How the World Became Rich … and Can Become Richer

A brief introduction with more to come

My first posts have focused on the economics of ancient Rome, the political economy of Dune, and the economics of World War 2, and there will be plenty more content like that! But in my day job, I’m an economic historian and I originally created this Substack to promote my book with Jared Rubin, “How. the World Became Rich”.

It has been almost 2 years since Jared and I published How the World Became Rich. The book’s success has exceeded our expectations. If you’ve read it, thank you!

One aim of this Substack is exploring topics where new research has come to light since we wrote the book. Another aim is to go deeper on some of the topics which due to space constraints, we only touched on.

If you’re a college professor and interested in teaching from the book, Jared and I maintain a website that offers lecture slides and discussion questions here. If you’ve assigned the book and it has been successful please let us know!

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Here are some more media and other resources on the book:

Here is a recent interview recorded with the Institute of Economic Affairs’s Daniel Freeman on the book .

And this is the link to an interview I recently did with David Beckworth of Macro Musings: https://www.mercatus.org/macro-musings/mark-koyama-how-world-became-rich-historical-origins-economic-growth

And here is an interview Jared and I did with the excellent guys at Economic Forces, Brian and Josh:

Here is us chatting with Shruti Rajagopalan about how the book related to India. Lots of other podcasts along with reviews of the book can be found here.

And here is short summary of our argument (for those who haven’t read it yet) (written with Jared)

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The world is rich. At least, richer than it ever has been. It may not always seem like this is the case, but a smaller percentage of the world’s population suffers from absolute poverty than ever before, more people lead longer and healthier lives, infant mortality is at an all-time low, the global middle class is larger than ever, more children have access to education, and so on.

Yet, there is also far to go. The specter of impoverishment looms large over too many people. Climate change and conflict pose huge risks to the world’s most vulnerable.

What can the past tell us about addressing these problems? If we are in fact richer than ever, how did we get here?

We tackle these questions in our book, How the World Became Rich: The Historical Origins of Economic Growth. We survey a rapidly growing academic literature. This literature tells us much about why sustained economic growth began around two centuries ago, why some parts of the world have since been able to escape poverty, and why others have not.

Any explanation of “how the world became rich” must account for the rise of the first modern economy: Britain. It must explain why Britain became so technologically innovative around the 18^th century. Previous societies experienced episodes of economic growth: classical Greece, the early Islamic Caliphates, Song dynasty China, and Renaissance Florence all saw rising incomes for a period. But these episodes of growth petered out. Sustained innovation is at the root of the modern economy. Things like trade, capital investment, and finance all mattered, but many societies have had these in the past. None broke through until Britain did during its Industrial Revolution in the second half of the 18^th century.

There are many reasons why Britain was able to break the seemingly impenetrable ceiling that had constrained economic growth in all previous societies. These include important institutional developments in the 17th century that imposed limits on royal power. As a result of the English Civil Wars and Glorious Revolution, Parliament strengthened its hand versus the Crown, in the process giving more political power to wealth holders and  limiting the capacity of the Crown to act unilaterally. Another important factor was a large internal market that facilitated trade and the division of labor.  Britain also benefited from a pool of highly skilled workers who were not under the control of guilds. (which limited worker mobility while artificially raising prices).  International trade, particularly access to the lucrative Atlantic trade in sugar, cotton, and tobacco also mattered, specifically for the rise of cities in the west of the country.  Easily accessible coal deposits in the north meant that a cheap source of energy was available, at least once considerable engineering ingenuity had been applied to the problem of draining water from coal mines.  A culture that valued industrial ingenuity and did not disdain trade was also an important background condition.

None of these factors alone were decisive.  Other places, like the Dutch Republic limited executive authority. Others still, like France, had large internal markets. Some of the cities of the Holy Roman Empire were renowned for their skilled laborers. Spain and Portugal had easy access to the Atlantic and began exploring it well before Britain. China and the Ruhr Valley in Germany had abundant coal. Societies across Western Europe embraced Enlightenment ideology. One difference between Britain and the rest was that Britain had all of them.

During the initial decades of industrialization, real wage growth was limited due to rapid population growth and war with France. Overcrowding in the new industrial cities resulted in epidemic disease and pollution. Nonetheless, the fruits of industrialization ultimately resulted in high incomes for ordinary people in Britain by the mid-19^th century. By this time, sustained economic growth was no longer confined to Britain. Places like the U.S., France, Belgium, and Germany quickly followed suit.

Fortunately for them, they did not need to reinvent the wheel. Although Britain needed a specific set of factors to break through in the manner it did, once it burst through the barriers that had constrained growth in the pre-industrial world, it became possible for other countries to do so too. Catch-up growth via technological adoption requires only some of the features that were unique to Britain. For instance, it does not require large internal or Atlantic markets (international trade will do just fine) or access to coal (also available via trade). Societies with enough of the key factors enabling growth, especially limits on executive power and a culture valuing ingenuity, could adopt cutting-edge technologies, skipping over some of the steps taken by Britain.

But why were some societies able to do this and others not? Japan eventually began to catch up in the 1860s after the Meiji Restoration, but despite multiple attempts, it would take China another century (with the market reforms under Deng Xiaoping in 1979). It is the answer to this question which gives us real insight into what might matter and what might not.

A lack of economic and political freedoms can impede growth. When economic and political rights are routinely violated, there is less incentive for people to invest in capital, transact with strangers, and innovate. A high rate of innovation is tough to maintain when innovators have to worry about whether they will be able to reap the fruits of their investment. Many of the poorest parts of the world were mired with governments that sap the economic vitality of their societies. This was a major factor preventing parts of the world from catching up.

But just getting rid of autocrats is far from the whole story. After all, growth is possible under autocracy.  Much of the worldwide poverty-alleviation of the last four decades has been in autocratic China. There was so much underutilized labor in the Chinese countryside that any pro-market reform that brought labor to market and engaged in international markets was likely to succeed.  The challenge is what happens once China becomes truly rich by worldwide standards (it is currently a “middle income” country): without massive political reforms, will China go the way of the Soviet Union? Or will it blaze a new path and became a more autocratic (and more populous) version of South Korea?

Another reason why reforming political institutions may be insufficient is that the way institutions work in one society is not necessarily the way they will work in others. The main reason is that cultural norms are essential for political institutions to function as designed. If there are no norms respecting the winner of a fair and free election, how can democracy work? If the population is suspicious that anything run by the government will be fair and free, how can democracies thrive? In short, merely transplanting institutions that “work” in one country to a developing country is unlikely to yield economic growth, especially when those countries are culturally distant.

What, then, can the past teach us about how to unlock economic growth in those places that still have only a limited taste of the fruits of the modern economy? Perhaps the biggest lesson from our book is that there is no silver bullet. Policymakers are tempted by the notion that economic growth can be unlocked if only we have the right "key". The “Washington Consensus” of the 1980s pushed market reforms as central, and the neoconservative foreign policy consensus of the early 2000s placed democratic institutions as a panacea. History suggests that economic growth is more complex than this.

But just because there is no silver bullet does not mean we should just throw our hands up and eschew lessons from the past. In fact, our book suggests precisely the opposite: history matters because it informs us why one solution worked, or did not, in a specific society.

This is not to say that anything goes. The historical lessons from the parts of the world that became rich since Britain first broke through suggest that there is a menu of items that have been “good” for economic growth in a variety of contexts. Among the most important are limits on executive power, investments in education, protection of property rights and markets, and public investment in infrastructure. Even if none of these features ensure sustained economic growth, a society that lacks many of them is unlikely to grow. Each country has its own unique path to becoming rich. History gives us clues as to the impediments that must be overcome in order to find that path.

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