The failure to forecast the 2008 banking crisis appears to stem, in part, from the fact that few fully understood how much risk there was in the global financial system. There were too many mathematicians posing as financial experts and economists who did not have enough knowledge of economic history or long enough historical periods with sufficient data to measure risk as as precisely as they claimed. As a result we underestimated systemic risks...
-A Talent for Missing Trends, Richard W. Rahn
Like me you’ve no doubt had time to fret about the economy lately. Lost jobs, slashed home and portfolio values, bailouts, persistent stock volatility, etc., all too close to home. Now's the perfect time to learn more about the dismal science. Ten years ago would have been better but ‘better late than never.’ A Farewell to Alms: A Brief Economic History of the World by Gregory Clark offers a start to educating ourselves about things we’ve left to the increasingly NOT SO expert experts.
Like much of our modern systems such as the internal combustion engine, medical billing, water purification, etc., we know little about money, i.e. the how and whys of capitalism, socialism, communism or any of the hybrid variations in the world today. This book offers a base-line of economic smarts.
To study economics is at heart saturated with statistics, formulae (this book alone has a 23-page bibliography--all book and scientific journal references). Taken in small bites, a chapter at a time, it is as captivating as a good thriller (except the formulae). Like Adam Smith’s Wealth of Nations, Karl Marx’ Das Kapital and Jared Diamond’s Guns, Germs and Steel, Clark’s template is the BIG PICTURE. He also asks big questions: Why are we at this economic juncture and not still hunter gatherers? Why are some countries so rich and others so poor? What does the future hold?
Although Clark is chair of the economics department of the University of California, Davis, most of his wealth of statistics are from England, which has the best statistical evidence of any country in the world, dating back to the 13th century.
Hunter gatherer societies are the most egalitarian. In Mesopotamian the Agrarian Revolution millennia ago produced the first burst of great wealth, but not for everyone. And on page one you learn that, “the average person in the world by 1800 AD was no better off than the average person of 100,000 BC.” By page two you begin to see the true meaning of Industrial Revolution in this chart:
The history of wealth in one picture
The economic history of the world is represented by a squiggly line with scant variation from 1000 BC until about 1800 AD. The wonders of ancient Greece and Rome...mere blips in the increase of world wealth. The Black Death, a down tick, the Renaissance an uptick.
Not until the Industrial Revolution do we see a dramatic change in world economy. Mill owners in a remote corner of northern England began grappling with a peculiar confluence of forces--new business models using capitalism, insurance (think Lloyd’s of London, established 1688), the application of water power with machine technology and consolidating the workforce--created the most formidable, indeed revolutionary change in wealth the world has ever experienced.
This vertical, nearly tenfold increase of wealth was garnered by an equally revolutionary portion of the population: the non-ruling class-- unskilled workers, risk-takers, financially strapped entrepreneurs, prisoners and other disenfranchised land-strapped people traveling to the four corners of the world. Think Andrew Carnegie, Henry Shaw, James J. Hill, thousands upon thousands of European and Chinese migrants, African slaves against their will. These disparate groups created farms, new businesses and railroads in America, Australia, South America, Asia and Africa, ushering in a era of all new wealth with the advent of rapid economic, social, political and physical change.
Adam Smith’s The Wealth of Nations, published in 1776, changed how people saw wealth. According to Smith wealth was no longer just what you could touch--gold, jewels, land, kingly power, hereditary title--but also what you could produce, ideas and labor to make other things possible. “The real wealth of a country lies in its consumable goods and in the labour which produces them.” This was a sea change in how we saw value, and in no small part influenced the necessary risk takers, within a few generations, to invest in the seemingly abstract factory model when it started to look promising. Smith also noted that people work hardest for themselves, not for king or church. He also advocated free trade and low taxation.
The first nine chapters of A Farewell to Alms, published 2007 by Princeton University Press and written by Gregory Clark, uses a dark, Malthusian lens to examine world wealth before the Industrial Revolution. Thomas Malthus you recall was a Cambridge educated minister in Surrey who published his most famous pamphlet, Essay on Population, 1798, postulating economic success is followed by an increased birth rate which taxes existing resources causing economic depression and famine. “In the pre-industrial world sporadic technological advance produced people not wealth,” Clark says in chapter 2.
Malthus’ ideal population would be in Malthusian Equilibrium when all of its production is used only for subsistence so the world’s poor would not increase in number. Innovation, agricultural good years, charity and government assistance all contributed to more births and then inevitable decline, causing the Malthusian Trap. These ideas are still very much debated today as they were 200+ years ago for often, in the West, the Malthus model is false, but sometimes not. Europe’s population is almost four times what it was in Malthus’ day but Europe is noticeably wealthier. Parts of Africa and Asia exemplify the dire Malthusian Trap.
Part Two of A Farewell to Alms analyzes the Industrial Revolution, why it began in England and not other possible locales such as China, India or Japan. The last two chapters and the Conclusion grapples with why great swaths of the world’s population is still outside the loop of this extraordinary surge in affluence, and in many instances are now even poorer than they were before the Industrial Revolution.
In 1800 the wealthy were four times more affluent than the most destitute. Today, the wealthy are now 40 times more wealthy than the poor. “Within societies the forces set in motion by the Industrial Revolution have moved toward equality and social harmony. But across societies, the Industrial Revolution led a marked increase in income differences. Before the Industrial Revolution the rich and poor were close neighbors. Now they are but distant cousins, gazing at each other across national borders and widening income gaps,” Clark concludes.
Pre-Industrial labor was rewarded more for brute strength.
By the mid-1700s it took about 18 man-hours to turn a pound of cotton into cloth. One hundred years late it could be done in 1.5 hours. “Rising incomes switched the emphasis of production away from sectors such as agriculture (demanding strength) toward such sectors as manufacturing and service (dexterity and social graces became more important).
“In 1886 women cotton weavers in Lancashire averaged 82 percent of male weaver’s production. Nevertheless the average woman in cotton textiles earned just 68 percent of the average man’s wages because only men filled such skilled occupations as foreman, mechanic, or mule spinner. But despite these barriers to promotion, women’s relative wage was already an improvement over the situation in pre-industrial agriculture,” Clark explains in Chapter 14, Social Consequences (of the Industrial Revolution).
Although economists do not agree on what confluence of events spurred the development of the Industrial Revolution they can document the results. There was marked improvement in many people’s lives. “...Aspects of the quality of life including life expectancy, health, numbers of surviving children and literacy--the differences between rich and poor (within certain countries) have probably narrowed since the Industrial Revolution,” Clark states. The value of land decreased too.
The Industrial Revolution The switch from an organic to inorganic system of energy maximized production but with an environmental cost. Coal and iron were far more productive than plants and animals. Sudden wealth led to cheaper land, more expensive labor, especially skilled laborers such as managers of mills and railroads, but created more pollution and, initially, disease because people were flocking to the growing cities.
The British dominated trade at the height of their empire which included most of India, Pakistan, Burma, Sri Lanka, South Africa, and Egypt. The British policy of free trade did much to facilitate the growth of their markets. In 1910 the total size of the open cotton textile market was about $400 million, with a quarter of world production controlled by the British.
“British imperialism contained the seeds of its own downfall. It created growing cities such as Alexandria, Bombay, Calcutta, Madras and Shanghai that enjoyed the cheapest labor in the world; security of property; complete freedom to import technicians, machinery, capital, and even the entrepreneurs; easy access to the largest market in the world. This was the closest any society has ever gotten to Adam Smith’s ideal free market. World War 1 ended this 100+ years experiment.
Clark’s analysis of England compares its development to Japan and China, circa 1600-1800. These two Asian societies had many of the same components Clark describes as the ideal incubator for the Industrialization Revolution:
-stable institutions
-creation of well-defined property rights
-low inflation rates
-low marginal tax rates
-innovative ideas
-free markets and free trade
-avoidance of armed conflict
A curious historical difference between England and Asia was the birth rate of the ruling classes. The English ruling class was more successful at reproducing than the working class and the Japanese and Chinese ruling classes. The only direction for a recently successful Englishman’s children to go financially was down.
Wealth did not increase so much as get redistributed. When another knight lost his title and property because he chose the wrong side to support in war or politics, for instance, a hypothetical young man, circa 1450 AD, could then be knighted after returning from the Crusades, thus joining the landed gentry, and going on to have five children surviving to adulthood. Our nouveau riche knight’s children would then most likely marry beneath them because of the aforementioned limited pool of wealth, but taking literacy, knowledge of law and order, and a host of establishment values with them as they integrated with the merchant and working classes, spreading Clark’s list of ideal conditions throughout the society, over 500-600 years. Because ruling class Asians were less fecund this filtering down occurred more slowly.
-stable institutions
-creation of well-defined property rights
-low inflation rates
-low marginal tax rates
-innovative ideas
-free markets and free trade
-avoidance of armed conflict
A curious historical difference between England and Asia was the birth rate of the ruling classes. The English ruling class was more successful at reproducing than the working class and the Japanese and Chinese ruling classes. The only direction for a recently successful Englishman’s children to go financially was down.
Wealth did not increase so much as get redistributed. When another knight lost his title and property because he chose the wrong side to support in war or politics, for instance, a hypothetical young man, circa 1450 AD, could then be knighted after returning from the Crusades, thus joining the landed gentry, and going on to have five children surviving to adulthood. Our nouveau riche knight’s children would then most likely marry beneath them because of the aforementioned limited pool of wealth, but taking literacy, knowledge of law and order, and a host of establishment values with them as they integrated with the merchant and working classes, spreading Clark’s list of ideal conditions throughout the society, over 500-600 years. Because ruling class Asians were less fecund this filtering down occurred more slowly.
The Great Divergence “...Differences in income per person across economies can have only three basic sources: differences in capital per person, differences in land per person, and differences in efficiency,” Clark explains in Chapter 16, Proximate Sources of Divergence. “...Poor economies since the Industrial Revolution have been characterized mainly by inefficiency in production.” It has continually puzzled manufacturers and economists that poor countries, despite huge amounts of available investment capital worldwide did not take over the textile industry. The British invested heavily in India to achieve this goal. After importing textile machinery and managers, and with far less overhead for wages--the most expensive component of producing cloth--the productivity of Indian mills still could not compete with English mills.
Before World War II the inability of Asian, African and Middle Eastern workers to compete with industrialized Europe and North America was attributed to quality of labor. After World War II it was attributed to quality of management. Surprisingly, as recently as 2004 the “U.S. production of apparel was still 42% of its consumption, despite having the highest labor costs. American workers are simply far more productive. Why is this?
Our Man in Havana* Clark’s most engaging explication for the Great Divergence takes place in chapter 17, Why Isn’t the Whole World Developed? In 1907 the Indian Factory Labour Commission reported on why Indian mills were not productive. “A substantial faction of workers were absent on any give day. Other workers would supervise the absentee workers’ machines while they were gone...The mill yards would have large eating places, barbers, drink shops and other facilities to serve workers taking a break. Some mothers allegedly brought their children with them to the mills. And workers’ relatives would bring food to them inside the mill during the day. There was an utter lack of supervision in the Bombay mills. One manager stated the typical worker ‘washes, bathes, washes his clothes, smokes, shaves, sleeps, has his food, and is surrounded by his relations.’” Needless to say English mills had shop foremen that ran their mills like battleships.
The novel, The Namesake, by Jhumpa Lahiri, comes to mind. It’s a story of a newly married Indian couple who move to America to study at MIT. They are at the pinnacle of American university life but Boston is a cold city, especially juxtaposed with their memories of the vibrant and colorful city they left behind, as well as the fold of their extended family. It’s the modern, dichotomy of work over hearth, and the difficulty of finding a place that meets both essential human needs.
This may be the cumulative effect of the social genes Clark alluded to earlier--remember the nouveau riche knight? Could this ability to sacrifice certain things be what propels some English to become more goal oriented at the expense of community and family?
For many people at the bottom end of the income spectrum, such as Malawi, Bangladesh, Zimbabwe , Haiti, etc., the risk of violence or famine occurs too frequently causing the tensile social fabric to break. The same is true for the richest countries, such as the United States, Britain, Germany, etc. where drug use, consumerism and machines take over the roll of community.
Impoverished economies can be nudged into remarkable innovation. In 2006 Mohammad Yunus, a Bangladeshi economist, received the Nobel Prize in Economics for his theory and success with micro loans of sometimes only $25- $100 to very poor women to start small businesses that fit in with their family life. It was often just enough to make all the difference in their lives. They avoided usurious loan rates of conventional loans. This idea has spread to hundreds of countries throughout the undeveloped world.
We in the developed world can retire this catastrophic borrowing madness that’s weakened individuals, banks and whole governments and return to normal business models, only this time directing our energies toward more lasting needs such as designing homes that have a longer life span than 15 years. No doubt each person that reads this blog has ideas how we can improve our economy which is what we do best: Innovate.
The title, A Farewell to Alms, I believe, is interwoven with Hemingway’s A Farewell to Arms, about a soldier who is broken by life and ends up with nothing to fight. A poem of that title was written by a contemporary of Shakespeare, George Peele.
A Farewell to Arms
(To Queen Elizabeth)
HIS golden locks Time hath to silver turn'd
O Time too swift, O swiftness never ceasing!
His youth 'gainst time and age hath ever spurn'd,
But spurn'd in vain; youth waneth by increasing:
Beauty, strength, youth, are flowers but fading seen;
Duty, faith, love, are roots, and ever green.
His helmet now shall make a hive for bees;
And, lovers' sonnets turn'd to holy psalms,
A man-at-arms must now serve on his knees,
And feed on prayers, which are Age his alms:
But though from court to cottage he depart,
His Saint is sure of his unspotted heart.
And when he saddest sits in homely cell,
He'll teach his swains this carol for a song,—
'Blest be the hearts that wish my sovereign well,
Curst be the souls that think her any wrong.'
Curst be the souls that think her any wrong.'
Goddess, allow this agèd man his right
To be your beadsman now that was your knight.
An aging warrior, now a monk, has gone from honoring his love of country in battle to saying prayers on his rosary (beads) for his Queen. He no longer uses-or needs?- the ‘arms’ of the title. Once we understand how wealth is created we will no longer need alms? Or...You decide.
This was a hard book to read and review. There was so much information it made for slow reading, so data could percolate. But by the time I got to the last few chapters I was able to use a more Socratic method of interpreting all the statistics, instead of simply trying to absorb them. ‘Reminds me of when I spent three months reading Norman Mailer’s Harlot’s Ghost, which weighs in at about 1000 pages. Those weird characters kind of became part of my life for a while. So much so it’s hard not to distinguish them from the real life events they were built around. I’ll see if I begin to quantify each new garment I buy (amazingly, the Eileen Fisher tee shirt I bought in my Mall Musings was made in the USA!) or if I become inordinately curious about any factory I pass. I understand more about how wealth is created after reading this remarkable book.
