My View on the Source of Wealth in the Modern World

About 15 years ago, I wrote something I wanted to repeat here just because I keep looking for it and a lot of my old Typepad blog era stuff is hard to find.  The original post is gone but I quoted from it in 2005.

Since 1700, the GDP per capita in places like the US has risen, in real terms, over 40 fold.  This is a real increase in total wealth, created by the human mind.  And it was unleashed because the world began to change in some fundamental ways around 1700 that allowed the human mind to truly flourish.  Among these changes, I will focus on two:

  1. There was a philosophical and intellectual change where questioning established beliefs and social patterns went from being heresy and unthinkable to being acceptable, and even in vogue.  In other words, men, at first just the elite but soon everyone, were urged to use their mind rather than just relying on established beliefs
  2. There were social and political changes that greatly increased the number of people capable of entrepreneurship.  Before this time, the vast vast majority of people were locked into social positions that allowed them no flexibility to act on a good idea, even if they had one.  By starting to create a large and free middle class, first in the Netherlands and England and then in the US, more people had the ability to use their mind to create new wealth.  Whereas before, perhaps 1% or less of any population really had the freedom to truly act on their ideas, after 1700 many more people began to have this freedom. 

So today's wealth, and everything that goes with it (from shorter work hours to longer life spans) is the result of more people using their minds more freely.

At the time, perhaps to my shame, I had never even heard of Deirdre McCloskey nor her work that has been published in three volumes called the Bourgeois Era explaining what she calls the "great enrichening" (which I am slowly plowing through).  My thinking when I wrote this seems reasonably consistent with her conclusions, though she has obviously been a lot more systematic in thinking about it.  This exchange with Gregory Waymire is a short but quite readable window on her thinking.  She writes in part:

You're adopting a conventional and somewhat silly view that the bourgeoisie were especially diligent, when it is not true as fact and is anyway not the character of the bourgeoisie that
mattered to the Great Enrichment (which by the way was a factor of 30 per capita in countries that fully adopted economic liberalism, not the factor of 10 you quote: look at the passage again, and read slower and longer). Weber sometimes got this right, sometimes wrong. But people tend to read him as saying that higher savings and more diligence, Ben Franklin style (and even Ben did not actually do it), is what made us rich.

One trouble which such a conventional argument is an economic one that Solow-type models (and Smith- and Marx- and Weber- type models) that reduce growth to savings and labor effort are radically mistaken. What matters is human creativity released from ancient trammels....

What made us rich, I argue at no doubt tedious and unreadable length in the Bourgeois Era trilogy, is imagination, ingenuity, radical ideas released. They were released in turn by liberalism, Smith's "liberal plan of [social] equality, [economic] liberty, and legal [justice]."

  • 4kx3

    Human progress has indeed been dramatic in the past few centuries, and seems to be accelerating now that communism has been largely reversed. I believe a major part of the progress has been technological, occasioned by acceptance of the scientific method. (Which says, in short, that all hypotheses must be falsifiable, and that hypotheses are falsified when not supported by data. String theory does test this model.) Note that science and religion are not in conflict since there are no areas of overlap except in the minds of people who don't understand science.

  • timworstall

    Worth reading Brad Delong's (yes, I know) "Cornucopia" on this. Scott Sumner or Econlog referred to it earlier today. Very good indeed essay on very much this point.

  • gr8econ

    When I teach Macro we call this New Growth Theory.

  • johnmoore

    I don't buy the "questioning beliefs" because that questioning has gone on throughout human history. And, there has been a pretty much monotonic rise in knowledge and technology in the West since around the Roman Empire. Science and scholarship didn't suddenly start in the 1700s. It had been going all along - the "dark ages" is a myth that was propagated for political purposes. Freedom started being a serious idea at least with the Magna Carta. Corporations started when the economic activity of medieval monastaries became to large to manage without finance.

    I think the changes since the 1600s were primarily driven by technology - especially printing and navigation. The natural sciences, which had been making progress for over 1000 years, accelerate rapidly with the availability of printed books, and led to the profound technological changes that enabled the industrial society.

  • Trey Tomeny

    Or perhaps God? In the 1820's or so, Jesus appeared to a young Joseph Smith in upstate New York and restored the Priesthood authority of God that was mostly absent for at least 1500 years. Most of the big growth has come since then and The Church of Jesus Christ, of Latter Day Saints, continues to grow and abet progress.

    I have found this to be personally true, as my fortunes, in all ways, have grown exponentially since joining the true Church a few months ago.

  • Trey Tomeny

    Because, I'm sure, that the source of good ideas is that small voice in each of us, which is the light of our world, the Spirit, of Jesus, begotten of the Father.

  • Bistro

    I think in the case of the United States a lot of that wealth was the direct result of conquering and taming an entire continent that was, for all intents and purposes, free for the taking. With it came all the wealth that accrues from farming, timber, mining and transportation of goods.

  • cc

    I would suggest a few things that are not sufficiently considered. The liberalization of thought was ironically inspired by the church. First, the rise of monasteries across Europe after the pioneering efforts of the Irish monks after 600AD created hundreds of small centers of learning where people could learn to read and where books were copied. By 1200 to 1300, the feeling was becoming common in the church that the way to religious truth was individual study and even debate, and true universities began to arise. Science also began to be viewed as a good thing because it uncovered God's laws and reality.
    Wealth began to be accumulated by the merchant class, and it was the rich trading cites like Florence that got the Rennaissance going.
    But to my mind the key was the gradual development of lots of technologies that finally reached a tipping point where they began to affect the common man, not just the kings. Better crops, better plows, bigger ships for trade, better steel, mechanisms, clocks, navigation instruments, water wheels and irrigation and locks and dams all came in around the time of Leonardo and began to have a snowball effect. If you look at the life of the upper middle class (not just kings) in paintings around the 1500s, 1600s, you can lots of sophisticated things from pianos to fine furniture, showing that many technologies had been invented by that time. By the mid 1700s mass production of textiles began to happen and water power was being used for machinery. At that point is was just a matter of all those engineers improving things little by little until boom, the industrial revolution.

  • Peabody

    A small Christian sect founded in the United States is responsible for global growth beginning a century before. Makes sense.

  • Trey Tomeny

    Thank you for your agreement. Those who do not have the eyes yet to see often find their words inspired.

  • Mercury

    Pretty big difference in wealth outcomes for North vs. South America which are both richly endowed with natural resources - so obviously that's not the whole story.

    Korea probably had comparable GDP per capita to Saudi Arabia in the 1950s. South Korea is much wealthier than SA today despite having close to zero natural resources vs. the oil endowment of SA. S. Korea vs. N. Korea is basically a "twins" study of same DNA vs. different nurture/environment.

  • Mercury

    Hah! A direct ancestor of mine retired to the Ohio territory in the early 1800s and wrote basically a science fiction romance based on the abandoned Indian settlements he found nearby. It seems pretty likely that at least some of it (and/or a second lost work by the same author) was cribbed by Smith for Book of Mormon:

    https://en.wikipedia.org/wiki/Spalding%E2%80%93Rigdon_theory_of_Book_of_Mormon_authorship

    Now that's how you generate wealth using your mind!

    U-S-A! U-S-A! U-S-A! U-S-A!

  • Mercury

    "Communism" may be on its last legs but Marxism is alive and thriving everywhere, trying to convince everyone that everything in life is a zero-sum game...

  • Trey Tomeny

    Because God is in all, doing all, for the good of those who love and follow him. Much of what I write is "cribbed' from other sources, even Coyote himself. For as he is yet to perhaps worship God with the knowledge of truth, he surely, in his great wisdom, is a worshipper in Spirit. God works in, through, and for, even those who have yet to call upon his great name, Jesus.

  • Mercury

    "Got that baby? God speaks through me. Now get yourself upstairs and behave yourself like your other sister-wives!"

  • Trey Tomeny

    If it's not love, it's not God doing the speaking.

  • JEFFREY SINGER

    McCloskey is interesting, but I think Clark has the better argument -- after all, the logical question to ask you and/or McCloskey is why did those ideas about wealth creation pop up in Northern Europe when they did? Clark's answer is not one that is very popular these days but makes a lot of sense when thinking about the world in general and why places in Asia were able to catch up so quickly with Europe with respect to growth (but Africa and most of South America lags behind.)

  • Joshua

    I think there are two elements here. 1) where does wealth come from? and 2) what made that creation easier or more popular? I only know of one source of wealth - trade. Only when I give you something and you give me something and we are both better off after the transaction is wealth created. Unfortunately I have no idea how it came to be that trade was popularized. Was it Ricardo? Smith? The Portuguese? Diversity? Atheism? I don't think that McClosky's explanation is enough.