Revolution is the “all-pervading rise in incomes per person” (195), which was accompanied by a growing gap between the living standards of the rich and poor countries from 3-4:1 before 1800 to 40:1 today (He says “more than 50:1” on page 320!).

Clark contends that understanding modern economic growth is easy, “it requires no more than basic arithmetic and elementary reasoning … growth is generated overwhelmingly by investments in expanding the stock of production knowledge in societies”. (197) Land, once very important, is no longer a major factor. Increasingly from 1800 growth in income was due to two changes: more capital per worker (about 25 per cent) and greater efficiency of the production process (75 per cent). This means that “the bulk of the growth is explained by advances in efficiency”. But Clark goes further to argue that the “apparent independent contribution of physical capital to modern growth is illusory”. (204) The growth in physical capital is caused by growth in efficiency.

To explain the Industrial Revolution then we need to explain why it was before 1800 there was “such limited investment in the expansion of useful knowledge, and why this circumstance changed in for the first time in Britain some time around 1800. Then we will understand the history of mankind. (207) Simple! But Clark’s argument is ultimately unsatisfying and given all his data on other issues amazingly underdone:

Millennia of living in stable societies, under tight Malthusian pressures that rewarded effort, accumulation and fertility limitation, encouraged the development of cultural forms – in terms of work inputs, time preference and family formation – which facilitated modern economic growth. (209)
Despite earlier telling us that all we need is basic maths, Clark then tells us that it doesn’t really help because the most important factor in understanding economic growth – innovation – is not measurable.

Clark points out that “most of the knowledge capital of the modern economy is not owned by anyone; it is available free”. The “emblematic industry” of the Industrial Revolution – cotton textiles shows how difficult it is to profit from the creation of knowledge. (203) Innovations in cotton spinning led to lower prices rather than super profits for innovators. (236) Despite the difficulties of profiting from innovations, their supply increased enormously. (238) Productivity advances in textiles account for half of all productivity gains, with transport and agriculture next most important and coal and iron ore making a smaller contribution. (233)

Clark argues that “contrary to appearances, the Industrial Revolution actually stretched back hundreds of years to its origin, and that it was a gradual and evolutionary development that affected other European countries almost as much as England.” (231) Individuals, Clark contends, do not matter. The Malthusian era would have ended regardless of whether “Sir Richard Arkwright – the sometime Bolton hairdresser, wigmaker and pub owner who introduced mechanized factory spinning in 1768 – had “instead opened a fish shop”. (231)

The appearance of abrupt change was caused “by accidents and contingencies”: rapid population growth in England after 1760, British military success against France and economic development in the United States. (231) Rapid population growth meant that “Britain’s rise to world dominance was thus a product more of the bedroom labors of British workers than their factory toil”. (243) Efficiency gains were less important than population growth in driving up output during the Industrial Revolution. (245) This extra population needed to be fed but British agriculture could not keep up. Instead the westward expansion of the United States allowed British manufactures to be traded for food and raw materials. “It was this, rather than technological advances that made Britain the workshop of the world.” (248)

Clark also deals with the question of why the Industrial Revolution took place in Britain and not China, India or Japan. He dismisses arguments about the advantages of geography or of new sources of energy and raw materials. Instead what matters is that Britain was ahead on bourgeois values. (262-271) Asian societies were not static as Malthus had assumed, instead they had simply “not evolved as far”. (266) In time, they would have had their own Industrial Revolutions. But the important question was why they were behind. Clark contends that Malthusian constraints were more important in Britain than in Asia, While Asian populations increased significantly in the 400 years or so before 1750, Britain’s was static meaning that Darwinian selective selection was more severe. There was, therefore, less downward mobility in Asia. (267-8)

Clark points out that the major beneficiaries of the Industrial Revolution, contrary to Marx and Engels, were the working classes. Ricardo was wrong about wages staying at subsistence and most of the rewards going to land as a factor of production. (273-4) The Industrial Revolution also improved the lot of women because the shift in production away from agriculture to manufacturing and services meant strength was less important. Instead skills such as dexterity and social interaction became more important. (277-8) Clark acknowledges the complexity about measuring inequality, but contends that in the long-run distribution of the fruits of economic growth was vastly improved by the Industrial Revolution.

Not only did labour generally get more, but unskilled labour improved its lot in relation to skilled labour as well: in the 1770s the ratio of unskilled to skilled wages was 47 per cent, in the 1850s it was 46 per cent, but by 2004 it was 57 per cent. (282) Clark provides two explanations for why unskilled labour has improved its lot in the modern economy. The first is that people are dexterous and the tasks that they perform cannot be easily replaced by machines. (287) Jobs in food preparation and supermarkets cannot be replaced by machines (yet).

Ironically computers have found it much easier to replace what we think of as the higher cognitive functions of humans – determining amounts due, calculating engineering stresses, taking integrals – than to replace the simple skills we think of even the most unlearned of as possessing. (288)
Human interaction, unsurprisingly, is also something that humans do best. The effectiveness for sales of pleasant interactions should not be underestimated, he argues, especially in a world of similar products. Clark warns, however, that the past may be “no guide to the future” and that eventually unskilled labour may lose its value. (288)

Clark outlines the demographic transition during and after the Industrial Revolution. During the Malthusian era because land was such an important share of national income, increases in population reduced living standards. But after the Industrial Revolution “the share of land and natural resources has dropped to insignificance in the industrialised world”. He cites Saudi Arabia as a possible exception, but perhaps Australia might also not fit this generalisation.

Demography would thus seemingly be a minor cause of the surprising shift of income to unskilled labour. Only in the poorest countries, as in sub-Saharan Africa, and in those with large endowments of natural resources such as Saudi Arabia, do population levels remain important determinants of income per person. (289)
It is likely, he contends, that the insignificance of land is due to the income gains of the Industrial Revolution going to consumption rather than more children. Because fertility has declined, Clark argues that demography is “now unimportant in such societies as the England or the United States”. (289) He probably means demography in terms of population increases, otherwise the statement is a little surprising. Obviously demographic issues go beyond population increases. The age transition of societies has significant ramifications for long-term economic growth rates and will affect future rates of immigration and societal changes.

The reduction in fertility in developed societies began in the 1890s and has since progressed rapidly. The shift to lower birth rates reversed the very factor that Clark contends created the conditions for the Industrial Revolution in Britain. The possibility that the “general rise in incomes reduced fertility” means that children must be “‘inferior’ goods, in the same category as potatoes”. He goes on: “children as consumption items are intensive in the extreme … The rich are having fewer children than the poor only if we count children by heads. If we count by expenditures richer parents still spend more on their children than the poor.” After entertaining us with this possibility he dismisses it: “Had income alone been determining fertility, the rich in the preindustrial world would already have been restricting their fertility.” (291-3) Instead it may have been the case that families always would have preferred smaller families, but given infant and child mortality, bigger families were essential to ensure survival especially of a “surviving son”. Also possible is the “increased social status of women”. (294-5) This could explain why fertility fell first in higher income groups as well.

Clark concludes Part Two by asking why it is that owners of capital did not get more from their investments. Competition in textiles and eventually in railways in Britain restricted the garnering of above-average profits from technological advances. Growth of the cotton textiles industry in was rapid and by 1900 “40 percent of the entire world output of cotton goods was produced within 30 miles of Manchester”. (296) Consumers reaped most of the benefits, which “further explains the equalizing tendencies of growth since the Industrial Revolution. (299)

These equalizing tendencies only applied, however, within advanced societies. Across societies the income gap increased enormously. This is the subject of the third (and shortest) part of the book. From the late eighteenth century “technological, organizational, and political developments seemed to imply the coming integration of all countries into a new industrialized world”. (305)

The technological changes were the development of railways, steamships, the telegraph, and the mechanized factory. The organizational change was the development of specialized machine-building firms in Britain, and later the United States, whose business was the export of technology. The political changes were the extension of European colonial empires to large parts of Africa and Asia, and internal political developments within Europe. (305)
Technological changes reduced the costs of trade enormously and the mechanized factory increased productivity and employed large numbers of unskilled labour. Innovations in cotton textiles and railways led to the development of capital goods exports as British manufacturers looked for foreign markets. (313) European colonialism was extensive. While Europe constituted only 4 million square miles out of a global total of 58 million by 1900 “its dependencies covered 20 million square miles”. Britain had 9 million square miles, France had 5 million, the Netherlands 2 million and Germany 1 million. And these figures don’t include countries, such as China, forced to cede trade privileges and rights to Europeans. (316)

But the integration that seemed so promising resulted instead in the “divergence of national incomes and living standards” that “continues to widen to the present day” (319) Given that living standards have only increased ten times in Britain and the United States means that poor countries are “poorer than the average society before the Industrial Revolution”. (320) The divergence began in the first period of globalisation from 1870 to 1913 and continued through what Clark calls the “period of international economic disintegration”, which he marks from 1913 to 1980. (320) It has persisted through the return of globalisation. The increase in incomes during the Industrial Revolution was concentrated in Northwestern Europe, the United States and European offshoots, Canada, Australia, New Zealand and Argentina. Outside Europe the effects of the Industrial Revolution “were even more slight”. (322) Industrial output declined in India and China as they became raw material exporters and manufacturing importers. A comparative advantage “in exporting food and raw materials and importing manufactured products did not serve India well”.

In the most dramatic example, Indian raw cotton was exported through Bombay over 6.800 miles to Lancashire mills, where workers paid four to five times the daily wages of mill operators in Bombay manufactured it into cloth, which was then shipped back over 6,800 miles through Bombay to be sold back to the cultivators of the raw cotton. (322)
According to Clark, Europe, North America and Oceania (Australia and New Zealand) accounted for 27 percent of world income with 12 percent of the population, which means that even before the Industrial Revolution they were “a relatively rich area of the world”. By 1913 Europe and its offshoots accounted for 51 percent of world income and 20 percent of its population and by 2000 they had fallen to 45 percent and 12 percent respectively. (324)

Clark argues that political and social institutional failure does not account for the great divergence. Instead it is due to “differences in efficiency”. These differences in efficiency did not come from “discrepancies in access to the latest technologies [or] from economies of scale”; rather they came from “a failure to utilize technology effectively”. The particular form of the failure was “rooted in an inability to effectively employ labor in production, so that output per worker, even using the latest technology, was peculiarly low in the poorest countries”. (329) In both cotton textiles and railways, poor countries used the same technology as rich countries and achieved “the same level of output per unit of capital”, but they only did so with significantly more labor per machine that they lost any cost advantage. (345) In the international textile industry for which he has most evidence, Clark lays the blame not on poor management, but on workers. (357)

But the important question is why labour quality is so low in poor countries. In the 1920s and 1930s in India, managers in Bombay knew that their textile factories were overstaffed firms but Clark argues that those firms that rationalised their workforces did not make significantly greater profits than those did not because they ended up paying their reduced workforces more. (360-1) The real problem in India was the lack of discipline and high absenteeism of the workforce when compared to Britain. (363) This is an extremely ‘efficient’ argument, but it almost certainly too simplistic and one that disregards the role of politics and imperialism. One doesn’t need to be too left-wing to realise that the developing world’s problems go beyond “laziness”.

Divergences have grown since 1800 because during the Malthusian era “differences in labor effectiveness had no consequences for the average level of output across societies”, but since the Industrial Revolution “income per person has no longer been constrained”. Modern medicine has also made a difference reducing the “subsistence wage in such areas as tropical Africa, allowing populations to continue growing at incomes substantially below the average of the preindustrial world”. Finally, “new production techniques … have raised the wage premium for high quality labor”. This means that manufacturers are not necessarily attracted to low wage costs. (365-7)

And that’s it for the explanation of continuing third world poverty, effectively Clark is arguing that the absence of bourgeois cultural values explains why most of the world is poor. No attempt to explain why parts of Asia managed to take off in the post-war world. Despite briefly referring to evidence from Asia, Clark’s view of world economic history is uber-Eurocentric.

Clark concludes by noting that economics’ “ability to describe and predict the economic world reached a peak around 1800”, which might explain why he spends so much time on this period and so little on the twentieth century. Economics has become too obsessed, Clark argues, with daily economic concerns about “capital markets, trade flows, tax incidence, sovereign borrowing risk, corruption indices, rule of law”, instead of “the great engines of economic life in the sweep of history – demography, technology and labor efficiency”. (372) The West has no model to offer poor countries and the best way for the West to help would be to liberalise immigration.

Aid to the Third World may disappear into the pockets of Western consultants and the corrupt leaders of these societies. But each extra migrant admitted to the emerald cities of the advanced world is one more person guaranteed a better material lifestyle. (373)
Clark also notes that despite our income growth today “we are no happier than our hunter-gatherer forebears” (374) How we can know how happy our ancestors were is a mystery to me, but random conjecture to make a point is no bar for Clark. Early in the book Clark argues that the profligate lifestyles of rulers “had no social cost in the Malthusian era. The glories of Versailles were not purchased at the price of the misery of the poor”. Today’s happiness research, Clark argues suggests the same thing, which means that:

If we value such collective goods as scientific research, space travel, public art, and fine architecture, then we should tax to fund them, whatever the economic cost. The consequent reduction of our material consumption would have little psychic cost. (377)
But his argument about waste seems ridiculous, mixing a short-term variable – present taxation and living standards at any particular time with a long-term one – the averaging of income and living standards over time. It also fails to consider how the nature of rule mattered a lot to people at any particular point in time.

So much of the book, despite the huge pool of evidence on fertility, mortality and income rests on conjecture. None more so than this claim about the wide dissemination of bourgeois values through English society through the prolific fecundity of the rich. His claim that poor countries are poor mainly because of poor productivity of workers in the third world is also simplistic and disregards the significance of geography, history and politics. Clark crudely adds cultural determinism to his boiler plate economic determinism. Despite it being crucial to his argument statements about genetics are left hanging like exotic, out of reach fruit on Dr Suess-like trees.

In stylising his facts and trying to be bold Clark pushes his arguments too far – the averaging and subsuming that he does some disservice to his obviously amazing breadth of knowledge and data collection. His economic focus on income makes it appear that for thousands of years up until 1800 little of consequence really changed – the Malthusian trap ensured this. The mind boggles at the ingenious nature of some of the evidence used to support his claims about fertility, mortality and income. This is a man who has obviously spent a good deal of his life immersed in economic history. Perhaps he should get out more.

No comments:

Post a Comment

Please be civil ...