Who Has The Wealth?

 Posted by on 6 August 2008 at 12:01 am  Economics, History
Aug 062008

Megan McArdle has written an interesting analysis of the following map showing GDP per capita in various countries:

She writes:

When you see the map, it becomes radically apparent just how firmly Britain was the root of the Industrial revolution. With the lone exception of Japan, the darkest places on the map are either next to Britain, or former British colonies. And aside from Saudi Arabia and Chile, all the growth seems to spread outward from those Anglosphere points of infection. Nowhere, not even Saudi Arabia, has the income density of Western Europe and North America.

Of course, the interesting question is why is there this distribution?

Dr. William Bernstein (a neurologist turned financial analyst/historian) does a pretty good job of answering this question in his book, The Birth of Plenty : How the Prosperity of the Modern World was Created. In particular, he analyzes history and economics over the past 400 years and makes a good case that there were four key factors that allowed men in some countries to prosper, whereas men in other countries couldn’t. The four key factors he identifies are: “property rights, the scientific method, capital markets and communications”. He argues that countries prospered to the extent that these factors were present. And in particular, when Great Britain embraced all four of these, it then led to the explosion of wealth known as the Industrial Revolution.

Although Bernstein’s analysis is fairly good, it does not quite go far enough. His four factors can be further essentialized to two: reason and rights.

His first factor, “property rights”, is self-explanatory. Property rights is the direct application of the concept of rights to humans living in a material world. It is a recognition that if men are to live, they must live under a government which respects and enforces certain principles with respect to how men should deal with physical objects, and with other men. In particular, it establishes objective principles of property ownership, and all of the corollaries (e.g., the right to use, sell, trade, dispose of, and exclude others from one’s property.)

His second factor, “the scientific method”, is the application of reason to the practical world — namely, using man’s mind to understand the nature of reality and the causal factors that allow men to shape the world for their purposes.

The third factor, “capital markets”, is an extension of property rights into the realm of finance. When men have confidence that their property rights will be respected in the long term under an objective rule of law, they are able to devise increasingly complex contracts to suit their financial needs, with terms involving time intervals that could span months, if not years. Men could create financial instruments that permit them to engage in lending, insurance, futures and options. Similarly, the birth of the limited liability corporation and the associated rise of stock markets greatly facilitated the ability of investors to shift their capital to ventures that could yield the greatest return, allowing both investors and producers to create and execute long-range plans over a period of years, if not decades.

The fourth factor, “communications”, is the practical outgrowth of both reason and property rights. Even the apparently simple task of guaranteeing the safety of roads for travel and commerce required a government able to protect individual rights from thieves and highwaymen. More sophisticated forms of communications and transport, such as the telegraph and railroads, became possible only as men’s reasoning minds created the necessary technology in a context where they could be turned into viable businesses under the protection of a government that respected property rights.

All of these factors were mutually reinforcing, in that the respect for rights and reason created prosperity which allowed for more innovations in science, technology, capital markets and communications, which led to more prosperity, etc. But the roots of this prosperity were ultimately philosophical. Without a proper understanding of rights, grounded in a philosophy of reason, none of the prosperity of the Anglosphere would have been possible.

Therefore, it is no coincidence that the GDP map tracks closely with countries that still respect reason and rights, which tracks closely with the Anglosphere. The prosperity of modern-day Japan follows from the sweeping cultural and political changes imposed on that country during the American occupation following World War II, and some regard it as a part of the “Anglosphere” in that sense.

(Note: William Bernstein is pretty good when it comes to historical discussion, but he is definitely not an advocate of full laissez-faire capitalism. For a more consistent defense of free market capitalism on both philosophical and historical grounds, I’d recommend the book by Andrew Bernstein, The Capitalist Manifesto: The Historic, Economic and Philosophic Case for Laissez-Faire. To the best of my knowledge, there is no relation between William Bernstein and Andrew Bernstein.)

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