Title: Escaping Poverty: The Origins of Modern Economic Growth
Author: Peer Vries
Scope: 4 stars
Readability: 3.5 stars
My personal rating: 5 stars
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Topic of Book
Vries reviews the substantial literature on the origins of long-term, sustained economic growth. In particular, he focuses on whether on differences between Britain and China before 1800 accounted for their differences in economic growth after that year.
If you would like to learn more about origins of modern economic growth, read my book From Poverty to Progress: How Humans Invented Progress, and How We Can Keep It Going.
If you are looking for a detailed review of all the factors that contributed to the “Great Divergence” between Northwest Europe and the rest of the world, this is a pretty good place to start. Vries does a good job explaining each competing theory fairly, while not being afraid to state his own opinion. He never presents his own theory, but I think his conclusions are quite reasonable.
- 18th Century Britain had key advantages that made it far more like to industrialize first. A few other nations in Northwest Europe did as well. China and other Asian nations had virtually no chance of doing so.
- The recent revisionist attempts to show that Northwest Europe and Asia were not that different in the 18th Century are largely untrue.
- The supposed advantages of European empires were not decisive or even important.
- The East was already fading before the West even rose.
- Sustained innovation is the key to modern economic growth.
- No nation has been able to industrialize with free market policies. Even Britain and the USA departed heavily from this ideal.
- The fragmentation of power between European states and within European nations played a key role in the dynamism of the region.
Important Quotes from Book
What are the causes of the wealth and poverty of nations? Why are some countries rich while most of them remain poor? To answer this question, this book posits the thesis that the emergence of a new kind of growth must be explained; economists normally characterise this growth as modern economic growth, the essence of which consists in its sustained if not self-sustaining character. Those countries that knew it became rich, while the rest continued to be poor. The book will deal primarily with the question of how this global gap between rich and poor – a gap that continues to confront economists and economic historians with such a huge challenge – actually emerged.
That the wealth of the world should be spread so unevenly across nations is anything but obvious. Actually, the fact that there are rich countries at all is quite surprising in the sense that it is unusual. Over most of global history, poverty has been the normal state of affairs for societies.
From a scholarly perspective the real intellectual challenge is to explain how some countries, for a long time, almost exclusively Western countries apart from Japan, managed to escape from poverty at all. They did this in the nineteenth and twentieth century in a process that started in Great Britain in the eighteenth century and that often is described as industrialisation but that can be better characterised as a take-off into modern economic growth that created a huge gap between rich countries that had growth and poor countries that lacked it.
Ever since the publication of the book by the American economic historian Kenneth Pomeranz, the coming into being of this gap has been called the Great Divergence.3 Before that divergence, the average inhabitant of the wealthiest countries of the pre-industrial world, Great Britain and the Dutch Republic in the eighteenth century, had a real per capita income that at best would have been some five times as high as that of inhabitants of the world’s poorest countries.
The debate on the Great Divergence clearly is not a recent fad. It is one of the central questions of history and the social sciences and is as old as those disciplines themselves. Up until quite recently it was usually discussed in terms of ‘the rise of the West’.6 It has become quite vigorous again because a lot of the assumptions it used to take for granted, have become highly contested with the emergence of the so-called ‘California School.”
The California revisionist thesis, in a nutshell, can best be described in terms of ‘surprising resemblances’ and ‘Eurasian similarities’.
Not to fight straw-men, I immediately should add that the most important Californian, Kenneth Pomeranz, very recently admitted that he probably overstated the lateness and suddenness of the Great Divergence and that economic parity between the two extremes of Eurasia probably had already disappeared in 1750 if not in 1700. The Great Divergence, so he now writes, may indeed have been somewhat more of a drawn-out process instead of a quite sudden break.
The Great Divergence was caused by the economic rise of some and the non-rise and sometimes even economic decline of many regions. More specifically, the gap emerged because the economies of parts of the world began and continued to grow, which was abnormal, whereas in the rest they did not, which was quite normal. The fundamental fact to be explained is the beginning or origin of a historically novel kind of growth that economists tend to call ‘modern economic growth’. This book deals with: ‘How it all began’. Such growth involves a per capita rise in real income.24 It is defined as substantial, of course a qualification that is a matter of debate, but most importantly as sustained. The Great Divergence is studied here as the effect of the fact that some regions in the world came to know this growth, whereas most of the others didn’t or did only much later.
It is essential for my arguments to realise the magnitude and character of what is discussed here: what we try to explain for Britain and Western Europe is the take-off into an increase in wealth that between 1820 and 2003 amounted to no less than 1500 per cent; that occurred in an almost continuous process over many decades and that was accompanied by structural changes in Western Europe’s economy and society.
The Great Divergence, whatever its causes and their longevity, indeed involved a rise of theWest. It is important to realise that it was not due to increasing poverty after 1750 of the countries that were to become the poor ‘Rest’ but to increasing wealth of the countries that turned out to be rich.
What occurred in the nineteenth century with Western industrialisation and imperialism was not simply a changing of the guard. What emerged was a gap between rich and poor nations, powerful and powerless nations that was unprecedented in world history. The emerging gap was not only far bigger than ever before, it also had much more of a global impact then ever before.
The coming of modern economic growth was not a natural continuation of previous economic history, be it on a different scale: it was quite unnatural. It was not something that was bound to occur if only certain blockades would disappear.
In my view, the chances that Qing China would have industrialised first instead of eighteenth century Britain are nil. The probability that Britain would industrialise considering the trajectory it was on definitely was not negligible and in any case much higher than the probability that any other region outsideWestern Europe would and also – but with less distance – higher than the probability that this would occur in, e. g. the Dutch Republic or France. The huge, enduring and for many decades steadily growing gap that we call the Great Divergence simply cannot be the sole consequence of some luck or windfall.
The Industrial Revolution and modern economic growth were neither foreseen, nor predicted or planned.
In my view, the Great Divergence is neither something pre-ordained from time immemorial, based on fundamental and perennial differences, nor “a late, rapid, unexpected outcome of a fortuitous combination of circumstances in the late eighteenth century” as Perdue and many Californians want us to believe.
The emergence of modern economic growth and industry in the Western world were not inevitable whatever that exactly may mean – but they did have a relevant pre-history that certainly stretched further back in time than the late eighteenth century. They were path-dependent outcomes of a specific trajectory that made their occurrence in Britain (and Western Europe) in the eighteenth century much less unlikely than they would have been in Qing China (and any other part of the non-Western world) at the time.
What we want to explain is the emergence of long-during, sustained, substantial growth in one part of the world and its nonemergence at the time in the rest of the world, focusing on the very beginning of the process of breaking the strangleholds of the old economy.
What brought about the little pre-modern growth there was? Very important was rent seeking, a common denominator for all sorts of surplus extraction that are not so much a matter of creating and profiting from overall growth as of appropriating as much as possible of an already existing ‘pie’ via force or, in any case, power.198 Think of war, plunder, extortion, coercion, manipulation or monopoly. The wealth of a nation was then as a rule regarded as something that could best be promoted on the backs of other nations.
In my view, at least it has now been fairly effectively shown that actually China’s economy – to again focus on this country – not only functioned quite differently from that of Western Europe, in particular Great Britain, but also was less advanced than revisionists assume and that chances that it would industrialise were only a fraction of the chances that Britain’s economy would. I hope to have shown in the text that the chance that Qing China might have become the world’s first industrial nation for several reasons was about nil. I even think its potential to quickly catch up in the nineteenth century – even had it been left to its own devices – were tiny.
We see fundamental differences with regard to average farm size and whether that increased or decreased; with regard to the importance of scale effects, the use of animals, non-family and wage labour, and with regard to the sources of energy used. In Britain, non-human energy sources, i. e. animals, water and wind and, quite early on, coal played a far more important role. We also see fundamental differences in the organisation of domestic industry : whereas in Britain putting out was more prominent, a system of individual buying and selling was predominant in China. Urbanisation reached different levels in both countries and decreased in China, whereas it increased in Britain. The nature and function of towns differed in both countries. Labour was more expensive and less abundant in Britain where wage labour was far more normal. Britain’s labour force had higher literacy and numeracy rates. Skills premiums were lower there. The country had more mechanics. Entrepreneurs, scientists, engineers, artisans and tinkerers were in closer contact to each other. There were substantial changes in China’s consumer demand, but foreign goods played a less prominent role in those changes and in any case had less impact on production.
As regards accumulated surplus, both countries in principle had enough means at its disposal to pay for a take-off. In Britain, however, the purchasing power and market-orientation of the broad masses were higher. Britain’s economy and society were far more open in terms of the exchange of goods, people and ideas with societies all over the globe. Collusion between economic and political power was far more normal there. Britain was a fiscal-military mercantilist state until the 1820s at least, while Qing China was not. Britain’s government had far more tax income and far more other income because British people were willing to support government and lend money to it. The country’s tax system was more efficient. The same goes for its monetary and financial system. It, in contrast to China, had a system of funded debt, a national bank and state–supported paper money. Its bureaucracy was more efficient and less corrupt than China’s. It had a strong army and the strongest navy in the world. Its government endorsed most economic innovations. The country had a strong sense of national identity, unity and commitment, and relatively inclusive institutions to put it in Acemoglu’s and Robinson’s terms.
The revisionist claim that the wealthiest parts of China were as wealthy as the wealthiest parts of Western Europe on the eve of Britain’s industrialisation now seems to be refuted.
Qing China from the beginning of the long eighteenth century onwards simply was quite static… The country may indeed have invented the printing press, the compass, gunpowder, paper money and many other things, but the 250 years of Qing rule did not see much real innovation. No breakthroughs occurred in mining (neither in drainage nor in ventilation), in iron production, in the enormously labour-intensive irrigation or in the husking of rice. What is also very striking is the almost entire lack of major institutional innovations as compared to Britain with its financial, political and military ‘revolutions’.
The take-off in Britain and later the rest of theWest indeed,.. was preceded by a ‘decline of the East’, discussed,
India had already lost a significant share of the world’s textiles markets to Britain before that country had a clear technological advantage in producing them, i. e. at least before 1800. Indian competitiveness suffered because of developments in India itself that drove up wages and prices. For China, we indicated that its exports of porcelains and silk textiles shrunk already in the last decades of the eighteenth century. In the OttomanEmpire, de-industrialisation set in later ; only after the 1820’s. But there we see a striking loss of political and military power.1303 The Iranian Empire of the Safavids basically already collapsed in 1722.
In my view, geography in the widest sense of the word, including location and the local availability of resources, definitely can be an important factor in explaining wealth and poverty. But no one has been – nor will anyone ever be – able to come up with general i. e. ‘universal’ and unequivocal causal connections between specific geographical factors and wealth or growth, let alone modern growth. When it comes to sustained and substantial economic growth, geography can at best be a necessary precondition but never a full or even major explanation. It simply is too static for that.
I can only, looking at the available literature, conclude that when it comes to the specific human capital needed for the specific breakthrough that we refer to as the ‘Industrial Revolution’, the situation in Western Europe, first and foremost Britain, simply was more favourable than in the rest of the world. All indicators I found with regard to available skills point in that direction, as does all the circumstantial evidence.
When it comes to accumulation as such, that is, to the amount of capital Great
Britain needed for the first take-off and the amount of capital it would have taken other countries that did not take-off, the conclusion can only be that the capital requirements of the first take-off into modern economic growth that is at the heart of our analysis relatively speaking were so small that in principle they must have been less of an issue than they often seem to be in older literature. They definitely could have been met by several societies. Admittedly, after 1850, with the coming of the so-called Second Industrial Revolution, but in essence already with the coming of the railways, capital requirements clearly became higher and catching up more ‘expensive’. But then Britain had already taken off.
The first take-off actually was quite cheap.
Rent collecting abroad has its limits and as such can never guarantee sustained growth like the growth the rich world has now known over many decades. The contribution of the periphery in terms of rents was not necessary for theWest to take off, even in cases where it was substantial – which as compared to total GDP it never was.
Modern growth is simply not a matter of primitive accumulation, even if of course it will clearly have helped at certain times and places. The West in any case did not simply become developed, industrial and rich thanks to coercive external extraction like trading slaves and exploiting their labour or appropriating bullion from Latin America.
No one will deny that specialisation and exchange can be sources of growth. But that does not turn trade into the motor of modern, sustained growth. Trade without innovation reaches its limits as it exchanges products that are produced within the limits of the existing production functions and does not move the entire economy to a higher level. Ceteris paribus, the limits of Smithian growth are determined by the extension of the market. That determines how far specialisation can go. This extension of the market in turn is determined by existing technology, in terms of transport and communication, by institutional arrangements, in particular the level of trade barriers, and by income, and it normally is influenced by the factor endowment and size of the countries involved.
Modern economic growth as sustained and substantial growth exists because of sustained innovation.
Some scholars writing on the Industrial Revolution froma global perspective, such as Joel Mokyr and Jack Goldstone, full well realise the fundamental importance of innovation and all it takes and pay ample attention to it. But very influential scholars in the field of global history like Andre Gunder Frank, Kenneth Pomeranz, Roy Bin Wong, and quite recently also Ian Morris, in their analyses all but completely ignore the role of innovation as a continuing process and rather casually present inventions and innovations as fairly isolated and obvious responses to obvious challenges in terms of necessity being the ‘mother of invention’ or even as a matter of contingency. All this is simply not borne out by the historical record of countries that took off: the essence of innovation in modern economies is the fact that it is a sustained and broad process, too sustained and too broad to be just a response to a challenge or just an accident.
The Great Divergence would have been unthinkable without sustained innovation, i. e. without sustained technological and scientific development. There obviously is more to modern economic growth than just innovation but there can be no doubt that without steady innovation it would soon have dwindled to nothing.
I would personally be willing to endorse the thesis that property rights are a necessary condition for sustained, substantial growth. But they definitely are not sufficient.
Overall I would say that when it comes to the market exchange of commodities, services and capital goods, there unmistakably are several differences between Britain and China. These, however, are too small to be able to explain why Britain took off and China did not. When it comes to labour markets, differences are striking. Overall, as far as we know now, there was much more wage labour in the West than anywhere else in the world and nowhere so it seems was wage labour more normal, and expensive, than in Britain. When it comes to money markets, to conclude, judging by the interest rates, more money was available and they worked much better in Great Britain than in China. Judging by the criterion of how much economic life took place on a market, Great Britain, all-in-all, was therefore a more developed market economy.
To do so is to ignore that capitalism, at least in the perspective of just about everyone who ever discussed the concept, includes far more than the buying and selling of consumer goods on a market. Whatever else the concept may mean, it in any case refers to a mode of production and exchange that is characterised by (1) exchange on markets of not just consumer goods but also capital goods, labour and money, (2) a specific organisation of production with a focus on accumulation of profits on those markets and (3) permanent investment of those accumulated profits in capital goods. Using this definition eighteenth-century Britain and the Dutch Republic – and admittedly to a lesser extent most of the rest ofWestern Europe – were so much more capitalist than the rest of the world that one basically has to conclude they, with all the differences between them, were the only capitalist regions in the world. No part of the world had such a large labour market – and so many medium and large-scale enterprises and firms – and such low interest rates. The comparison with China in these respects provided striking results. In that country, there were hardly any fulltime wage labourers whereas interest rates were very high. The bulk of production took place in households which still had means of subsistence and there was not much large scale, productive (re-)investment. Considering its mode of production, it was far more improbable that China’s economy would take the road to industry than Britain’s.
What is very important in this context is that Great Britain not only had a market economy that was capitalist in the sense just described but on top of that also, as a kind of super-structure, a layer of economic life that was capitalist in the sense in which Braudel and Wallerstein use that term. At the commanding heights of Britain’s economy, in particular in finance and long-distance trade, and there where the state had its interests, the ordinary rules of the market hardly applied. At that level, monopoly, lack of transparency, collusion between economic and political interests and interest groups and regulation were the rule.
The striking conclusion of our comparative empirical analysis must be that Britain, the first industrial nation, during its take-off until at least the 1830s, and in several respects even longer, was a fiscal-military, mercantilist and imperialist state that did almost everything that mainstream economists think a country wanting to grow should not do. Taxes were very high, as was public debt. There was an extensive bureaucracy and a government that intervened quite often in economic affairs. Expenditures for the army and navy were staggering. The country was very protectionist and not exactly democratic.
Whatever the outcome of that debate, it simply is a myth that the economic history of early modern Europe would be the history of the rise of the Smithian market. When Britain took off, in many respects, it was as unlike a night-watchman state as a state can be. This also applies to the other Western countries that took off in the nineteenth century. Actually it goes for all major countries that ever took off. Developing countries, i. e. countries in the process of taking off, all had states that can be called ‘developmental’, if one does not take the term to literally and with its twentiethcentury connotations. All those states were economically very active, interventionist and intent on promoting growth.
But what economic historians have shown beyond any reasonable doubt is that the endlessly repeated mantras of all varieties of mainstream economics about the ideal setting for economic growth have hardly any relation to what actually happened in many periods of history.
If I were forced to indicate what to my view would be the fundamental cause of the rise of the West in all its varieties, including the economic Great Divergence, I would refer to this non-monopolisation but at the same time close interaction of the sources of social power, between and within states, and its differing effects in different contexts. It fuelled Western Europe’s dynamism.
The first lesson is that the odds that economic growth would emerge in Great Britain were far higher than that this would happen in China. In my view, the chances that Qing China would be the first country in the world to industrialise – or even quickly catch up – were negligible to zerowhereas for Britain the chances of a take-off were higher than anywhere else on the globe. That, of course, does not mean that Britain’s take-off was ‘inevitable’: it just means that the most likely place where it might happen wasWestern Europe, and in particular Great Britain. Industrialisation as it took place in Great Britain and more in general the modernisation of its economy can be regarded as a ‘logical’, or, in any case, quite ‘conceivable’ continuation of the route that Britain and its economy had already taken earlier on: a route of high wages, capital-intensive and energy-intensive production with ample use of wage labour, of efforts to profit from scale effects in production and exchange, of specialisation and import substitution, of gearing useful and reliable knowledge to production and of openness to innovation.
The second lesson would be that when it comes to explaining the Great Divergence, mainstream economic theory with its focus on free markets, fair competition, and market-supporting institutions including a ‘minimal’ state, is fairly irrelevant at best and in most respects downright wrong. Great Britain and all the countries that took off after it, especially in their international economic relations, were not laissez-faire states. Britain’s state in any case before and during take-off was not lean and very pro-active in the field of economic affairs. It can best characterised as ‘mercantilist’ or even ‘developmental’.
- “Bourgeois Dignity: Why Economics Can’t Explain the Modern World” by Deirdre McCloskey
- “Economic Transformations: General Purpose Technologies and Long Term Economic Growth” by Lipsey, Carlaw and Bekar
- “Why the West Rules-for Now: The Patterns of History” by Ian Morris
- “Escape from Rome: The Failure of Empire and the Road to Prosperity” by Walter Scheidel
- “Enlightened Economy: An Economic History of Britain 1700-1850” by Joel Mokyr
- “The WIERDest People in the World” by Joseph Henrich
- “A Culture of Growth” by Joel Mokyr
If you would like to learn more about origins of modern economic growth, read my book From Poverty to Progress: How Humans Invented Progress, and How We Can Keep It Going.