Sunday, July 20, 2014

The evolving demos, raised living standards

Why did the British surge ahead during the industrial evolution? Would you believe, it was awareness of numbers, and patience?

How learning to pass the marshmallow test explains global economic evolution
[...] Paul Solman: So we get to 1800 and now suddenly things become dramatically different. If you’ve got a line for growth per person that’s basically horizontal along a timeline of all human history, suddenly after 1800 it looks like it’s going straight up?

Greg Clark: Yes. Sometime around 1800 this dominant feature of the world up until then, which was very slow technological advancement, changed, and we moved to a world where technological advancement was systematic, expected, occurring all the time. But I should emphasize that that change is actually much more gradual than that 1800 date would suggest.

There was a break at some point between, say, 1600 and 1900 from this Malthusian world to the modern world, and that, for the advanced economies, just dramatically changed their nature.

What I want to emphasize here is the bizarre and puzzling nature of the Industrial Revolution, and it’s important to understand that this is one of the intellectual puzzles of history that’s on a par with the biggest puzzles in physics, or in astronomy, even though people generally don’t appreciate this. And perhaps the reason is that modern economists have constructed a false history of the world in their minds. They tend to assume that since high-income modern economies have certain economic features –

Paul Solman: Free markets, rule of law…

Greg Clark: …stability, peace, open government, and that low-income modern economies tend to have violence, market interference, restrictions — what must be the case is that the pre-industrial world suffered from all of these problems, and that then somehow people stumbled on the right institutions, and then growth occurred.

Paul Solman: And by “institutions” you mean markets, the sanctity of contracts?

Greg Clark: That’s right. Property rights, markets, representative government, limitations on the power of government. And it does turn out that England, which was in the vanguard of this movement, was a politically stable society with limited democracy, and very little government interference.

However, when you study the long history of the pre-industrial period, it becomes apparent that, for example, if you go back to 1300, England already had all the institutions you needed for modern economic growth.

England had a government tax rate that averaged 1 percent. It had, for hundreds of years, zero inflation. It had no government debt. It had absolute security for most people of their property rights. Most markets were free. For hundreds and hundreds of years, England had everything it needed for modern growth. If you go back to ancient Greece or ancient Rome, or probably even ancient Babylon, they had institutions enough for getting growth.

Paul Solman: We have the tablets from ancient Babylon because they were incised in clay, and there were all kinds of contracts.

Greg Clark: They had home mortgages, they had rental contracts, they had labor contracts, they had urban societies.

But, says Clark, the Babylonians obviously didn’t have modern economic growth. Nor did the Greeks, the Romans, the Chinese or anyone else, even though they had many of the institutions that economists credit with the advent of prosperity.

Greg Clark: It’s the dominant paradigm in modern economics. The idea in this is that economics has an amazing power. Institutions – I mean, it’s just the rules of the game in any society. If we don’t like the rules we have, why don’t we just change them? And then apparently, we could have endless growth.

That I think, is what gives economics its power and its appeal. But that’s what I’m trying to argue against.

I think the key was that there is very strong evidence that people were changing through this long Malthusian interval. Human nature seems to have been changing. It may well be culturally. It’s impossible to rule out that it’s actually genetically. What we find, if we look back at the earliest societies, is that people tended to be violent, impulsive, impatient. They didn’t like to work.

When we get to societies like England on the eve of the Industrial Revolution, you can see that people are accumulating capital in ways that they never did before. There’s much less violence – ordinary day-to-day violence — in the society.

People’s levels of education have expanded enormously. They are much more aware of numbers.

The upper classes in ancient Rome mostly didn’t know what age they were. On their tombstones they would record ages that were just fantastical – 120 in a society where life expectancy at birth was 25 to 30. No one seems to have thought: “This is crazy.”

You also get in these early societies people giving numbers for battles that just make no sense in terms of what we now know about history.

Paul Solman: What’s an example of that?

Greg Clark: They typically quote 80,000 for some reason as a standard number, and it just seemed to mean “big.”

There’s a case in medieval England where someone testified in Parliament to having fought in a battle in his youth, which occurred more than 100 years earlier. No one interrupted to say, “What are you talking about?”

And so we really see big changes in terms of work effort, patience, interest rates in very early societies at astonishing levels. If you go back to ancient Babylon, your house mortgage would cost you in real terms 20 to 25 percent interest rate per year.

These were societies that offered fantastic profit opportunities – profit opportunities that even venture capitalists now would die for. They were available to everyone, and no one took them.

In ancient Greece, your standard return from completely safe investments was 10 percent. But on the eve of the Industrial Revolution in England, the rate is down to 4 percent. There’s just a fundamental change in people’s psychology. What that implies is that people were historically very impatient.

Paul Solman: So you mean the time value of money — the value of waiting — has simply gone down as time has gone on?

Greg Clark: Yes. There’s very clear signs that with risk-free investments, the amount you have to pay people to wait declines very dramatically. We know, in the modern world, that people vary in their degree of impatience and how much they have to be paid.

I have three children, and they vary very significantly across that factor.

We also know in the modern world that psychologists were able to test four-year-olds and say, “You can have one marshmallow now or two marshmallows if you wait for a few minutes.”

There’s a bunch of kids that have to have the marshmallow, and others that just have this different psychology where they can wait. It turns out that’s a very good predictor of how they’ll do later in life. It seems to be a fundamental feature of peoples’ personalities: how willing they are to wait for gratification.

There seems to be this possibility that on a world scale, this was actually changing as we moved from hunter-gatherer society, to 1800. [...]
I'm sure one reason that people were "historically impatient", was that they didn't live very long!

Read the whole thing for embedded links and video.


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