Growth and prosperity

Here’s Don Boudreaux, on how economics made the world great:

When we talk about economic growth of a few percent a year it can appear trivial. But these have an exponential effect on living standards, and they are a relatively recent phenomenon. Sustained economic growth didn’t really occur before the eighteenth century, and since then has only happened in a few countries. For some parts of the world at present GDP per capita is similar to what it was like in Europe before the Industrial Revolution. It wasn’t until the nineteenth century that some nations began to experience 1% sustained growth per year, and only since the middle of the twentieth century that it has been 2–3%.

Although these numbers seem small, they make a big impact. As Stephanie Flanders has pointed out, the economy grew by about 2.25% per year, on average, from 1970 to 2010. This means that living standards double every 30 years. But if this growth rate slips to 1.25%, it will take 60 years.

Here’s a quick look at global growth since 1766:

If – between the years 1870 and 1990 – the US growth rate had been just 1% less per year than it actually was, then it would have only ended up at the same level of economic development as Mexico. While around 20% of the world’s 7.5 billion people live on less than $1 a day (adjusted for PPP), anyone reading this chapter will most likely be in the top 1% richest people in the world. Indeed the scale of difference between rich and poor is astounding – the poorest people in a rich country have about three times as much purchasing power as the richest people in a poor country.

The increases in global income have been incredible. In Factfulness, Hans Rosling tells us that 100,000 years ago everyone was poor and most children didn’t survive long enough to become parents. 200 years ago, 85% of the world were still in extreme poverty. Today, most people live in middle-income countries, with living standards similar to Western Europe and North America in the 1950s (see p.38).

He who disdains the fall in infant mortality and the gradual disappearance of famines and plagues may cast the first stone upon the materialism of economists.

Ludwig von mises

Here’s my explanation of the causes of economic growth:

One reason why economists have done such a poor job making poor countries rich is that it is often historical accident that results in all three being in place. Indeed while it is pretty simple for poor countries to have more “stuff”, knowing what to do with it is harder than it appears. And it is not even worth trying to generate wealth without the right institutions. Attitudes towards economic development have broadly followed these stages of growth theory.

But identifying the source of economic growth is far easier than being able to generate it. Even though we know why some countries are rich and some countries are poor, it is naive in the extreme to think we are able to export this successfully. Any formal institutions must “stick” with the informal culture that already exists.

Higher incomes are really important, they lead to:

• Reduced population growth – poor communities have lots of children because many will die early, and they need a contribution to family income. As they get richer, the need for more extra children declines and parents focus on quality not quantity… based on current growth projections total global population is due to stabilise at ~11 bn people. As Rosling says, “Once parents see children survive, once the children are no longer needed for child labour, and once the women are educated and have information about and access to contraceptives, across cultures and religion both the men and the women instead start dreaming of having fewer, well-educated children” (p.91)
• Greater concern for the environment
• More resources for humanitarian assistance (e.g. for natural disasters or global pandemics)