Should Western Australia Secede?

 Westralia’s law. Westralia’s will; Our loyalty, ‘England and Empire’ still.”

Some West Australians or Western Australians as the rest of Australia calls them have always been a bit reluctant about being a part of the Commonwealth of Australia. WA was so late into the Commonwealth that the preamble to the Constitution doesn't actually mention it:

WHEREAS the people of New South Wales, Victoria, South Australia, Queensland, and Tasmania, humbly relying on the blessing of Almighty God, have agreed to unite in one indissoluble Federal Commonwealth under the Crown of the United Kingdom of Great Britain and Ireland, and under the Constitution hereby established:

Western Australians approved the draft constitution in a referendum held on 31 July 1900. As Thomas Musgrave notes:

A special provision - section 95 - had been inserted into the Constitution in order to address Western Australia’s concern over the abolition of the inter-colonial tariff. Section 95 permitted Western Australia, on condition that it entered the Federation as ‘an original State’, to maintain its inter-colonial tariff within the Federation for a period of five years, in a formula which decreased the tariff by twenty percent each successive year. A further economic inducement came in the promise of a transcontinental railway linking Western Australia to the eastern States.

Another major factor, however, was the threat of an internal secessionist movement based in the gold fields. This secessionist movement was not hostile to the other Eastern colonies, but to the isolationist views of established Western Australians. The WA gold rush led to a massive increase in the colony's population from 47,000 in 1890 to 179,000 in 1900. Depressed economic conditions in the rest of the country increased the attraction of going to WA. A phenomenon that is not being matched during the current boom, mainly because, despite the doomsayers, the rest of Australia is still doing relatively well as we will see below. The new settlers changed the political outlook of the state, challenging the isolationist views of the WA establishment. As Musgrave argues:

The Western Australian delegates who attended the constitutional conventions of 1891 and 1897-98 were drawn for the most part from the traditional elements of Western Australian society. Their approach to the notion of federation reflected the isolationist sentiments of their constituency. But these were not the sentiments of the goldrush settlers. When it became apparent that Western Australia might not join the proposed federation, the settlers formed the Eastern Goldfields Reform League. The Reform League began to agitate vigorously for the secession of the goldfields region from Western Australia and its integration into the Australian Federation. At this point the British Colonial Secretary, Joseph Chamberlain, intervened to pressure Western Australia into joining the Federation. On 27 April 1900, Chamberlain sent the acting Governor of Western Australia a telegram alluding to the secessionist movement in the goldfields and advising the Governor that in these circumstances it would be in the best interests of the colony to join the Federation. The loss of the goldfields would have been disastrous to Western Australia, both from an economic and a political viewpoint. Therefore, a Bill was hastily introduced into the Parliament of Western Australia providing for a referendum on the draft constitution.

So in the beginning, it was the miners who wanted to be a part of the Commonwealth and the 1900 equivalent of WA's cafe latte set that didn't want it (perhaps we could call them the sherry sipping set).

West Australians again tried to secede in 1933, when two-thirds of the electorate voted yes to the question:

Are you in favour of the State of Western Australia withdrawing from the Federal Commonwealth established under the Commonwealth of Australia Constitution Act (Imperial)?

 At the same referendum a majority voted no to the second question:

Are you in favour of a Convention of Representatives of equal number from each of the Australian states being summoned for the purpose of proposing such alterations in the Constitution of the Commonwealth as may appear to such Convention to be necessary?

Ironically, the party pushing for secession - the Nationalists - lost the election to the party opposing it - the Labor Party. Nevertheless, the Labor government sent a delegation to London in 1935, but the mission failed because a Select Committee of the British House of Commons argued that only the Commonwealth as a whole could decide on the issue of secession. According to Musgrave the Committee concluded, that

the petition was not receivable because Western Australia, as a State, was ‘not concerned with the subject-matter of the proposed legislation’ and because the Imperial Parliament did not have jurisdiction to enact the request ‘except upon the definite request of the Commonwealth of Australia conveying the clearly expressed wishes of the Australian people as a whole’.

In other words, by joining the Commonwealth, Western Australians had given up the right to make that decision unilaterally.

As Australia entered WWII the issue of secession faded into the background, but it has periodically returned as key West Australian players have periodically railed against Federation.

Mining magnate, Lang Hancock, the father of the world's richest woman Gina Rinehart founded the Westralian Secession Movement, but like many wealthy people in recent years perhaps thought his wealth would lead necessarily to popularity. (Australia has a proud history of wealthy people thinking that success in business should lead them to success in politics or the ownership of sporting clubs).

Ironically, given the current WA Premier's recent comments about his states closer relationship with Asia than with the rest of the country, Hancock was opposed to developing closer resource ties to China. In "A Condensed Case for Secession", Hancock 'wrote':

On May 28, 1973, a report appeared in one of our national mining journals regarding Dr Cairn’s visit to Red China. This indicated that the good doctor was giving some thought to inviting Chinese geologists to the Pilbara for prospecting expeditions. 

By what divine right has either of these two members of our Government the authority to hand out Australian lands, or to permit them access to our minerals? 

Such high handed acts by the Federal Government should not be tolerated by the people of WA. Who is going to protect them from such wild, irrational policies? 

Their first step should be to support and join the Westralian Secessionists, who intend “fielding” contestants for the Senate in 1977. This movement has no loyalty to any political party and has its State as the first and only consideration. 

How things change, while Hancock could accuse the Whitlam Labor government of betraying Australia by providing for Chinese investment in Australia, current WA politicians rail against 'racist' Easterners for not allowing Chinese state-owned enterprises freer reign to invest in WA mining infrastructure and development.

Currently some West Australians are feeling that the rest of Australia - "the East" - is dining out on their hard graft in producing Australia's export wealth. See here and here and here.And as we will see below there is some truth to this assertion.

It's not the first time that West Australia has come to Australia's rescue. As I wrote in The Vulnerable Country:

In the period from 1900 to 1914, increasing demand for Australia’s exports underpinned economic growth, the repayment of foreign debt and rising living standards. The recovery was not dependent on foreign investment and immigration, rather it was bolstered by gold discoveries in Coolgardie and Kalgoorlie, and Western Australian development generally

I imagine that some in WA would be a little uncomfortable with the current secessionist rhetoric, but others would support it wholeheartedly. (I can't find a properly conducted recent opinion poll on the issue and Newspoll assures me that they haven't done one, although they did offer to do one for me for a couple of grand.)

Supporters, however, should bear in mind that whilst their state is currently making sizeable contributions to the Commonwealth, over the longer-term this may not be the case. Western Australia might actually need the rest of Australia in the future to cover its shortcomings if the mining sector falters. Whilst a boom in mining is undoubtedly a good thing in a state where mining makes up 33 per cent of Gross State Product, it also means that a slump in mining would disproportionately affect the West.

It wasn't long ago, i.e. the 1980s and 1990s, that most policy-makers and economic commentators thought that Australia's future as a resource exporter was a recipe for becoming a third world economy. While that was obviously wrong for now, it may not be the case in 10, 20 or 30 years time. It's possible that as China's and India's resource intensive period of growth changes into the traditional pattern of intensive services growth that Western Australia will be more reliant on the Eastern states and the wonders of horizontal fiscal equity.

It's also possible that over the shorter term that growth stumbles in China and India will bring resource prices crashing or that the vast number of gas discoveries will actually lead to a gas glut and eventually lower prices. Note that it's possible not a certainty. We could still have a Boom Mark 3 as well! Indeed Japan's demands for gas will increase, but they are actively seeking alternative sources of supply, most importantly an end to the ban of gas exports from the United States. The difference between the US price and the world price for gas is enormous and a lifting of the ban would encourage even more fracking in the United States.

If one studies the history of capitalism, then even commodity super cycles like the current one come to an end. Major exports that many people believe will always be most important generally do not continue to be most important forever. Remember the fate wool, for so long Australia's major exporter and only Australia's 20th largest export in 2010-11.  Still there's some money to be made in the meantime.

Our analysis of the WA case for secession will be improved by not only speculating on the future, but by considering the recent past performance of  the Australian states.

An excellent article from the March Reserve Bank Bulletin analyses the recent economic performance of the states. Kathryn Davis, Kevin Lane and David Orsmond argue:

Spending has grown strongly in the resource-rich states in recent years, primarily reflecting very high levels of investment in the mining industry. However, the pace of growth in state production and developments in other economic indicators have been more uniform across the states. This reflects the high import content of mining investment as well as the flow-through of spending and income from the resource-rich states to the other states.

One of the ways to measure state economic performance is to analyse state final demand, which measures "the growth in consumption and investment spending by the household, business and government sectors combined"

.

Western Australia and Queensland have clearly outperformed the rest of Australia, but note that they also did considerably worse during the downturn as demand from China temporarily collapsed. While this might not worry West Australians (or Queenslanders) at the moment, it might in the future if the terms of trade collapses as it has done after all booms in Australian history (see here for explanation of the terms of trade)

Remember that this boom is different from many other booms in Australian history because it's both an investment and terms of trade (price) boom. This means that large amounts of capital have been invested in the mining sector at the same time as there have been massive increases in the prices of our major resource exports. 

The figures for iron ore are truly astounding, especially given the fact that they had been flat for a long period of time before 2003. The increase in demand for iron ore during the rise of Japan from the 1960s was not matched by the massive increases in prices that have occurred since 2003. Coal prices were also flat for a long period before 2004.

 Iron Ore Prices 1982-2012 USD

Source: Index Mundi

Source: ABARES

What has happened in recent years is a massive expansion of supply to match the increased demand for all kinds of resources. Simple supply and demand analysis would suggest to us that if supply increases at a faster rate than demand then prices will fall. And if supply increases significantly and demand falls significantly as well, then prices will fall, well, significantly. But we can hope that supply increases will be matched by increasing demand as China's Communist Party successfully manages to keep investing in infrastructure and as demand for Chinese exports continues to increase from revitalised US and European economies or that the CCP engineers a successful transition to a more domestically oriented economy or that India keeps growing rapidly or ... You get the picture. Lots could go wrong. As ABARES predicts (in the graph above) prices for steel making raw materials (Australia's two biggest exports) are likely to decrease over coming years.

Getting back to our assessment of the states, Davis, Lane and Orsmond point out that investment spending has been a large source of growth in the resource states: "In 2011, business investment in the resource-rich states was exceptionally strong, increasing by 28 per cent in Western Australia and 58 per cent in Queensland."

This accounted for a large percentage of demand growth. Much of this investment spending, however, was used to purchase imports and "part of the mining investment (and operational) spending undertaken in Western Australia and Queensland is met by production in other states, not just for inputs such as parts but also for a range of professional services, such as accounting and consulting services. As a consequence, up until now at least, the differences in the growth of production across states has been narrower than the differences in the growth of total spending."

Resource investment, particularly gas investment is particularly import intensive as the chart below shows.

Consumption growth has been strongest in WA, partly because of increased investment, partly because of increased incomes and partly because of increases in WA's population. The overseas migration rate could be about to get even larger with new projects demanding foreign labour to compensate for the relatively small amounts of interstate migration to WA. It is worth noting the massive interstate migration to Queensland in the 2000s has also slowed considerably over the last few years. I'm also intrigued by the considerable increase in interstate migration to Tasmania in the first half of the 2000s.

The authors note that the differences in state production have been less than many would imagine.

Gross state product (GSP) measures the level of state production by adjusting spending for both interstate and overseas trade. However, GSP is published only annually; the most recent data are for 2010/11, which is before the surge in mining investment in the second half of 2011. Nevertheless, the GSP data indicate that while production in Western Australia and Queensland has grown faster than in the other states since the onset of the resources boom in the mid 2000s, the differences have narrowed markedly in recent years. 

The authors also provide some excellent tables at the end of the article on the relative size of the states, growth rates and industry shares. 

In terms of state growth rates WA and QLD are the clear leaders with SA and Tasmania the clear laggards, although the differences in GSP per capita are less significant. 

The big anomaly in terms of industry shares is of course the 33 per cent of WA production accounted for by mining, compared to 9 per cent for Australia. Construction has also been more important for WA than the other states and Australia as a whole. Financial and business services dominate in NSW and Victoria.

In terms of exports, WA clearly dominates. According to DFAT, WA accounted for 40 per cent of exports in 2010-11, followed by QLD and NSW with 19.5 and 19.1 per cent respectively.

NSW dominated imports in 2010-11 accounting for 38 per cent, followed by Victoria with 26 per cent. WA ran a clear trade surplus accounting for only 12.8 per cent of imports.

While WA has been increasing its dominance since 2005-06,  it only took over as the largest state exporter in 2002-03. (See here on p. 4) Its lead has increased markedly, however, during Booms Mark 1 and 2, but its possible that with a slowing or end to the boom that it will be drawn back to the pack in coming years.

So WA has some significant evidence to back its case that it carries the rest of the country, with the exception perhaps of Queensland, but the rest of the East is also not doing as badly as some in WA seem to think (see here also). Remember that exports only accounted  for 21.2 per cent of GDP in 2011, down from 22.7 in 2009.

So in sum do I think WA should secede from the rest of Australia? The answer is no, but I would say that wouldn't I, given that I am after all from 'the East' - a South Australian living in Queensland (although as a Queenslander I am a contributor to national wealth and as an academic I am involved in Australia's third biggest export.)

All the discussion is probably moot anyway because a change to the Constitution requires a majority of Australian voters and a majority of voters in a majority of states. The East is unlikely to let the West go, but the Commonwealth might have to do a better job of maintaining good relations with the WA government and avoid cutting by too much the amount of WA's own GST revenue that it gives back to West Australians. It might also have to re-consider the issue of state mining royalties.

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.