Mark Koyama is an associate professor of economics at George Mason University and is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. Mark is also a returning guest to the podcast, and he rejoins Macro Musings to talk about his recent book that he co-authored with Jared Rubin titled, *How the World Became Rich: The Historical Origins of Economic Growth.* Specifically, David and Mark discuss the key drivers of long-run economic growth throughout history and what we might be able to expect in the future.
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Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].
David Beckworth: Mark, welcome back to the show.
Mark Koyama: Thanks for having me, David. Looking forward to it.
Beckworth: It's great to have you on, and you do a lot of work on economic history, long-run economic growth, and this is such an important topic. Sometimes on this podcast, we get caught up in business cycle questions, the pandemic, the inflation surge, the recovery, and these are all important questions, but when we pull back the lens and we look at the broader historical perspective, it's even more important where we go over the next 50, 100 years. That makes a difference between people escaping poverty versus those being [put] into it.
Beckworth: It's important to avoid the Great Depression or the Great Recession, but I think it's even more important to think about how do we alleviate poverty and how do we pull people into the good life that we know in many of the advanced economies of the world, and your book is a great way to think about it, to tackle it, and your book provides a great overview of the theories, and so I'm real excited to have you on. In fact, Mark, this is a little overdue, because this book came out in 2022. We talked about doing this earlier, so thank you for coming on, and you're going to keep us straight on long-run economic growth and what motivates it. Tell us about the book. How did you guys do this? Why do it, and why now?
*How the World Became Rich*: Motivations, Background, and a Survey of Economic Growth Literature
Koyama: We've been teaching, both Jared Rubin and myself, we've been teaching economic history for roughly a little bit more than 10 years to undergraduates, and there are a lot of classic books about the origins of economic growth, books that we reference here, like Jared Diamond's book, Guns, Germs, and Steel, David Landes has a book, and there's a lot of great books, but those books are somewhat old, and they don't reflect this [burgeoning], growing new literature in development economics and in economic history over the last 20 years, the literature which has really shed new light on the empirical foundations of our understanding of growth, both in the countries in Western Europe, which eventually pioneered the Industrial Revolution, but also actually looking across the world at parts of the world like East Asia or the colonized world. So, we thought that there's a real gap in the market for surveying that literature and bringing together those insights and packaging it in a way that was accessible both to undergraduate students, people in adjacent fields, scholars, but also, to some degree, the reading public.
Beckworth: Yes, and it's a really great read. We'll have a link to the book in our show notes, and before we jump into the various competing theories, or maybe even complementary theories for economic growth, and then you have some case studies we'll walk through as well, [but] just briefly, Mark, I want to get a survey of this literature. You mentioned that there's a lot of work being done, currently has been done, since some of these other books have come out that you touched on, Jared Diamond's book, which is one that I'm reading back in the day as well, and was really influential, and all of my friends had a copy of it. Landes' book, that was also a fun read as well. What are people doing now in this literature? I bring it up, because I also remember a period where cross-country growth [regressions] were really popular, right? Is this literature now doing more and more of this applied micro with a natural experiments approach? Is that where the cutting edge is?
Koyama: Yes, that precisely, David. If you think about the 1990s, cross-country growth regressions were the frontier of research, and they tell you some things. They tell you quite a lot about the correlates of growth. They tell you something about things which give us some stylized facts about things which come together, but they're not necessarily well-suited for identifying causal effects. And so, a strand of this literature, particularly in development, has definitely been applying applied micro approaches, so different identification strategies, all aimed at identifying causal effects to development, but also to the deep origins of development, so to economic history. Think about, as pioneers of this research, Daron Acemoglu and his co-authors, Simon Johnson and James Robinson, and also Melissa Dell and Nathan Nunn. That's part of where we're going. That's a literature which many people are familiar with, because it's been tremendously influential in development as well as in economic history. There's also careful economic history work, more traditional cliometric economic history work, which has gone on. For example, Angus Maddison was a pioneer of historical growth statistics.
Koyama: A lot of the data we need to estimate growth isn't available before about the 1870s. Angus Madison pioneered these estimates for GDP going back further and further in time, but the data he had were quite crude, were quite rough, and more recently, other scholars have gone in and basically updated a lot of these figures, provided figures for countries which just didn't have estimates before. I would say that there's both this very influential applied micro-development literature, which we survey and we bring into field, and there's been updates amongst more traditional economic history scholarship, which has actually updated how we think about these questions.
Beckworth: So, there's efforts going on to collect and build up data sets for historical periods throughout the world. There's also the cutting-edge natural experiments, quasi-natural experiments. Are there any attempts at theory? I think, in particular, of Paul Romer and his endogenous growth theory. That was really influential, too, back when I was in grad school.
Koyama: Theory has been less influential, a little bit to the detriment, probably, of scholarship. In the heyday of growth econ, we were investigating, testing the predictions of, say, the Romer model and other models of endogenous growth, and the current trend in development economics is atheoretical often. That's both the natural experiment work and also the actual experimental development economics of Banerjee and Duflo. I would say that that's reflective of the papers we survey in our book, but I think there's a room for economic theory in these historical questions. Avner Greif, whose work I'm sure you know, he was very influential, again, about 20 or 30 years ago, in introducing game theoretic models into economic history.
Koyama: And I would say that there's definitely a room for this. It's probably under-exploited right now, underutilized. I think that there are, particularly, political economy questions where it's not obvious what the prediction should be. Maybe you need a model to get some predictions. There are a few areas where I think that models are making a bit of a comeback in this area, at least I hope so. I would say that in development economics more generally, sometimes you need theory to interpret the mechanisms. You can do policy evaluation. You can identify a causal impact of an experiment, because it's very well set up, and people understand that it can't be easily manipulated. But, why are we getting the results we're getting? Maybe we need some theory. So, theory's been neglected. It's not very prominent in our book, but actually, both me and Jared think it should be making a bit of a comeback.
Beckworth: Okay, well, let's move into your book, what it does, what it aims to do, and we'll get back to, maybe, theory near the end. I do want to come back to endogenous growth theory, because one of the questions that I think about now is the decline in the population growth in the world, what bearing might that have long-term. But let's get to your book, and let's first start with your first chapter, which I think is very important, and I think it's easy for many of us who listen to the show, who live in advanced economies, to take for granted that we live in a very rich world, a world of abundance. It's kind of like looking at the curvature of the Earth. You can't see it, because you're standing right here, and you have to really step way back to really see the full story. When you got riches right in front of you, I think it's hard to appreciate this point. Remind us where we are in Earth's history in terms of human economic growth, and how long it took us to get here.
The History of Economic Growth
Koyama: Yes, so it's a great point. We are, roughly, maybe 20 times richer than our ancestors were in 1800. I think I borrowed that estimate from Deirdre McCloskey. There's been a great enrichment, again, to use McCloskey's terminology, a great enrichment, and particularly since 1800, although it began a little bit before. And I think it's important to realize that we know that's the case in the United States, Western Europe, parts of East Asia, but it's important to realize that almost all parts of the world are comparatively rich relative to the world before 1800.
Koyama: The vast majority of countries are richer today than the United States was, in per capita income terms, in 1900. The United States in 1900 was the world's richest economy and the majority of the world's countries have populations whose incomes exceed that today. And so, most people now live in middle-income countries. It's largely due to a growth of income in China and India. So, middle-income countries are by no means rich by contemporary standards. We would like these countries to be much wealthier than they are, but they're rich by historical standards. So, middle-income countries, the vast majority of the population are not in any danger of starvation. They have adequate nutrition. They have adequate resources to meet their everyday needs. So, in historical terms, like relative to human beings as a species, most people today are rich.
Beckworth: To highlight the points you make in your book, we had both the takeoff, with the Industrial Revolution several hundred years ago, but even more recently we've had parts of the world like Asia really explode. People talk about China lifting a billion people out of poverty, or the growth in Asia lifting a billion people out of poverty. It's a real success story and you provide a number of measures in that first chapter to remind us where we are. And the fact is, we need to explain this, how we got here. One of the metrics that you use that I really like is what percent of the population is living in extreme poverty. I think if you go back to the 1800s, you have 90%, now it's below 10%. You do the typical per capita GDP, you look at life expectancy, a number of measures. And you asked this one hypothetical question.
Beckworth: I just want to park here for a minute, because you give an example later in the book. But in that first chapter, you asked this question: would you trade your current life for the life of wealth of an English baron in, say, 1200? Now, I'm going to go to chapter five and this isn't even to 1200, this is the 1700s, but let me read the first few sentences from chapter five, it's on fewer babies. You and your co-author write, "It is January 24th, 1700. A cold winter air blows through Westminster Abbey in the center of London. Even open fires and coal braziers struggle against the winter chill. Princess Anne, heir to the throne of England, is silently sobbing into her bedclothes surrounded by her maids and ladies-in-waiting. Anne had miscarried again.”
Beckworth: “Though only 33, this was her 17th and last pregnancy. She had not produced a living heir. Of her four last births, only one outlived early childhood. Prince William died at age 11 of pneumonia having been bled and blistered by his doctors.” Then you go on to talk about Anne's own frail health. But that's such a powerful illustration of what it was like back then. And she was the heir to the throne. She had all the best medicine, resources, food. Yet, her life was very precarious. She couldn't bring a child to adulthood. So, maybe shed some more light on that point. Why wouldn't we want to be a baron back in 1200 or swap places, even if it seems appealing on the surface?
Koyama: You have command over people. So, as a baron in 1200 or Queen Anne in the 18th century, you have a lot of power over other human beings. But, your power to affect your environment is actually still limited because the technology is basic. You have a lot of resources, and you can command armies and have many servants, but your ability to heat your house adequately or have air conditioning or translate your income into, say, medical technologies is limited because the baseline technologies available to those societies are limited. I think that's how we think about it. And so, all of those riches, they buy you status, they buy you something which we value, but they're quite feeble when translated into means of improving one's material condition.
Koyama: So, what we've had, as a result of modern economic growth, is much more efficient translation of resources into things which materially affect how we live. Another example is, if you wanted an ice cream in 18th century England, you could have that, especially in winter. In summer, you could still have it if you're rich enough, but you have to be rich enough to basically get a block of ice and have mass quantities of ice taken from some cold, mountainous region, taken to where you are, and then some of your servants can maybe make some ice cream. But, today, basically, anybody in the Western world, or even not the Western world, anywhere, or anybody in most parts of the world, can, for basically $1 or $2, have a huge array of different ice creams.
Beckworth: Okay, so we live in an amazing time and place in terms of economic history. Again, it's easy to forget that just a few hundred years ago, almost everyone was poor. The rich were really, truly the rulers, the few elites who had access to it. So, this is a complete reversal of fortunes for most of humanity. Alright, so we're going to go through some of your chapters here, and [here’s] just a brief outline of what we're going to do. In your book, you go through the theories of why the world became rich. The first one is geography, second one is institutions, third theory is culture, demographics, and then maybe colonization and exploitation. Let's start with geography. You already mentioned Jared Diamond's famous book, Guns, Germs and, Steel, where he makes a strong case for demographics. Walk us through the arguments made for geography and why that really drives long-run economic growth.
Geography as a Driver of Long-Run Economic Growth
Koyama: Yes, so geography is a powerful constraint on the economic activities we can do. Jared Diamond gives one example of this when he gives a powerful explanation for why the Spanish— but it could have been anybody from Europe or anyone from Asia— why the Spanish had so many advantages over the Incas in the early 16th century. Diamond's geographical argument, really, it's about the location of certain crops. It’s very difficult to domesticate crops. Only a small proportion of crops are likely ever to be capable of being domesticated by humans. Similarly, animals, there are only a small number of large mammals who have ever been domesticated.
Koyama: And so if you think about the geographical lottery, which determines where these cultivatable crops or animals happen to be, some parts of the world happen to be more fortuitous than others. The Middle East, the so-called “Fertile Crescent,” happens to be a place which had a lot of these preconditions of agriculture. They get agriculture earlier than other parts of the world, and then because of the shape of the Eurasian landmass, these early agricultural technologies, spread, basically, relatively quickly across Eurasia. The people in China have rice agriculture, and they have other technologies as well, as the people in Europe.
Koyama: But in the Americas, they don't have wheat, they don't have barley or oats. They only have maize, and maize is harder to produce. It spreads much more slowly. They also don't have metallurgy, and they don't have very many large domesticate-able animals. And so, in some sense, they're just disadvantaged from the get-go because of their geography, and these effects accumulate over time. So there's some path dependence, whereby this early advantage to Eurasia sets in motion many other developments which then cascade such that the Eurasians have these advantages over the American populations. That's just one example. There are others which we discuss in the book like being landlocked. Jeffrey Sachs talks about this. Also, your geographical location affects the disease burden you have. Parts of the world which have high disease burden, they're malarial or they're vulnerable to things like the tsetse fly, they might also be historically underdeveloped.
Beckworth: Yes, the Eurasia example you gave was very interesting. It's easy to think about, yes, okay, they had a head start, but it was also this compounding effect that you noted, the interaction. They were exposed to animals, to horses, to cattle, early on. Therefore, they were exposed to the diseases that these animals carried where, in North America, they were not. So, when they come over, they carry all of those diseases. And so, they have this head start, both immunity, but also tools, technology, and it's a really interesting argument. You mentioned that and they’re landlocked, as you mentioned, versus [having a] coast, mountain ranges, climate, disease burden. I was also intrigued to read in your book… and this is good for me to get my literature up to speed on where things stand.
Beckworth: But Robert Fogel had a famous book that he wrote. I think it won a Nobel Prize, right? The one on the railroad. So, he argued that the railroads really weren't that consequential to the development of the US economy. His argument is, well, if there hadn't been railroads, canals and other forms of transportation would have stepped in. Do the right counterfactuals is his point, a very clever approach. But, apparently, there's been recent research that puts down that idea, or at least weakens that idea, because there's other indirect effects that it contributed. Maybe speak to that finding.
Koyama: Yes, so Fogel's argument was, undoubtedly, groundbreaking. So, as you say, it's like the idea that there's a counterfactual. Fogel's key insight is that there's some substitutability. Historians would say that the railroads made America. Railroads made it possible to domesticate this incredibly large land mass. Fogel's point is actually that the railroad effect isn't just what you see, it's a relative effect, relative to the next best transportation technology, which are the canals, and the Erie Canal or other waterways, which also can integrate an economy.
Koyama: The particular approach he uses relies on just the standard assumptions of benchmark neoclassical economics, particularly with the assumption of perfect competition. And the more recent work by Donaldson and Hornbeck, what they're doing is, they're taking into account, as you said, these indirect effects, but particularly a market size effect. If you were close to a canal, then obviously the marginal effect of the railroad is small. But if you're in a part of America which wasn't likely to be connected by a canal, and you happen to get a railroad, what's the net effect of the railroad on your economy?
Koyama: They say that you have to take into account that, basically, without this transportation technology, these places would be very isolated from other markets. And so, the local firm would be a monopoly, [and] their ability to diversify and specialize would be limited. So, I interpret it, at least, very much as an Adam Smithian point, an Adam Smith insight, that the benefit of the transportation technology is mediated through the size of the market. And so the railroad does have a big impact when you take into account its effect on the overall size of the market.
Beckworth: So, we have all of these arguments for why geography matters, and we have some prominent economists who've made the case, Jared Diamond, Jeffrey Sachs, and others. But there's a limit to this argument, as you note in your book, right? You make the point that geography may be a constraint and may affect where you go, but it's fixed. Why does that “fixed” matter? Why does that make this argument not as thorough and conclusive as some think it is?
Koyama: There are two reasons. One is, it can't explain any reversal in fortune, or it struggles on its own to explain any reversal in fortune. If some areas are blessed by good geography, they should be rich in ancient times and in modern times. At some level, we do observe this. If you think about city locations [which] might be constant through time, which parts of the country have cities, that location might be good in the Middle Ages, [and it] might be good today. We know— at least in some countries— we know that there have been reversals of fortune; areas which have been ahead, which have fallen behind, and areas which were backwaters, which have then overtaken them.
Koyama: So, geography, on its own, struggles to explain this. That's a reversal of fortune. The other issue is the timing. So, what we see with the industrial revolution is a dramatic— at least in historical timescales— a dramatic increase in a rate of economic growth after roughly 1750 or 1800. And so geography doesn't give you much of a hold, or there's not much traction in geography into explaining why the overall rates of growth, across several societies at once, picks up after around 1750.
Beckworth: Okay, so it can't explain reversal. The example you give in the book is, in around 1000, the Middle East was far ahead of Europe economically, but now it's reversed, and then the growth changed. The geography is constant, but growth is accelerated. You need a variable that changes with the growth rate to fully explain the story. Okay, so that's geography. Let's move on to your next chapter on institutions. First, define what institutions are and what you mean, in this case.
Institutions as Long-Run Drivers of Economic Growth
Koyama: Yes, so we're drawing on this economic definition of institutions, which is more abstract, probably, than the everyday definition. It's not just an organization like the Federal Reserve. An institution, in the language of Douglass North, the Nobel Prize winning economic historian, is a set of rules, the rules of a game. The idea is that these rules of the game matter, because they structure the incentive systems we face. So, North's famous insight was that things like investment… people might say, “What drives economic growth?” And you'd say investment in capital or capital accumulation. And North's point was that, if that's true, that is a cause of growth, but it's only a proximate cause, because there's something which is shaping your incentive to invest, as opposed to not invest, that money. And so that incentive structure, he then calls institutions, and then [he] argues that that's the core driver of growth.
Beckworth: And you cite Acemoglu and Robinson. They have an interesting categorization of institutions. They talk about inclusive versus extractive growth institutions. So, maybe highlight the historical context in which they're applying that and what it means.
Koyama: Yes, so that's particularly in their 2012 book, Why Nations Fail, [and] they're really thinking about what kind of institutions are an impediment to growth. Particularly, they're thinking about institutions imposed, say, by the Spanish Empire on its colonies or institutions we might observe today in autocratic dictatorial regimes like North Korea or Syria. They're contrasting those with types of institutions we, as economists, generally think of as being good for economic growth. So, a stable system of property rights, a market economy, and they particularly distinguish between economic institutions and political institutions, but they argue that there's a key feedback relationship between them. And so, a set of extractive political institutions are compatible with a set of extractive economic institutions, but they're unlikely to support inclusive economic institutions or inclusive political institutions. So, the idea being that a market society, a free market, will generate a lot of entrance and it will generate a lot of churn amongst the rich, and that will undermine a kleptocratic or highly autocratic regime.
Beckworth: Let's flesh that out a little bit more. So, you give the example of Spain, and you touched on this already, versus, say, the United Kingdom, Great Britain, or the Netherlands. So, Spain had the monarchy, and the monarchy controlled everything, all of its colonies, and it was definitely after extraction, so this extractive emphasis. And their argument is that this led to a set of institutions, political and economic, over there, in many of its Latin American colonies, that were not conducive to long-run growth, whereas Great Britain had a different approach to its colonies, and in part because it had a parliament, it had checks on the monarch's power. Discuss that example of how these institutions can interact, so from the top down to the structures of the economy, how the political and economic institutions feed off each other and have long-lasting effects.
Koyama: It's a little bit like a resource curse argument, the argument for the Spain versus England. So the Spanish Crown… there was a Parliament in Spain in 1500, but the way colonization takes place is that it's basically done under the auspices of the Crown, and the Crown get a big cup of the riches, basically [what] the conquistadors acquire when they conquer native peoples in the Americas, and they get access, particularly, first to gold, but then later to silver, so there's a big silver mine in Peru. And so that's where we to get to Johnson and Robinson's argument, is that this windfall basically enriches the Crown, and it allows the Crown to cement its control over the local Spanish parliaments, and it basically makes the Spanish monarchy more authoritarian and autocratic. So, it's an institutional resource curse. Spain basically gets the "best colonies” in the Americas, but over time it worsens the Spanish institutions, and it actually makes Spain poorer in the long run.
Koyama: In contrast, the argument about English colonization… the English are latecomers, they get Virginia, basically, and New England, and these are not desirable territories, because they're very underpopulated. Virginia is just forest. There's no silver, there's no gold. The native population is very sparse, so there are not many slaves. And so, the consequences of this for England is that the Atlantic economy, which does grow up, [but] when it grows up, it's largely in private hands, so it's largely private merchants. And these private merchants basically empower the parliamentary side of things in the conflicts between the Crown and Parliament, and they then push for a more representative government, more checks and balances, more constraints on the executive, and more support for property rights and markets.
Beckworth: And that explains some of the differences today between, say, North America and South America.
Koyama: It does two jobs, yeah, I should be clear. It's both explaining the differences between North America and South America, and that's Johnson and Robinson’s argument, and it's explaining the small divergence within Europe, why, after 1500, Spain does less well than England.
Beckworth: Okay, so it affects institutions both at home, in the European countries, as well as in the economies. You gave an example in your book, a finding that found that institutions and geography can interact with each other. You showed that parts of Africa that had great coastlines, easy access, tended to be raided more often, and that affected their long-term institutions and the way that they function economically versus places that weren't very accessible. I thought that was a neat illustration of how these different effects can interact with each other.
Koyama: That's based on Nathan Nunn's research. It's another example of institutions and geography interacting, which is a key theme. Slavery is very detrimental for long-run development in Africa, it undermines trust in state-building. It's a key conclusion from Nathan Nunn's work. And what he shows is, basically, ruggedness to some degree, affects the likelihood of native populations being enslaved. It's easier to escape could-be slave traders and slave capturers in the mountains, in the highlands. In the rest of the world, ruggedness is bad for economic development, but in Africa, it's positively correlated with economic development.
Beckworth: Yes, it's very interesting. So, the key question out of that chapter of institutions [is], well, how do we get good institutions? We touched on some of it. There's some path dependency, some interaction with other factors. But that's the question. We have geography, we have institutions. How do we get good institutions? So, let's move on to something closely related to it, culture. Why does culture affect economic outcomes? First, let's start with the definition. What do you mean by culture in this discussion?
Culture as a Driver of Long-Run Economic Growth
Koyama: The definition of culture we emphasize or draw on, is drawing on the work of Harvard anthropologist Joseph Henrich. It's the idea that, as humans, we have a lot of shortcuts and heuristics that we use in our head to make decisions. A key one which we'll discuss and we discuss is trust. Should I trust a stranger or not? So, some of that is a rational calculation, but some of it is just like, something in my brain prompts me to do something, and that's kind of what we mean by culture, so culture of trust or culture of distrust. The culture could apply to a culture of savings or thriftiness versus a culture of expenditure. Culture just refers to any one of these sets of traits which shape how we reason and shape our preferences.
Beckworth: Going back to the story of Africa and slavery, you talk about in your book how those places that were raided often for slavery, often the trust became very low in the remaining population. They didn't trust their leaders, and that continues to this day. Again, another, I think, powerful illustration of how these geography, institutions, [and] culture can interact with each other. It's not easy to draw a clean monocausal story. It was just this factor, not the other ones. Alright, one of the fascinating areas of culture, of course, is religion. And so we have to ask, does religion matter?
Koyama: Very much so, but not necessarily in a way that people have always thought. I guess a key example is the Protestant work ethic and Max Weber's hypothesis that there's something about Protestants which makes them either save more or work harder, and that's a key driver of differences in economic outcomes between Protestants and Catholics. That's a longstanding hypothesis in the social sciences, which was originally formulated by Weber, and when Weber formulated it, it did make sense, in the sense that many of the richest countries in the world, like Great Britain or North America, were predominantly Protestant at that time, and the UK was much richer than, say, Spain in 1900. Similarly, within Germany in 1900, the northern, more Protestant areas were richer than its Southern, more Catholic areas like Bavaria.
Koyama: But it turns out that, today, this doesn't really hold nearly as strongly. Italy and Spain are not meaningfully much poorer than, say, the United Kingdom. Within a country, say, Bavaria, is a richer part of Germany than the northern parts. So, this correlation has substantially weakened, and the research that we document in our book by Sascha Becker and Ludger Woessmann argues that the real channel for this association, this correlation between Protestantism and higher growth in the 19th century and early 20th century, wasn't a work ethic or savings, but it was due to education and human capital.
Koyama: So, something that can be documented is that Protestants were more literate than Catholics after the Reformation, so Protestantism had an effect. It caused higher literacy across Northern Europe. And higher literacy didn't really matter for growth that much in a pre-industrial period, because if you're a literate farmer or an illiterate farmer, it doesn't make a huge amount of difference, but by 1900, it does make a difference. Workers who could read or write, they could operate machinery, they could follow instructions. It's just positively associated with productivity. And so the Protestant areas have a benefit of having a more educated workforce, and that's largely a result of Protestantism, at least according to this paper by Becker and Woessmann.
Beckworth: So, to the extent it had an effect is because it drove literacy, going off the Protestant call for sola scriptura, read the Bible only, and that required literacy. The other thing about that that's interesting is the long-lasting influence that we do see with culture. Alright, let's move on to demographics in the next chapter. This is where you bring up Thomas Malthus and Malthusian theory, and you tie it into the Black Death and the big debate over real wages.
Demographics, Malthusian Theory, and the Black Death
Koyama: So, the effect of the Black Death on real wages. The Malthusian framework is a very useful, sort of simple framework for thinking about the pre-industrial world. In the pre-industrial world, agriculture is the main source of economic development, and it's subject to diminishing returns to labor. Most people are farmers, and so if you add more people, basically… think about adding one extra worker to a fixed plot of land. That worker's marginal product will be lower, so his wage will be lower, and his living standards will be lower. This is this Malthusian insight, that adding more people doesn't grow the economy. It makes people worse off.
Koyama: And so in this context, the Black Death is this tremendous shock which kills a third to a half of the population, and so this question about what impact it has on the economy, both real wages, but also per capita GDP. And so I'll tell you what actually happens in terms of… people often think of it as happening immediately, but, initially, actually, the Black Death is such a devastating shock that, actually, it causes a lot of economic hardship, because it kills so many people that there are not enough workers to harvest the grain. So, fields are lying empty, because there's a scarcity of workers, and there's just so much disruption, and it's actually associated with a lot of inflation initially, so real wages don't go up right away.
Koyama: Similarly, this is an economy bound by custom. It's not an economy used to dealing with nominal price increases, so it takes some time. But, within a decade, the workers are demanding higher and higher nominal wages, and the lords are saying, “this is outrageous, these pesky peasants are asking for wages twice what they were 10 years ago, this can't happen,” and they try to legislate against it, but the market eventually speaks. Labor scarcity eventually speaks. And so workers are able to increase their demands and inflation stabilizes. Real wages do go up eventually.
Koyama: This is helped by the plague returning periodically. So, the plague keeps coming back, keeping the population down. And so, real wages peak, in England, around 1450. So, a century after the Black Death, population has gone down to being under 2 million, so probably a third of what it was a century before, and workers are really getting a lot in terms of real wages, part of which they're consuming in the form of actual wages. But part of this they consume in the form of more leisure time, so they just work less as well. That's partly how they're consuming this. They're also consuming this in the form of a more protein, meat-based diet. They're drinking more beer. Peasants in 1300 probably weren't eating much meat, but by 1450 they are, so they do benefit from this labor scarcity, but not in a way that leads to modern economic growth, because these are still agrarian economies. They haven't really industrialized in any meaningful sense.
Beckworth: So, Thomas Malthus and his theory, it actually makes sense up until the Industrial Revolution. Malthus today gets a bad name, people make fun of Malthusian economics and stuff. But I think what I'm hearing here is that this actually makes great sense up until the Industrial Revolution.
Koyama: Yes, exactly. So, Malthus is correct about his world until the point in which he's writing. So just as he starts writing, he's precisely going to be incorrect. But, he's very accurate in describing the world he's living through, which is what you would expect for a man who is really smart, and he's looking at a lot of history. He's surveying history. He doesn't have what we would consider hard data, but he has a lot of data points, and he's correctly fitting a theory which matches all of those data points. The work of Oded Galor is very much-- We were discussing theories before. He provides a theoretical framework [where] he links this Malthusian model with a modern growth regime, it kind of unifies the two. That's one which provides us one way of thinking about, why was the world Malthusian before, and why did it cease to be Malthusian, in the long run, after 1800?
Beckworth: When did he write his famous work? I see he was born in 1766, he dies in 1834.
Koyama: I think the first edition is 1797, but he keeps updating it. I think the first edition is 1797, and the first edition is the one which is most famous. That's where he predicts doom and gloom, and in his later editions, he moderates a little bit.
Beckworth: That's interesting, that he writes at that time, because Adam Smith is also writing at about that time, and Adam Smith actually gets it right. I mean, Adam Smith, he sees modern economic growth, markets, and stuff. But Thomas Malthus' problem was that he was looking back, I guess, too much and maybe not appreciating the market process?
Koyama: I would just caveat that to say that I think Smith scholars are undecided about how optimistic he is in the long run. There's an optimistic reading in there, but there's also quotes where he talks about a stationary state, so Smith scholars are in two minds. I like to think that he's optimistic as well, because he envisions increasing returns, so i'd like to think of him as optimistic. Malthus thought he was building on Smith.
Koyama: He doesn't think he's repeating Smith. He thinks that Smith would agree with him.
Beckworth: That's interesting. So, some Smithian scholars think that Adam Smith wasn't that optimistic [about] long-run growth, and Thomas Malthus thought he was building upon it. And you’ve got Karl Marx writing, too, sometime around that period, so a lot of ways to interpret it as very pessimistic outlooks during this time. But, I will claim Adam Smith and the camp for long-run optimism, and, I guess, the argument there, again, to summarize, is that the Black Death, the reoccurrence of the plague, in some sense facilitated economic growth. Although, this isn't a great story once when we get to the Industrial Revolution. The last chapter on potential explanations is the one on colonization, exploitation, and we've kind of touched on some of this already, the slave trade, the European powers taking advantage of their head start. What can we say about this particular explanation?
Koyama: European colonization is obviously a huge topic. As an explanation for modern economic growth, on its own, I don't think it flies. There's a naïve version of this whereby the riches of England, after Industrial Revolution, are due to their pillaging of India. People think of this as, very much, a transfer of resources from one part of the world to the other, very much a zero-sum way of thinking. That obviously is ludicrous once you see the scale of the growth. Colonization is largely a consequence of economic growth and industrialization, not a cause. There are some scholars who see some role for colonization as an input to growth. There are some arguments that the sugar-slavery nexus in the Caribbean, in Britain, was important in facilitating industrialization. So, colonization could have played a role, but it's going to be subsumed or interacting with all of these other factors making Britain an industrial hub after 1800, not the sole or main cause of it.
Beckworth: Those were the main theories that you outlined in your book, and then in the rest of the book we get into where we are today and, also, the case study of Great Britain and the Industrial Revolution, why it took off. So, maybe let's go there, let's talk about the UK. Why was the UK the place [where] the Industrial Revolution started? You note that the Netherlands, the Dutch, they also had great opportunities as well, they had a robust economy, they had ships. Why was it that the UK, Great Britain was the place where the Industrial Revolution started?
The UK as the Birthplace of the Industrial Revolution
Koyama: I think it's not a single one factor, that’s kind of the way we picture [it] in that chapter. It's a confluence of factors. So, one difference between the Dutch and the British is the size of their economy. The Dutch are prosperous, they're mercantile, they're— if we want to use that word— they’re capitalists, right?
Koyama: So, their per capita income is higher in 1700, but they're disadvantaged by geopolitics. So, the Dutch were invaded by the French in late the 17th century, they fought them off successfully, but they incur a huge national debt, which is actually more up your alley, David, because it's a macro thing. They incur a huge debt, which they had to pay off in the 18th century, and they actually raise very high taxes— they're the most taxed country in Europe— to pay back this debt.
Koyama: And so, from a political economy perspective, you could say that the Dutch are just too small and Britain is big enough. And that’s both big enough to provide the defense, particularly the Royal Navy, to fend off the French, but without burdening the domestic economy with too big of a fiscal state. Contemporaries like David Hume and Adam Smith did think taxes were too high, debt was too high, in England in the 18th century. They complained about this a lot. But, ex post, it doesn’t seem to have been too high, because the Industrial Revolution was still able to get going even though the British state was taxing a lot and using it to fund the Royal Navy.
Koyama: Another reason in which size helps the British relative to the Dutch is the internal market. Britain has got enough consumers, its population is growing in the 18th century. And so, if you're a Smithian, there is a scope for the division of labor in Britain going back to the stuff we discussed in our geography chapter. The British also really built a lot of infrastructure, a lot of new roads and canals, which helped knit together this growing commercial economy. Then, there are some other background factors, some of which are common to the Netherlands and also to Britain. So, one background factor was the Scientific Revolution. The Scientific Revolution was laying a groundwork of ideas, really establishing the idea that we could use science to improve nature. So, we could use science to improve the productivity of nature; better fertilizers for soil, using machines to improve worker productivity.
Koyama: And, as we’ll get to, the key industry that Britain is going to excel in is the textile industry. And so, there, the British already have-- they've been doing textiles since the Middle Ages, so they already have some kind of preconditions to really develop textiles as a key industry of the Industrial Revolution, whereas the Dutch don't, so much. They have some textiles, but not as much as what was [actually] in Belgium, or the low countries, what would become Belgium. That was more of a center for textiles. And so, the Dutch are really ahead on commerce and trade, but they're not as well positioned for manufacturing.
Beckworth: Okay, so that's the story, and there's an entire chapter in the book that listeners can go check out. So, it makes a lot of sense. I want to go back, though, Mark, to the conversation you had back when you were first on the show, and that's Rome. So, as we talked about back then, Rome had about a million people at its peak, is that right? The population, is that correct? Okay. And they were able to feed them, to thrive for some time, and that suggests a big market, and I think there's evidence that there was a Smithian market process. So why couldn't Rome have reached something like this? Why couldn't Rome have kept growing even if it didn't have all of the ingredients, but, over time, accumulated the necessary ingredients to put it at the place where Great Britain was on the eve of the Industrial Revolution?
Why Didn’t Rome Industrialize?
Koyama: It's a great question. I've just been reading a book called Pax Romana which actually touches on these topics as well. So, we have a city of Rome that has a million people, [and] the Roman Empire itself, maybe 50 to 60 million at its height. And so, it's not ludicrous to think that Rome could have industrialized, because London, in 1800, is about a million people. And so, a million people in a city like Rome in 100 CE, it means that those people are not farmers. They're not living on the land, they're not subsistence agriculturalists, and so they're being supported by someone else. So, that speaks to at least a dense trade network. It speaks to a relatively sophisticated market economy with a division of labor. And the Romans were technologically innovative in a few areas, so concrete, aqueducts. They had some understanding of steam technology, even.
Koyama: So, there's this big puzzle about why they didn't industrialize. And I wrote a blog post about this several years ago, where we speculated [that] slavery is often cited as a reason why they don't invest in labor saving technologies, and this touches upon what we discussed in the book, because one of the prominent arguments for British industrialization is this need for labor saving technology. That's Bob Allen's argument, that in England, the labor costs were, relatively speaking, quite high relative to the cost of energy, or the cost of capital in the form of interest rates. And so there's a particular incentive to do labor saving technology and technological changes, and that just wasn't the case in Rome.
Koyama: I would say, having read more widely since then, I'm probably a little bit more pessimistic about the Romans than I was even back then, because a lot of Rome's size was probably due to rents, political rents being directed into the capital. There's, basically, a free grain dole where citizens get free bread and oil, and there's all of the wealth of the empire and there's all of the slaves being transported there. So, in some sense, Rome is artificially big. It's a huge metropolis, but that's not a reflection of underlying preferences and productivities in the same way that I think London was in 1800. It's partly a reflection of coercion. And so, Rome is a market economy and it’s, in some sense, in some direction [the] technology has been sophisticated, but it's far from being innovative in the way that I think the British economy was after 1700.
Beckworth: So, it wasn't sustainable, the system that it had set up?
Koyama: Yes, it seems not. And then, the Roman economy gets a bunch of bad shocks after 150CE. So, the book I read was called Pax Romana, and it's about the Antonine plague. And the plague, a disease epidemic which took place [during] the reign of Marcus Aurelius. We don't know what it was, but it was devastating. And, also, the work of Kyle Harper shows that the Roman golden age was a period where the climate was quite favorable to agriculture in North Africa and Italy. And after around 250 or 200, it gets worse, the climate deteriorates, and it becomes drier and less certain. And that's like a negative supply shock, and that seems to also derail Roman economy.
Koyama: I will you tell you one final point that I will just make before concluding on this, is that one of the things we argue that matters for Europe is that it's politically fragmented. So, political fragmentation means that if one state or policymaker [makes] some bad decision, in some sense, other states don't have to go along with it, and they're somewhat insulated. So, Europe is culturally and intellectually quite unified. Ideas cross European borders very, very quickly. Bad policies might be confined to one or two states. Not everyone has to do a bad policy if one guy does it. And so, that's another argument for why Europe is well poised for industrialization after 1700, whereas other parts of the world aren't. That would also apply to why Rome wasn't, in the second century AD.
Beckworth: So, Great Britain had a perfect storm of all of these pieces coming together that led to the industrial revolution. Alright, let's go from the Roman Empire to the present day. And there's a lot more in the book, I encourage listeners to check it out. Again, we'll have the link to it in the show notes. But let's go to the present day. Now, I'll bring up two issues related to prospects for future growth going forward. And so, one I alluded to earlier, and that is population. It looks like population growth rates are definitely declining, and in some places like China, it’s an absolute decline in population.
Beckworth: If we go to someone like Romer, the endogenous growth theory, what drives growth is this idea generation. Even in the Solow model, that residual, the total factor productivity, you can think of idea generation being important, and you need to have people, you need to have a distribution of IQs. You just need a lot of people to generate ideas to have sustainable long-term growth. So, I guess, question number one would be, should we worry about the decline in population growth? Number two, a more optimistic story would be AI. AI might be a positive productivity shock, might make up for the decline in population. Do you have any thoughts on those two potential factors that weigh on future economic growth?
The Future of Economic Growth: Demographics and AI
Koyama: Yes, the Romer model… and this idea goes back to Michael Kremer, that basically, in a population of a million, you might not get that many geniuses, but in a population of 100 million, the chances are that you'll get some. So, what matters for growth isn't the average, it's the tails, because the tails will generate technologies which are then non-rival, and so everyone benefits.
Koyama: So, Isaac Newton invents calculus, along with Leibniz, but then everybody thereafter can benefit. Even if me and you are not nearly as smart as Isaac Newton, but we could benefit from the invention of calculus. And so, that's one reason why you want population growth. So, yes, I think it is an issue. The unified growth theory, as I mentioned earlier, actually endogenized demography, and so they endogenize the idea that once you get to a certain level of income, population growth will slow down. But, it shouldn't decline unless the costs of having children are too high. And so, I think that's the problem in modern countries, developed countries, and the worst is in places like South Korea and China, is that the costs of education are too high when you take into account not just universities, but extra tutoring and so on, and then the costs of having kids in terms of space.
Koyama: If your housing policies are screwed up, [and] you can't have a comfortable suburban home, then you're less likely to have children. Another issue is that the education structure and the job structure for women encourages women to get their careers together first, basically. And so then, basically, if you're taking 10 or 15 years after university to establish yourself in your career before you start having children, by the time you have children, your natural fertility is reduced, and so you may not even be able to have children even if you want them. So, those are the fertility issues that we face.
Koyama: And I think it is an issue. I think it's not fully compensated for by immigration. Some people will say that it doesn't matter that the Germans or Italians are not reproducing, themselves, they can just immigrate people from the developing world. They think that's the same, because they're not one-for-one substitutes, and there are other costs involved with assimilating the immigrants, so it's clearly a problem. That's going to be an active productivity shock, potentially. Although, actually, first and foremost, it's a problem for entitlements. Before it becomes a problem for innovation, it's an entitlement problem.
Koyama: AI is a positive productivity shock. We don't know how positive. We haven't yet seen it, really, I think, in the growth stats. And so, that could offset the negative one we get from a smaller population, but I don't know. People have switched from being techno-pessimists a few years ago to being techno-optimists in the last couple of years. I can see why it could be a game-changer. But, so far, all of the claims I've seen made are a little bit over-exaggerated so far. So, people claim it could really improve your research productivity. You can get it to write your code. Maybe those people are just better at using it than I am.
Beckworth: Well, maybe if we get to the place where AI really can make a difference in productivity, we'll have a different danger to face if it becomes aware or cognizant, and we have to deal with another issue. But just circling back to the population growth, this is an issue that's near and dear to my heart, because I see all of these issues that we're dealing with today, things like climate change. You hear people call for having fewer children, and to me that's completely the opposite solution. The solution should be, let's have children, and let's train them well, and, one day, one of them might be an Einstein of climate policy or climate technology. They might find a solution. We want minds to solve the problem. And as your colleague Alex Tabarrok says, do you view a person as a stomach or as a brain? And I think that has a huge bearing on how you view these issues.
Koyama: It's Julian Simon, basically, and I agree.
Beckworth: Yes, Julian Simon, great person. Okay, with that, our time is up. Our guest today has been Mark Koyama. Mark, thanks so much for coming on the show. Mark’s book is titled, How the World Became Rich: The Historical Origins of Economic Growth.
Koyama: Thanks, David. It's been great.