How the World Became Rich. Mark Koyama
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and improvements to the plow are all examples of new technologies that allowed more people to be fed with less labor. Yet, prior to the 18th century, all spurts of economic improvement were temporary.
What matters in the long run is whether growth is sustained. Sustained economic growth refers to the continuous positive growth rates that have been experienced by countries like the US and the UK since the middle of the 19th century. What is unique about developed countries today is not that they have experienced a rapid acceleration of economic growth (Hausmann, Pritchett, and Rodrik, 2005). Many countries that are poor today have experienced temporary growth accelerations in the past as well. What distinguishes rich countries is that they have not experienced growth reversals. For instance, US GDP has grown fairly constantly since 1870 (Figure 1.6). Even the Great Depression – the one shock that does register in Figure 1.6 – only had a temporary impact on economic growth. The point is that prior to the first few decades of the 19th century, the continuous economic growth experienced by the UK, the US, and other developed economies in the past two centuries was all but unheard of. What was more common was periods of growth offset by periods of contraction, like that experienced by Venezuela between 2011 and 2021. Broadberry and Wallis (2017) call this “shrinkage”. From this perspective, the main difference between rich and poor countries is not that rich countries grow fast during their periods of growth. Rich countries are those that have experienced fewer periods in which the economy has gotten smaller.
Figure 1.6 US GDP per capita, 1720–2018 (2018 USD)
Data source: Bolt and van Zanden (2020).
Sustained economic growth has been accompanied by a dramatic reorganization of society and production. This is what we refer to as economic development. By this we mean a fundamental and transformative restructuring of the economy associated with urbanization and the growth of non-agricultural sectors of the economy such as manufacturing and the service sector. This process of development was also associated with the emergence of new ways of organizing economic activity: factories, corporations, and stock markets. In contrast, before 1800, the majority of the population lived in the countryside and worked on the land. Sure, there was some variation in urbanization and the prominence of manufacturing or service sectors. In Italy between 0 and 200 CE, urbanization may have been as high as 30% (Wilson, 2011). Iron production soared in Song China. Commerce and long-distance trade were important parts of the economy of late medieval Venice, Bruges, and Antwerp. Nonetheless, the structure of all of these societies was vastly simpler than that of almost any modern economy.
In the developed world, the structure of the economy is different. Importantly, agriculture has shrunk both as a proportion of the total economy and, even more dramatically, as a source of employment. Today, only 1.3% of the labor force works on the farm in the US. In the UK, the number is smaller still (just 1%). Alongside this structural shift, there has been a transformation in organizational complexity. This is most notably seen in the rise of long-lived organizations independent of the state such as corporations. These are all hallmarks of a developed economy.
Measuring the Past
You might wonder: how do we know how poor people were in the past? No country had an office of national statistics collecting information and compiling GDP estimates until the mid-20th century. Instead, social scientists and historians have had to reconstruct the past. The first exercise of this kind was the pioneering work of Angus Maddison. He spent decades creating high-quality estimates of per capita GDP back to 1820 (Maddison, 1983, 1991, 2001). Maddison also produced a set of highly influential estimates for earlier periods, including estimates of per capita income at the regional level for the Roman Empire (Maddison, 2007). But these estimates were of much more questionable veracity. More recent work, including the Maddison project (Bolt and van Zanden, 2020) and the work of numerous scholars such as van Zanden and van Leeuwen (2012), Fouquet and Broadberry (2015), Broadberry, Guan, and Li (2018), and Palma and Reis (2019), has produced updated estimates of per capita GDP that are on a much firmer footing.
But GDP estimates are far from the only source of information we have on past economies. Since the 19th century, economic historians have been collecting information on wages and prices in order to produce estimates of how much an unskilled worker would have been able to purchase in the past. Owing to the work of Robert Allen, Jean-Pascal Bassino, Greg Clark, Charles Feinstein, Peter Lindert, Debin Ma, Jeffrey Williamson, and others, there now exist comprehensive estimates of the purchasing power of workers for a host of European and Asian cities. Allen’s method is based on the construction of a consumption basket for a representative worker. These baskets are constructed by consulting numerous diaries and the budgets of poor houses and orphanages. A benefit of constructing consumption baskets is that it allows us to compare living standards across time and space, while remaining cognizant that people’s preferences were different in different regions at different times. Whereas rice would have made up a large portion of the East Asian diet, grains or bread would take its place in Western Europe.
There are other measures we can use to assess living standards in the past. One common measure is height. Economic historians such as Jorg Baten, Robert Floud, Robert Fogel, and Richard Steckel have put together estimates of heights for many countries across many centuries (for an overview, see Steckel, 2009). Height is determined by several factors, including genetic endowments. Height is also influenced by in vitro conditions and the nutrition available to the mother during pregnancy and as a child. We observe a strong positive relationship between gains in height and per capita GDP in the past 200 years. People in the past were short. The mean height of an 18 year old in the English army between 1763 and 1767 was 160.76 cm (around 5’3”) (Floud, Fogel, Harris, and Hong, 2011, p. 27). The increase in average height partly reflects the improvements in nutritional standards achieved since the onset of modern economic growth.
A final measure of the standard of living is life expectancy. Modern economic growth is associated with large increases in life expectancy (Pritchett and Summers, 1996; Fogel, 2004; Acemoglu and Johnson, 2007). This matters for two reasons. First, increased life expectancy represents a significant component of the additional welfare brought about by economic growth (Becker, Philipson, and Soares, 2005). Second, increased life expectancy is a possible cause of economic development itself. An increase in life expectancy increases the value of investment in human capital (Cervellati and Sunde, 2005), the term economists use to encompass education and other investments in an individual’s productive capacity.
The answer to the question “How did the world become rich?” must explain where, when, and how human societies were able to achieve sustained economic growth. The where and the when we know the answer to: northwestern Europe and North America, in the early to mid-19th century. All of the metrics we discussed above agree on this point. It is the third question – how did the escape from stagnation happen – that is so vexing.
Understanding the origins of wealth is one of the most important pursuits of the social sciences, and for this reason it has been the center of much debate. The purpose of this book is to present and distill this debate. Ultimately, any credible hypothesis must be able to account for a number of facts. First, modern, sustained economic growth is the result of sustained technological innovation. Britain in the late 18th century experienced such a spate of innovations during the period known as the Industrial Revolution. Initially, economic growth was slow to follow. But unlike earlier episodes of economic growth, it did not peter out. By the mid-19th century, the rate of both innovation and economic growth accelerated as industrialization and structural economic change spread to other parts of the world. Why did this process first take hold in Britain? Why in the 18th century? Why not in some other part of the world? Second, Europe was an economic, technological, and cultural backwater around 1000 CE. What changed in that continent that allowed it to pull ahead of China, India, and the Middle East, all of which at one point had societies well ahead of even the most advanced societies