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An Old-Fashioned Recipe for Economic Growth

August 16, 2019 in Economics

By Chelsea Follett, Marian L. Tupy

Chelsea Follett and Marian L. Tupy

With the recent inversion of the yield curve sparking recession
fears in the United States and the stock market swinging wildly in
response to the ongoing trade negotiations with China, some are
wondering if the longest economic expansion in American history may
soon come to an end. Those uncertainties bring renewed urgency to
the age-old question at the heart of economics: what creates
wealth?

Throughout most of human history, there was almost no wealth.
People were very poor, and there weren’t that many of us. While our
species is roughly 300,000 years old, for the first 290,000 years
or so we were foragers barely scraping by. Even after Homo
sapiens
embraced agriculture, progress was still painfully
slow. But then, suddenly, population skyrocketed, followed shortly
by an explosion in income and standards of living.

Between 1700 and 1900, the world’s population rose from about
600 million people to about 1.5 billion people. Between 1800 and
1900, GDP per person per day doubled. Income grew over twice as
much in that century as in the preceding 18 centuries combined. The
two trends of rising income and population are related.

It is obvious how wealth allows for a larger population, but
could a larger population in turn also create more wealth? The
answer is yes — so long as people are allowed to innovate.
The computer or tablet or smartphone on which you are reading this
op-ed is the product of a complex web of human innovation and
cooperation that spans the globe.

People have been innovating since the australopithecines left
the African forests — carrying primitive weapons — some
seven million years ago. Moreover, we have been specializing at
least since Homo erectus some two million years ago. Yet
economic progress was very slow. So, what did the species do
differently in the last 250 years or so? What allowed humanity at
last to fully realize its innovative potential to create
wealth?

To figure out what caused the wealth explosion, we need to
consider where and when the change began. Economic growth started
to accelerate some 250 years ago, first in Great Britain and the
Netherlands, then the rest of Western Europe and North America, and
finally the rest of the world. What happened?

There are different theories, many of them complementary. The
Nobel-prize-winning economist Douglass North contends that the
evolution of institutions, including constitutions, laws, and
property rights, was instrumental to economic development.
Economist Deirdre McCloskey attributes the wealth explosion, or the
“great enrichment,” to a change in attitudes about
markets and innovation. Long scorned as vulgar, merchants and
inventors began to enjoy respect and institutional protection
— what she calls “bourgeois …read more

Source: OP-EDS

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