Listen:
Dr. Jared Rubin is the co-author of How the World Became Rich: The Historical Origins of Economic Growth, which he wrote with Mark Koyama, a previous guest on the podcast. We are so happy to welcome Jared to the show today to discuss the thesis of his book, and what he and Mark aimed to add to the literature on the subject of economic growth in the contemporary context. This is a fascinating and thoughtful conversation, packed with insight and nuance on important arguments of the past, what is needed to broaden and enhance our understanding of economic growth, and how far these projects might go towards enabling us to see a better future. Dr. Rubin answers some questions about geographic, legal, and technological explanations for growth, and stresses the importance of synergy and interplay between these theories for a more illuminating picture. So to hear all this and a whole lot more, including many reasons to pick up his latest book, tune in today!
Key Points From This Episode:
- Introducing the role of culture in economic growth, and tracing the roots of this inquiry.
- Positioning How the World Became Rich in the lineage of literature on the subject of growth.
- Looking at England and the emergence of modern growth; arguments over the most important factors.
- Why Dr. Rubin tried to bring different theories into conversation through writing this book.
- Unpacking the argument for the role of liberal speech norms in the history of development, proposed by McCloskey.
- Technological progress and geographic endowments; why this relationship is worth exploration.
- Rubin’s perspective on the role of law and legal systems in the growth trajectory of a country.
- Discussing the relative slowing of growth in the Western world and what this may mean.
- Rubin briefly comments on an argument for total factor productivity growth being linear.
- Thoughts on big picture topics through a micro lens.
- The lessons we can take from history for the most impactful policies for growth in the future.
Transcript:
Kurtis: Welcome to the Charter Cities Podcast. I’m Kurtis Lockhart. On each episode, we invite a leading expert to discuss key trends in global development in the world of cities, including the role charter cities and innovative governance will play in humanity’s new urban age. For more information, please follow us on social media, or visit chartercitiesinstitute.org.
Jeffrey: I’m Jeffrey Mason, Researcher at the Charter Cities Institute. Joining me on the podcast today is Dr. Jared Rubin, Professor of Economics at Chapman University. He’s an economic historian and co-author of How the World Became Rich: The Historical Origins of Economic Growth; a rich presentation of several decades of research on modern economic growth. Jared’s co-author, Mark Koyama, was a guest on the Charter Cities Podcast in November 2020, and I strongly recommend his episode on state capacity, religious toleration and political competition as a supplement to this episode. I hope you enjoy our conversation. Thank you for listening.
Jeffrey: Hi, Jared. Thanks for joining me on the show today.
Jared: Thanks for having me. It’s great to be here.
Jeffrey: Robert Lucas, he once famously quipped that once one starts thinking about the causes of economic growth, it’s hard to think about anything else. First, let me say thank you to you and Mark for doing a lot of the hard work for us and then writing this book.
Jared: Thanks. That’s nice of you to say.
Jeffrey: Let’s jump in. This is a really impressive collection of what all the different arguments are about where growth comes from, what drives it, why it happens in some places and not others. One of the big arguments that people put forward is culture, which is a tricky subject to tackle and talk about when we figure out what actually is culture. Joel Mokyr’s book, Culture of Growth is probably the most well-known treatment of the subject. What do you think economists have to offer in the study of culture? What is the increased focus on culture mean for economic history?
Jared: Yeah. This is, I think, important both to clarify what we mean by culture, but also, to talk about this in the sense that there’s been a lot of growth in this literature. You mentioned Mokyr. That’s right. I think, he’s the person that at least very recently in the last decade or so, that book was a 2016 book, has really emphasized this link between culture and growth. Somebody like Joe Henrich recently had a book that also does the same, but looking at very, very different aspects of culture in some context.
I think, if we want to think about the role that culture plays in economic growth, you could go back way further to somebody like Max Weber, who’s very famous book, The Protestant Ethic and the Spirit of Capitalism is in this mold. A lot of the biggest names of the early 20th century emphasized something along these lines.
Now, to be very clear, and we do this in the book, when we introduce the chapter on culture, for instance, we want to make it clear, we are not defining culture, or thinking about culture the way Weber and people in the early 20th and even before thought about culture, which really took on a pretty Eurocentric view of the world, that there was something about European culture, might have been Christianity. This was still a period where Europe had colonized the rest of the world and people were trying to find explanations for this. Maybe some type of superiority came in is their explanation.
I think, Eurocentric actually a pretty kind word for this. I mean, some of these would just be straight up racist. That is not the way we are viewing culture and it’s not the way the current literature views culture. I think, the one thing we briefly discuss in the book is that over the course of the 20th century, for very good reason, these types of explanations that I was describing that were in vogue at the beginning of the 20th century fell out of favor, again, for good reason.
Beyond just maybe the distaste of the racial, or even Eurocentric element, that’s not really why. Because I mean, I think that in the end, as social scientists, people that like to think that they’re using something akin to the scientific method, we should at least be willing to consider any type of explanation, no matter how distasteful. These explanations just don’t satisfy on a number of grounds. I mean, I think the most obvious thing is that Europe was not ahead for a very, very long period of time. Was certainly behind China, certainly behind the Middle East. Now some aspects of culture change, but not that much. Certainly, something ascribing it to Christianity, I mean, certainly you cannot really do a great job explaining why Europe was so far behind for so long.
These more static notions, or really racialized, or Eurocentric notions of culture fell out of favor, again, for good reason. I think, because they were so Eurocentric, or just distasteful, economist in particular. Mark and I are both economists. We’re economic historians. Really took culture out of their models. If you look at a neoclassical model of in vogue in the ’70s, ’80s, Chicago school type stuff. Somebody like Gary Becker tried to rationalize culture within a framework that would be very much at ease and within these neoclassical models. Economists would be familiar with these.
More recently, and this is much more the last couple of decades, even though it began with people like Boyd and Richerson in the 1980s, who are your more cultural anthropologists, we started looking at culture a little differently. We think about it as the lens through which people view the world. I don’t think it’s controversial to say that this differs across societies, and we can think of as cultural groups, almost by definition, as groups who share, at least to some degree, this worldview, the way that we might take in inputs from the world and have outputs.
This is what somebody like Mokyr latched on to. I just mentioned Joe Henrich. I think, he’s one of, if not the leader in thinking about cultural evolution these days and really how it affects economic developments. Certainly, he’s the most well-known. For good reason, his books are great and extremely readable.
What we’ve done in this book is look at is first off, we overview this literature. That’s one of the things we do. We overview a number of literatures and one of them is culture, because cultural explanations have become increasingly important in understanding why certain parts of the world have taken off and others have not.
Now, there’s a few reasons for this. By far, I think, probably the most prominent is that culture is notoriously sticky. Cultural elements, social norms, a big thing that economists have looked at are trust norms, for instance, which we do think of as being essential to market developments. You have to be able to trust people that they’re not going to rip you off. It’s not just a matter of there being some government that’s going to secure your property, or you can sue somebody if they rip you off. It helps a lot for market interactions to happen, if there’s some degree of trust in society, especially people that you don’t know.
That’s something that most societies in world history have not really had a great deal of in most societies, and this is still true today to some degree. Of course, you trust people you know, but also, maybe extended family. Even you can go much broader into, say, the kin group, which was the main social unit in many parts of the world throughout much of the world history, including Europe, until the medieval period. The question is, how do you trust people that you don’t know? When you start being able to at least have some degree of trust and probably, and typically supported by institutions that it can punish people who violate that trust, that’s when you can start really getting certain types of growth. Certainly, growth that is spurred on by trade.
It doesn’t necessarily solve some of the big questions. The big question, which I’m assuming we may get to at some point, is how did the world and particularly Britain initially become technologically developed? How did the rate of technological progress become so sustained? Because that’s really the thing that needs to be explained. Mokyr does try to explain this in terms of the culture that had emerged across Europe, not just in Britain in during the Enlightenment period, when that was a culture that valued scientific progress, that valued the sharing of scientific ideas. He calls it the enlightened economy. These are world views, so to go back to what we were talking about.
Mokyr’s view ends up being that there was something that emerged in the culture of Europe in the Enlightenment period. His is very much I would not considered a Eurocentric type of idea, and that he’s really trying to explain something that emerged a certain time. That’s not inherent to Europe. It’s something that that came about for various reasons. When looking at culture, I think another thing that’s important, too, is there are cultural elements that have emerged over time that have also been harmful to economic development. Again, trust being one.
Mark and I have also done plenty of work on religion, in the role that religious authorities, particularly we might think of as institutionalized religion has played in a variety of outcomes. Mark has done really good work, for instance, on the role that religious legitimacy played in persecution, medieval and early modern persecutions, which are things that we certainly would think have to do with political development, if not eventually, economic development. In my own work, I’ve looked at the role that religious legitimacy has played in broader, political and economic outcomes in the Middle East and Western Europe. These are things that are clearly imbued in culture.
One thing that, I think probably the most important point the book makes, though, is that when we’re trying to think of – the title of the book is How the World Became Rich. When we’re trying to think of how the world became rich, there’s no real one element that is at the answer. A lot of it is about the interaction between elements. For instance, the things I was just discussing was culture and institutions.
These are things that in many ways, are inseparable. Institutional developments that we think of as important, those that protect property rights, that limit the ability of autocrats to just arbitrarily govern things like this. These are, in a sense, unthinkable without certain complimentary cultural developments as well, especially as we move towards, say, something like, more democratic governance. You have to have democratic norms, for instance. Norms that respect the winners of elections, that there’s beliefs in that elections will be fair and free, things like this. These emerge in conjunction with institutions.
I think when we’re thinking about culture, that’s a very long-winded answer, but it’s important to know what we’re talking about in this case, if we really want to say — because I just want to be very clear that we’re not saying that there was just something about European culture that pushed it apart from the rest of the world.
Jeffrey: That was a really good answer. I was able to cross off about three questions, three or four questions that I was going to ask about there. As you mentioned this story of the emergence of modern growth, starts in Britain. Why is that?
Jared: Yeah. I think, the answer is similar to what I just said. I think, the most important aspect of the answer we come to in this book is that there’s no silver bullet. There are many things going on in Britain, all of which are going on in other parts of the world. There are other books out there that will say, that are pushing a certain answer for one of the questions we ask in this book. They’ll say, well, there are these other things in the literature. It can’t be X, Y and Z, because for instance, it can’t be coal. Because yes, there was plenty of coal in the north of England. You bring that coal down from Newcastle and to either to London, or to the other industrial cities in the north. It was easily accessible.
It can’t be that, because Germany, the River Valley had a ton of easily accessible coal. China had a ton of easily accessible coal. We can say the same thing about say something like, limited governance, which Mark and I actually think is really important. When we think about limits that are placed on executive authority. This is something that emerges in the course of the 16th and 17th century, where Parliament becomes much more important. It becomes sovereign. It’s really the king or queen cannot rule without the consent of parliament. If they tried to, as the Stuart Kings did in the 17th century, they find a rebellion on their hands. We find that to be really important.
On the other hand, a place like the Dutch Republic had possibly even more limited governance. Parliament was very supreme in the Dutch Republic. There in a sense, almost really was no executive power. There was an executive that was extremely weak. You could make the same case for that. Certainly, if you want to say, take Mokyr’s argument and culture of growth seriously, where you say, this was a pan-European phenomenon that he’s describing, at least what mainly Western Europe, where you have these Enlightenment ideas spreading. I mean, that’s certainly not just an English thing.
Yes, they are important Englishmen that were part of this. Isaac Newton probably being the most famous, but this was something – Descartes in France leading. In Germany, people that were equally as important to this progression. Again, well, it can’t just be that. There’s much more. There is one thing that we also note that the literature says is England had this large internal market. You have these goods that are now being produced. You don’t have as much of a necessity to rely on trade. You both have the internal market within Britain. You also have the colonies. Again, there were plenty of other countries that also had large internal market. France was an even bigger country than Britain at the time.
There’s actually a number more that we consider, including access to the Atlantic, which is, again, a big one, but obviously, not the only country with access to the Atlantic. Spain and Portugal had not just access to the Atlantic, but a head start by more or less a century over Britain and certainly, in its colonial enterprises as well.
The key, though, that we ascribe is that at least the way industrialization happened in Britain, which again, was not the way it really happened anywhere else, which is another key point. The way it happened in Britain required the combination of these things. It’s not just that one was necessary, and it’s possible, even though we don’t really come down hard on which ones of these were necessary. It’s possible that all of them were necessary, certainly for it to happen the way it did. Another one that I should note, because this is something that Mokyr is actually working on currently, and I know he has a forthcoming book, I believe, with Morgan Kelly and Cormac Ó Gráda, which appears to be very interesting and is built on their work, are the presence of skilled workers. England had a lot of them. It’s a point Mokyr has been making for a couple of decades now, on the eve of industrialization, in part because of guild regulations. There’s a variety of reasons they go into.
This is the type of thing that then allowed once you start getting these innovations for them to be really used, and thus, the rate of technological progress is more likely to increase over time. Again, not something unique to England, though. There were other places, especially in the free cities of central Europe, that had skilled workers in abundance. I think, though, that this is something we try to push in the book, not just with the case of Britain, but more broadly when we’re thinking about economic growth, is that when you’re writing a book, as both Mark and I have, on something as big as these big questions, and I’m talking about other books that we’ve written. Most authors for very good reason, try to push one story. Not necessarily by any means ignoring other stories, but you’re trying to push something.
That’s the way that we, I think, we should be doing it. That’s the way science advances. In doing so, what often happens is that there’s not a consideration for how these various theories interact with each other. How Mokyr’s theory, interact, say, with Deirdre McCloskey’s theories of more cultural, rhetorical change that happened in early modern England, in the Dutch Republic, or how these – I mean, how these theories interact with Bob Alan’s theories on industrialization, which certainly, Mokyr does address, because these are the two competing theories.
If you look at more broad theories, so somebody like Joe Henrich’s theory that looks at changes in the medieval church, we don’t really have a good conception for how his theories then would interact with these others. That’s something we try to do in this book, to say, look there are elements of truth to nearly all of these theories. Now, I should say, to be clear, we’re not just saying that we buy all of these theories, or we buy all of them equally. There are some we are less prone to buy, particularly ones that really blame everything on colonialism. We do go into colonialism in the book. We do think it played an important role, certainly in making those parts of the world that were colonized poorer and slower to catch up.
We’re certainly not saying colonialism was a benign thing, or definitely not saying it was a good thing. It was almost certainly bad on the places that were colonized. There are plenty of dots that have not been connected in the literature on why that would then lead to industrialization, or the modern economy as we know it. That’s just an example of something that is out there, but, or maybe a little less, we place a little less emphasis on. We should say, all these other explanations, including ones based on demography, having maybe smaller families over time, based on geography, how they interact with each other ends up being the center of what we argue is how the world became rich.
There’s not just one thing we want to talk about. This is as true, your question was about Britain. For Britain as it is other places that eventually caught up and maybe even surpass Britain’s, so like a place like the US, or also places that have not caught up. We also we also want to understand that. I mean, in many ways, that’s even more important to understand is why were some places able to catch up in some cases really quickly and others were not?
Jeffrey: I think you have my note sheet. I had a question in there. I was going to ask about McCloskey and her question. I’m curious how, and there’s a couple of things in your answer that I want to follow-up on. To start with this one, how does that argument about liberal speech norms fit into the story? Is that primarily a functional tool for technological dissemination, or what’s the channel at play there?
Jared: I mean, I think, it matters what are you talking about? Deirdre’s argument is that these rhetorical norms changed in – She actually places the Dutch as the first place of change in the Dutch Republic. Then this moved to England in the early modern period. These rhetorical changes that she describes are ones that in a sense, favored commerce, or favored merchant activity, things that historically, if you were in finance, for instance, and often, especially in the medieval period, medieval Europe, that you were probably Jewish if you were, these were people that were viewed as the scum of the earth.
Usury was in that period, defined as more or less any interest. Usurers were placed on the same scale as rapists and murderers, as in the lowest levels of hell. I think very rightfully, she makes this this claim that it’s really hard to imagine a modern economy emerging where those types of rhetorical norms are at play. I 100% agree with that. This is where I think culture, when we’re talking about culture, that’s how I think about culture, is that when we’re thinking about – when we’re talking about worldviews, in a sense, what she’s describing there is a worldview, where certain professions are viewed very negatively.
Of course, we still have that today. There are definitely professions today that are viewed much more negatively than others. There are certain professions that gets you plenty of reputation and everything else. That changes over time, too, of course. I mean, we see that in our own society. Her argument then goes into how these changes. She has three books, three very large books on this. There’s no way I’m going to do her arguments justice here.
Once you start to get these types of changes in a society, that’s when you start to get broader economic changes that do. When we look at the Dutch Republic, for instance, Dutch growth is not really based on technological advancement. It’s based on merchant activity, mercantile activity. The Dutch Republic is a pretty small place that amazingly becomes the world’s economic leader for a good 100, 150 years, which for such a small place, I mean, at the time we’re talking, just maybe a couple of million people, becomes highly urbanized, it becomes the center of trade, the center of finance. The Amsterdam financial markets are probably the most important in Europe, eventually eclipsed by London, and not just Europe, the world. Even the Dutch, even get a colonial – they have colonial enterprises. Indonesia, for instance, was a Dutch colony.
One of the questions is how does this really small country become so, so wealthy. Really in a way that I would not describe it, and I don’t think Mark would either as modern economic growth, in the sense that we really don’t get the technological advancements that become so important to modern economic growth. But it’s wealthier than just about any place had been in world history up to that point. It’s right on the eve of all these advancements occurring.
Oftentimes, when people try to explain, and I’ve done this in my own work as well, where the modern economy comes from, you look at not just Britain, but what we’re calling northwestern Europe. Because Belgium to a lesser extent was there as well. Certainly, it was Spanish for a very long time. That had some negative consequences as a Spanish colony in a sense. For the most part, we need to explain why the Dutch became wealthy, and then the English became wealthy and McCloskey then takes us into the mercantile activity. I don’t think there is as strong of a connection between technological innovation, even though certainly, if you were to combine her in Mokyr’s arguments, the way people talked about innovation, the way people –
Also, something that she brings up, and others have brought up as well is that if you look at a place like the Roman Empire, which at points, could have been on the verge. You might say, might have been on the verge of some type of take-off, that certainly per capita wealth, or per capita income, rather, was a little higher than most other places in the pre-modern era. One thing that was really negative that probably prohibited such a take-off was that work with one’s hands, or hard work was looked down upon.
The ideal was to become wealthy and go buy a villa, and then not work. In the case of the Roman Empire, would probably be by a bunch of slaves and have them do the work for you. The type of technology that ends up taking off is people that see a problem, whether it be in textile manufacturing, or metallurgy or something like this. Because they have an intimate knowledge of how these machines, in some cases are very, very old machines, machines that looked not that much different than they had 600, 700 years ago, especially in textiles. How can we improve those? That’s something that you don’t get, or you are unlikely to get, I should say. You don’t want to say don’t. If hard work, or the idea of work in general is something that you don’t want to do.
Eventually, what happens is the people that ends up end up running these factories and these larger and larger plants, they’re people that they either came across an idea of some type, or they were to figure out how to adapt the idea and make it a little better. Again, that’s something that cultural norms that give people that social prominence, certainly facilitate that process. That’s where I think McCloskey is particularly good. I would say, her explanation fits right in with a lot of the other stuff we’ve been saying. I want to make it clear, we view nothing as – none of the explanations as silver bullets.
Jeffrey: Sure. We talked a bit there about technology. It strikes me that technology has an interesting relationship with one of the stories for growth that we haven’t talked too much about yet, and that’s geography. People say, disease burden, how easy in a particular place it is to transport things, what resources are you endowed with it, etc., has an important impact on economic outcomes.
There’s an argument that I’ve heard before, I think semi-seriously, that Lee Kuan Yew’s Singapore, for instance, wouldn’t have been possible without air-conditioning as a fun, little case study in this theory. Historically, how much has technological advancement been a tool for shifting the relative values, or the relative advantages and disadvantages of differing geographic endowments?
Jared: Yeah. I mean, I think that the question you ask is exactly the right one, in that geography-based explanations, one that are just purely based on geography, that whether it be on climate, or having really hilly terrain, or just about anything else you can think about, have a massive problem in that they can’t really explain reversals of fortunes. Because stuff like institutions, stuff like culture, stuff like demography, that stuff can change over time. Maybe, when that changes that you get take off, or you get a reversal.
Geography doesn’t really change. Those types of explanations have a pretty hard time explaining, say, why China, Song China was light years ahead, or Abbasid Iraq was light years ahead of Europe at the time, and then Europe eventually took off. The geography of these places didn’t change. That said, as you’re alluding to here, geography can interact with institutions, or technological development, culture development in a variety of ways. I think, it particularly as we go into a little bit in the book, can interact with political institutions, like maybe why you get large empires, versus fractured states, things like this. Geography almost certainly does play a role in that.
When you’re talking about technological developments, one thing, and you use these words that it can do is it can overcome the curse of what you might consider somewhat bad geography, or a bad stroke of geography. The geography of a certain region might be good on one margin, but bad on another. We particularly would think of things like transport technologies as being able to do. When you get things like the locomotive, especially the steam locomotive beginning in the mid-19th century, that cuts geographic distance down a lot in what economists would call economic distance. How two towns, for instance, are economically related, becomes in many ways, almost trivial when those towns are connected by rail.
Eventually, when we think about the 19th century and particularly what have been described as second industrial revolution technology, so late 19th century technologies, there’s a huge boom in information and communication technologies. The telegraph becomes sufficiently widespread. That’s a period where you start getting the telephone, things like this, that again, one thing these can do is really make certain geographic endowments that at one point in time, might have been a bad thing for certain types of growth much less important.
Certainly, changes in the technology of shipbuilding would be another big one. Canals are a huge one for this. They connect places that were not connected before, particularly in the pre-rail era, where if you wanted to move goods of any type of size from one area to another, you’re probably doing it via ship. Yeah, this is right. I think that these two things are highly related. On the other hand, while we’re talking about the “curse of bad geography,” there are certain attributes of geography that are also good for economic development. The one I just mentioned is being near a source of water. There have been some explanations that say, England, or Britain had this advantage of on the one hand, being an island, meaning it was harder to attack. Also, eventually, once the Atlantic opened, it was right there to take advantage of those things.
That’s a geographical endowment that, again, that whose advantages became apparent only later. That would be one instance where we’d say, all right, England might have had a geographic endowment that benefitted. Again, though going back to something you mentioned earlier, obviously not the only place that had that advantage. In fact, the Iberian countries had it to an even more important extent, I think. That’s obviously not the only thing going on. Yeah. I mean, we should say, to circle back to the beginning of what I was saying, geography is not going to be a great answer if it’s the only thing you consider. If you think about how it interacts with some of these other features, I think then becomes part of the story.
Jeffrey: Another interesting element that you discuss, and I see it as a almost hybrid of both culture and technology, in the sense that it’s a social technology is law. Some of the work that you highlight in there by LaPorta, de-Silanes, Shleifer and Vishny, is on common law, which they argue is more historically favorable to growth and there’s an obvious relationship here to the rise, early rise of Britain.
I think, some folks have also raised the argument that at least in modern times, countries endowed with these common law, systems produce more litigious societies, which is could potentially be harmful for the maintenance of state capacity, which could have these knock-on effects for growth supporting investments. How do you evaluate this legal system argument regarding growth? Is law just a proxy for culture? What do you think is going on there?
Jared: Yeah. No, I don’t think law is just a proxy for culture. I think, that law is very important and it becomes enmeshed with the society’s institutions. Even societies that are based on English common law end up having legal systems that look somewhat distinct from each other. The same would be true of civil law varies from various European countries.
We think of law as being important on a few – particularly important, I should say, on a few margins. One is just basic protections of rights. This is something that comes down to law. It’s also not just law, but the way laws adjudicated and the credibility that one can actually take one to court, especially when the person you might be taking to court is your social superior, or somebody like that. These are things that we think of as basic to the rule of law. By that, there’s a ton of definitions out there. We could say something simple, like no one’s above the law. That there is a law, whatever it is, that is created by whatever process it’s created. Whatever that process is, it’s widely recognized that that is the way that law is created. It’s not something that can just be thrown out by an autocrat, or something like that. Then, once the law is created in such a way, everyone’s subject to it, including the elites.
When you have that, you have the capacity to interact economically with just about anyone, with some background assurance that they’re not going to cheat you. Again, as I mentioned at the beginning of the interview here, trust norms are helpful for this. But a society cannot have a true market economy just based on trust. There does have to be something undergirding it. That’s where the legal system plays, or can play an enormous role.
On the other hand, you look at countries that had – Both Mark and I really like the work of , who’s done a lot of work on the Islamic legal system. There were a bunch of laws in the Islamic legal system that when they were created, were actually very, very pro-business in the sense that they were formulated at a time where the Islamic world was among leading economic development, so there was a large corpus of merchant law. Inheritance law becomes something that becomes really important. These are things that also end up not, or being very, very, very slow to change over time. As the world is changing, the law does not catch up with it. I think there’s a variety of reasons for that.
My own personal bias is that because religious clerics provide a certain amount of legitimacy. Rulers just left them alone to do their thing in return. They made a lot of rents on providing one such an area. To the reason I bring this up in response to your question is that when you have these types of laws on the books, ones that are not really reacting to developments around the world, so somebody like Hiran says, there never ends up being an indigenous set of corporate laws, for instance.
The Islamic world never gets the corporation. This is one of the primary, if not the most important development in business history in the last least 500 years in the West, that allows for – eventually, allows for things like joint stock companies. That actually, it’s not just allows for it to goes – it emerges in conjunction with the growth of joint stock companies that then allow for exploration everywhere, that this stuff, when you don’t have law like this, there’s limited capacity to say, either grow business, or engage in widespread trade.
Down the line, especially if we think about law in a society where there’s not rule of law as I’ve defined it, where there are certain people that are above the law, or the law really doesn’t apply where property rights are therefore extremely weak, that then decreases massively the incentive to either invest capital, to innovate, because the fruits of innovation, you might not be able to reap. These are all things we think of as being really important for the growth of the modern economy.
Personally, I’d put law near the top of the really important things to think about, and at least in terms of first order explanations. Of course, why certain societies have different types of legal systems, and it’s not just the colonial inheritance, as you mentioned, the LaPorta and all articles, where that’s a big part of what they’re saying. Essentially, it’s like the English spread commonly everywhere, which they did. I mean, this is not to say that they’re necessary wrong in the way they’re thinking about it, but in terms of how these legal systems evolved over time, I think is one of the important things. Though, again, not the only thing. That’s probably something I assume I’ll say a few times when we’re talking about this, there’s no one thing that we focus on, but it’s among the important for sure.
Jeffrey: Yeah. The legal domain, I think, has been particularly interesting to us at CCI, because in the modern era, you have some very interesting case studies of using different systems of law as technologies. Dubai and elsewhere, they’ve created these financial centers, with the basis being, we are going to explicitly use English common law as a basis, or looking again, at Singapore using the British high courts for, I think, around 20, 25 years after independence. It’s interesting to see these applications of laws as a growth producing technology.
We talked about where growth comes from and how we’ve gotten here, where we are now. But where we are now is interesting, because we’ve seen in the modern world, or at least in the advanced economies of the modern world, a slowdown of growth in recent decades. Deitrich Vollrath has an interesting book on this called Fully Grown, where he argues that this isn’t necessarily a bad thing and it’s a sign of success. I take that to mean that the low-hanging fruit of material well-being and innovation has been picked. Do you agree with this view that the current growth slowdown we’re seeing shouldn’t be as much of a cause for a concern as conventional wisdom suggests?
Jared: Yeah. I mean, I think for the most part, yes, I agree. Certainly, when we’re talking about the already developed world that, yeah, and I mean, I think that for reasons you indeed mentioned that when we’re talking about the – there really is this idea that I think that also applies when you look at it on the converse, the countries that have grown rapidly recently. There was so much low-hanging fruit. I mean, China would be, I think, the obvious example, you essentially had a billion people that were underutilized workers. All it really took was some degree of market reforms, that even within a fairly autocratic and repressive system to really, both for the internal market and for external markets, to really utilize that labor. Frankly, there’s still a lot of low-hanging fruit in China. While growth has slowed a little bit there, I’d still expect it to outpace Western growth for decades to come.
Yeah. No, I think that that’s right. Now, I mean, I think that there’s also the possibility that new general-purpose technologies will also change in this pattern. Something like AI does hold that promise, even though there’s a lot of downsides to it as well. Some of these technologies will also have to consider climate concerns. This is obviously something that I think might be the most important thing for the next generation, which doesn’t always, though it can be conducive to growth, I don’t think that we have to think of that there is being just purely a tradeoff between economic growth and a better, cleaner climate.
There’s plenty of good work out there that suggests that these two things can be complementary to each other. Because the real important question for me is not so much how much Western Europe, or the US is growing, but how much of the rest of the world is growing. One thing that we stress, so the book is called How the World Became Rich. We’re not idiots. We understand the entire world is not actually rich, and it is way richer than it has ever been. Way more people and certainly, a way greater fraction of the world is not at the basest of poverty levels as it’s ever been the case. But there are about a billion people that are still very much at the lowest levels of poverty. The way to get out of that is growth.
To be clear, so in a place like Britain, it took a while for growth to then translate into real wage increases. In other places, and since then, that lag has lessened. I mean, take a place like South Korea, they just started growing in the ’50s, ’60s. Now, it’s one of the wealthiest countries in the world, in terms of per capita income. These two things can happen. If we want to talk about, I think, the two big parts of the world, or sub-Saharan Africa and South Asia, that’s where a large fraction of the world’s poorest people live today. That’s where growth really matters, in my opinion.
Yeah, to circle back to your opening question, there’s still a lot of low-hanging fruit in those places. We should expect there to be, and maybe you can describe it as a “one-time boom.” Those one-time booms can last a century. Now, we’re over that one-time boom in Western Europe and in North America and places like that. There’s plenty of parts of the world, even it’s still true in large parts of Latin America, there’s still going to be – there’s a lot of room for growth. Certain parts of Southeast Asia, still a lot of room for growth.
Again, this is not to say that I don’t necessarily take a purely pessimistic view that that there can’t even be further growth. I do think that there are these potential for general-purpose technologies, like the types of technologies that came about during both the initial period of industrialization, but even more importantly, in the 19th century and the late 19th century, where we get the second wave of industrialization that really incorporated science and revolutionized information communication technologies. I think all of these, there are things that, frankly, I don’t even know about, you don’t know about, nobody knows about. Or maybe very, very few people have even thought about.
It might be something that is invented by somebody who’s currently eight-years-old or something like that, that takes us to a very different place in the world. That’s what the history of the last couple hundred years would suggest, is that those things come about. Where they come about is not random either. It’s not just a matter of hoping that there’s some stroke of genius. That is actually what the world, the situation of the world was like, prior to the mid-18th century. You would get these random strokes of genius that would happen, and this is the idea behind the Malthusian trap, that you would get these random strokes of genius. But because technological development was not sustained, you don’t get sustained economic development.
We now have sustained economic development, clearly in the richest parts of the world as well. If you think about the state of technology that you live in, versus what your parents lived in, very different. What you grew up in versus what your children, going to be very, very different. That’s still going to be the case, probably for the foreseeable future. Again, completely obvious that this is going to lead to sustained economic growth, but it does just takes a technology or two for that to happen. I’d place myself on the more optimistic end of that, again, with the massive caveat that such technologies, almost certainly have to also address climate issues, especially as other parts of the world become rich and begin using more fossil fuels, which is I would view is completely within their rights. There’s no reason to think that certain parts of the world became rich, now we got to stop it, because we have this climate process. We can solve both these things at the same time.
Jeffrey: Yeah, that’s a good point. That’s something, I think, it’s interesting to see how that’s playing out in the international development scene right now, where you have folks from sub-Saharan Africa, from South Asia, elsewhere saying, you can’t pull the ladder up behind you. That’s not right.
I wanted to ask a couple technical type questions for how we should be thinking about growth. You probably saw recently, Thomas Philippon put out a paper saying that total factor productivity growth is linear, not exponential. If you’re familiar, if you saw that paper come out. Do you think that’s true? If so, what does that change how we think about the history and future of growth?
Jared: I will say this with the caveat this beginning, I have not read that paper in depth, so I’m not going to comment on that paper. As with any type of paper or book — I should probably read that soon, because I may ask that again. It might it might change the way I view things, because that definitely goes against my take on TFP growth, and we might say productivity growth has been historically. Actually, maybe I should also caveat that and that historically, it pretty much was like that, prior to the big takeoff.
TFP growth was not just linear, but it was practically zero. You might get a bump here, a bump there. For the most part, TFP growth was not going to be that great, where we can see that. Where we have seen takeoffs, though, linear would be a very hard way to describe the takeoff that was happening in 19th century Britain, that even in – certainly, in places like in China in the last 40 years. Again, with the massive caveat that I need – that I don’t know the exact argument that Philippon is a great economist. I’m sure that it’s a very well-done paper is making – these are not periods of linear productivity growth.
Now that said, I think it’s quite possible we have come to a place in the West, at least — not just the West. Now, it’s obviously, East Asia is in the vanguard in many of these technological advances. We’ll say, maybe the developed world. Where because there has been somewhat of a slowdown in general-purpose technologies, that you might get linear productivity growth.
That’s for me at least, in the absence of this paper, how I would think about it is that you initially get massive growth when you get new general-purpose technologies that is certainly not linear. Over time, the returns to those technologies end up diminishing, which might lead you to a state where it’s more linear, which at that point, you’re no longer seeing massive changes over time, as you do when these types of technologies are initially introduced.
Jeffrey: That makes sense. I think, I’m sympathetic to your view on that as well. Another interesting trend in economics is that folks are trying to use randomized controlled trials and other applied micro methods to study topics that are traditionally in this big picture, more macro mindset of growth-focused topics.
I haven’t read the paper myself, but a listener pointed me to a paper by Asher and Novosad, where they did a natural experiment looking at rural roads and finding that these weren’t transformative economically, when maybe we would think otherwise. What do you think about this approach to these growth, big picture topics from a applied micro lens?
Jared: Yeah. I mean, I have two takes, I think, on this. I think, both are actually somewhat optimistic. The most optimistic is that most of these RCTs in a very micro level studies, do not have great external validity. Meaning that you look at rural roads in Kenya, it might be a bad thing. You put them in Uganda, it might be a good thing. I’m just using those as made-up examples. I don’t actually know of any studies that are like that, but I was just picking two countries that border each other at random. That’s the nature of the RCT is you do it in one place and in a sense, there almost shouldn’t be external validity, because it’s happening in a certain context.
Now, on the other hand, I think the way that we should be thinking about them though is as marginal improvements on our knowledge. As a collection, there have been some real insights that we’ve been able to make, that certain types of maybe interventions or something are important in many contexts. Now, I think much more importantly, and this is a point that is much more broad in terms of what we say in the book as well, is that when you think about any type of big picture thing that might lead to economic development, so when we really focus on, for instance, the type of institutions that a society is, whether it be political, legal, social, religious, they work or don’t, to promote economic development only in certain cultural contexts.
Democracy, for instance, is the type of thing that has and I think, it’s not too much of a stretch to think why, is associated with positive economic outcomes. As you have more representation, presumably, some types of limits on what executive power can actually do. These are types of things we often think of as good for economic growth. Democracy works differently in different contexts, when you have different types of cultural norms. This is something that I’ve already talked about, associated with how we even believe is – are these really fair elections? For instance, this is something that autocrats often do is they will actually have “elections.” Saddam Hussein gets 100% of the vote, or something like that, or Putin does something very similar.
The institution of a society works very differently and can work very differently in different cultural contexts. This is also why, say a place like the post-Arab Spring and democracies ended up not often working as well. A lot of them just reverted back to something that is much less democratic than we envision. I think, that the same lesson applies to these types of RCTs, that – and this is the way we should be thinking about them. We should not necessarily always be looking for the most general of solutions to whether being in poverty, or bad political institutions, things like this, because different solutions are going to work in different cultural contexts.
That’s something that I and I believe Mark as well is convinced, is one of the big lessons that we can – we bring all of these various aspects of the literature together is definitely something we read from this literature. You really need localized knowledge to understand what’s going to work. I actually think that RCTs can be extremely valuable, especially if you want to think about the poorest parts of world. Now, the problem with this is obviously, they’re really expensive to run. If you spend a few hundred thousand dollars or something running something and show that something does or does not work in a certain village in Kenya, and that’s not generally applicable, then yeah, that’s a really expensive way to understand how to alleviate poverty in a place that might have a couple hundred people. Yeah, and probably not even alleviate poverty. Maybe alleviate one aspect of poverty.
I think that from a theoretical standpoint, I do think that I’m actually probably more sympathetic to RCTs than many outside of development economics are. This is something that is very – it’s the central way of doing development economics, I think now. There’s just a Nobel given a couple of years ago for this type of work. I think that when we think about it in its analogous type of way of thinking about broader things that help economic development, it starts to make a lot more sense.
Jeffrey: Yeah. I think that that was a really interesting answer, because this is something that I’ve just been grappling with myself is the RCT dominance, versus, so the pushback offered by Pritchett and others. I think, you’ve sketched out a valuable middle ground there.
To close, so Gordon Brown, former British Prime Minister, famously once said that in establishing the rule of law, the first five centuries are always the hardest. This seems obviously true, but there’s also a – I think there’s a Straussian in reading, as Tyler Cowen might say, of this quote, which suggests that to a significant degree, maybe day-to-day policy decisions over the long run don’t actually matter that much. Yeah. This is exactly what many economists and institutions, like the World Bank, etc., are engaged in.
Maybe the Washington consensus might be necessary, but it’s clearly not necessarily sufficient. Outside of some extraordinary cases, in modern times, so like Singapore, the China created by Deng Xiaoping. We see very few cases of transformative economic growth in recent years. Bearing all this in mind, what do you think are the actionable policy implications that can be derived from having an understanding of the history of modern economic growth that you’ve laid out?
Jared: Yeah. I mean, so it matters whose policy you’re talking about, right? I mean, I think that there’s only so much international organizations, like IMF or World Bank can do. They have certain levers that they can pull, but they’re also not overturning governments, or something, or massive government reforms. They can encourage government reforms via some of the levers, but often not the types of ones that we’re most interested in, because those types of government reforms would require getting certain people out of office that don’t want that to happen.
Jeffrey: Growth is not just a twistable dial, so to speak.
Jared: Yeah, for sure. I mean, I think that the way you just said it is very nice, that we shouldn’t be thinking of that there is being any one answer to this question. As, I think, I’ve now said a few times, the type of answer is going to differ by society. Now, one thing that I think has become clear is that enabling market activity is really important. How we get that is going to differ massively. In societies where for some historical reason, or some current reason, there are decent constraints on governance, that’s when the policy levers from international organizations can be really useful. You want big loans, so you can do X, Y, and Z within your society, free up some markets, things like that.
In those cases, I tend to believe that that’s where you can get some spurts of growth. As was the case for some parts of Latin America, even though there’s also really bad stories, of course, of what these international organizations in particular, led by the US did in the ’70s and ’80s. On the other hand, one thing that China cases has shown is that it’s not just about having massive constraints on governance. China has grown immensely in the last 40 years, while still being very autocratic, while still repressing rights when it suited them and being extremely repressive to say, religious minorities. Growth can happen in such a context.
You used and the Singapore context before. That’s a case where it’s not really a society where there’s massive constraints on executive power. Just so happens that the executive typically favors pro-growth policies, but you can’t be sure that the next one will. Same is true of South Korea. The growth happened in the context of more or less dictatorship in that point. A commonality there, though, is that there were movements towards market activity. Now, in the case of a place like Singapore, the internal market is not going to work. It’s just too small of a country. You have to have export focused type of whether it be production, or eventually finance, things like this, that grow an economy.
Something could be said true of South Korea, too. I mean, certainly the South Korean story that our take on it and the take of, I think, the literature would suggest something similar. China though on the other hand, has an enormous internal market, that can more or less lead to economic growth just by – without any trade, even though, obviously, trade became important there. Now, the question is, how do you get that in such a context? This is the million-dollar question that I’ll be honest, I don’t think we have a very good answer for it, and I still don’t think we do.
In part, this is because I don’t think the China story has been written yet by any means. I think, the million-dollar question for me in terms of thinking as a historian and economic historian, but also interested in what’s going on today within the economies of the world is what happens in China when growth slows to even something like 3%? Because one thing that you can see is while economies are booming, governments can get away with a lot, especially autocratic governments, can get away with a lot because enough people, especially elites, are satisfied, but even not elites are satisfied.
China still does a lot of things that in other contexts would be debilitating to economic growth. Especially, I mean, just think about regulations on social media and media more generally. That should have a negative effect on an economic growth. I think over time, it will. Again, there’s so much low-hanging fruit that’s still there that you can still grow 70%, or even more at least in a normal economy while doing so. When growth slows down, even 3% would be great by Western standards at this point. But when it slows down to the point where you’re starting to have people that expected much more and not getting that, rents going to elites being much weaker, what happens there is the million-dollar question. Because one thing that we stress is that historically, having some type of limits on government was really important.
China throws that to the wind in a sense, because all of these changes are happening in a very non-limited sense. On the other hand, one thing we briefly go into in the book is that the Soviet Union was able to grow fairly rapidly for some period, at least the beginning, mainly by just pumping resources into industrial production. Not through, obviously. the market mechanism. If you were writing in the 60s or something, you wouldn’t necessarily be as optimistic about some of the stuff we’re saying. Obviously, this didn’t last either. It took a while. I think the point here with China, too, where it’s going to just be very interesting to see how this works.
Frankly, if it ends up working for China and China continues to grow at a rapid pace and without any absolute any need for fundamental political change, or I think even more importantly, if it doesn’t continue to grow, yet there is no political change and it becomes a middle to upper income country without any real constraint. We need to rethink about what are the lessons of history and are these just lessons that are extremely context specific to a place with a Western style culture maybe, or something like this that don’t appeal.
I mean, I think in the end, I’m not really throwing my hands up, because I’m not saying anything goes here. I’m giving you, I think, a few possible scenarios, some of which will make us really rethink the way we’ve been thinking about it. Others of which would not. I don’t necessarily want to make a prediction on this, because I think any academic that’s in a sense, worth their salt will say, “When confronted with new evidence, I might need to change the way I’m thinking about things.” I think that the jury is just still out. If we write this book, maybe a second edition or something, or a third edition or whatever, if we’re lucky enough to do that in a decade, we might very much have to change the way we’ve approached some of this stuff as new information comes in.
Jeffrey: Yeah. I really do think what happens with China in particular will probably be one of the, if not the most important questions of the 21st century.
Jared: Agree.
Jeffrey: I think that’s a good place to conclude. Jared, thank you for joining me on the show today. It’s been a pleasure.
Jared: Thank you. It’s been great.
Kurtis: Thanks so much for listening. We love engaging with our listeners, so please always feel free to reach out. Contact information is listed in the show notes. To find out more about the work of the Charter Cities Institute, please follow us on social media, or visit chartercitiesinstitute.org.
Links Mentioned in Today’s Episode:
How the World Became Rich: The Historical Origins of Economic Growth
Charter Cities Podcast Episode 16 with Mark Koyama
The Protestant Ethic and the Spirit of Capitalism
Culture and the Evolutionary Process
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