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Wednesday, August 06, 2008 Who Has The Wealth? By Paul Hsieh @ 1:01 AM 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.) Labels: Economics, History   E-mail Paul Hsieh    PermaLink ()    Comments [8] (New Page)

Comments on "Who Has The Wealth?"
	Wednesday, August 6, 2008 at 3:51:59 mst Comment ID: #1 Name: Galileo Blogs E-mail: rayniles(at)rcniles.com URL: http://galileoblogs.blogspot.com Nice essay, Paul. You did a good job of identifying the fundamentals that account for the pattern of wealth across the globe. "Communications" and "capital markets" are certainly derivative factors. They are only possible in societies that respect reason and recognize property rights.
	Wednesday, August 6, 2008 at 7:10:47 mst Comment ID: #2 Name: William H. Stoddard E-mail: whswhs(at)mindspring.com URL: http://whswhs.livejournal.com/ That sounds like an interesting book; thanks for mentioning it. I'll have to look it up. Earlier this year, I read a book on comparative economic systems that went beyond the usual "market economies vs. state socialism" idealized models to talk about a variety of real world economies, including several different precivilized economic patterns, and multiple subvarieties of both market-organized and state-organized present-day economies. In particular, the author claimed that market economies could be divided into four types: the Scandinavian model, the continental European model typical of Germany and France, a Mediterranean model typical of Hispanic countries, and a model found in the English-speaking countries, Japan, and Switzerland. The last, he thought, was most favorable to the creation of new business ventures. Now, he clearly wasn't talking about laissez faire, but the comparison to your list seems quite close. I'll have to take another look at that book and see what specific institutions he thought went with that organizational style. What's your view of the Swiss economy, if you have one? Do you think it has anything comparable to the institutions of the Anglosphere, or the cultural differences?
	Wednesday, August 6, 2008 at 7:20:56 mst Comment ID: #3 Name: Paul Hsieh E-mail: paul(at)geekpress(dot)com URL: http://www.geekpress.com Unfortunately, I don't know much about the Swiss economy. I know that their health care system is a mixed public-private system. And from one of my former co-workers who lived their for two years, I gather that their economy overall is mixed, but I don't know much more than that.
	Wednesday, August 6, 2008 at 12:16:05 mst Comment ID: #4 Name: Bill Visconti E-mail: viscosity33(at)brlc.net I wonder if there is any correlation with high GDP and Protestantism. Max Weber, the German sociologist, argued that capitalism was a byproduct of Protestant (and largely Calvinist) religion. His argument was that Protestantism, because it did not believe in buying indulgences (ie salvation) from the Church, encouraged a more secular, this-worldly focus. As a result people were more interested in achieving salvation through their deeds on earth. A byproduct was the pursuit of material wealth. I think there is something to this in that Protestantism may have encouraged a more secular approach to Christianity and thus opened the door for reason to be used in the ways Paul described in this excellent post. The Anglo-sphere world is largely Protestant and not Catholic. I think there may be some correlation with Protestantism and the degree to which the Enlightenment ideas stuck. Mind you, I am not praising Protestantism (especially Calvinism which is insane) but suggesting that there may be something to Weber's analysis (which I understand was popular during the 19th century).
	Wednesday, August 6, 2008 at 16:19:07 mst Comment ID: #5 Name: Jim May E-mail: seerak(at)gmail.com Who wants to *destroy* the wealth? "John Barrett, one of the authors of the reports by the Stockholm Environment Institute at York (SEI-Y) for the government and campaign group WWF*, was quoted by the BBC today: Click here to find out more! "***We are constantly battling against increases of wealth***... There's a very fundamental problem here that no one really wants to talk about." http://www.theregister.co.uk/2008/08/01/uk_must_abandon_growth_to_c ...
	Wednesday, August 6, 2008 at 18:30:25 mst Comment ID: #6 Name: William H. Stoddard E-mail: whswhs(at)mindspring.com URL: http://whswhs.livejournal.com/ For some time, one of the scholarly journals I copy edited was devoted to "industrial ecology," which turns out to be not so much a field of research as a form of advocacy; they're the people who want to measure the "ecological footprint" of people in different countries and shrink everybody's footprint as much as possible. Over time, I noticed a recurrent argument in its articles. This claimed, first, that research showed that having more choices did not make people happier, as demonstrated by psychometric research; second, that therefore having fewer choices would not make them less happy (notice that the second is NOT a logically valid inference from the first); and third, that therefore governments should step in and take away our freedom of choice, both to relieve us of the burden of too many decisions and to save the planet from the excesses of mass consumption. The scary thing is that they were completely serious about this.
	Wednesday, August 6, 2008 at 18:50:43 mst Comment ID: #7 Name: Dan G. I believe an ARI affiliated scholar (Peter Schwartz, maybe) had a recorded lecture on that topic and did a thorough job of demonstrating that the Weber thesis was bunk. Its been a while since I listened to it (and it was a friend's tape, so I cannot readily listen to it again) but the main points I remember were 1) that Weber's starting point was just a guess, and then he looked for evidence instead of looking for evidence then abstracting a relation, 2) that if anything, the capitalism and the Industrial Revolution happened *in spite of* Protestantism and 3) the coup de gras, at the end of his book, Weber didn't even believe his initial assertion.
	Saturday, August 9, 2008 at 9:38:55 mst Comment ID: #8 Name: RT It was John Ridpath: http://www.aynrandbookstore2.com/prodinfo.asp?number=ER56M "Dr. Ridpath argues that religion is antagonistic to the needs of proper human life, and thus cannot possibly be compatible with the proper social system for manâ€"capitalism. Yet Protestantism is widely believed to be central to the development of capitalism. Why? These two lectures examine this issue at its root through the ideas of the founder of Protestantismâ€"Martin Luther. By analyzing his ideasâ€"as well as the later modifications of basic Lutheran doctrine by Calvin, Knox and othersâ€"Dr. Ridpath reveals the actual influence of Protestantism upon capitalism."
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