vrijdag 12 november 2010

Review of Bernstein’s “The birth of plenty” (2004) and Landes’s “The Wealth and Poverty of Nations” (1999)

Nobel Prize winning economist Robert Lucas has remarked that, once one starts thinking about the determinants of economic growth, it is hard to think about anything else. While there is huge scientific literature on the subject, it is hard to find books that target a general audience but that are not heavily biased ideologically.  
Bernstein’s “The birth of plenty” (2004) and Landes’s “The Wealth and Poverty of Nations” (1999) are exceptions. These books share the ambition to provide an all-encompassing explanation of long term economic development. The time perspective they take is more or less the last millennium (although Bernstein also succinctly discusses ancient Greece and Rome). This approach sets them apart, both from authors who take the ultra-long term perspective (such as Jared Diamond in “Guns, germs and steel”) and from authors who emphasize the quantitative analysis of recent economic growth.
However, apart from their ambition, the books couldn’t be more different.
Let us first consider “The Wealth and Poverty of Nations”. Landes is an emeritus professor at Harvard, and he has clearly intended this book to be his magnum opus (the not-so-subtle reference to Adam Smith’s “Wealth of Nations” takes away any ambiguity on this specific point).
Landes starts his book with a discussion of the importance of geography, and admits that geographical factors (a temperate climate, the absence of tropical diseases, a favourable coastline and navigable inland waterways) do play a role in understanding economic growth. However, this discussion is limited to a dozen pages (out of approximately six hundred), and Landes quickly moves on to a detailed account of economic history, starting with medieval Europe and ending with the financial crisis that struck Southeast Asia in the second half of the 1990s.
This book reflects the result of several  decades of work, and this shows. It is encyclopaedic in nature, with a strong emphasis on cultural factors on the one hand and technological progress on the other hand.
In my view, the detailed accounts of technological breakthroughs are the most valuable part of the book, because they clearly illustrate several important points: (a) until the 19th century, there was almost no interaction between science and technology, and several important breakthroughs were the work of uneducated craftsmen (b) most technical advances are incremental in nature (c) most technical advances are the result of decades of painstaking trial-and-error processes (d) technological progress is path-dependent (e) once a certain threshold has been reached, technological progress can become a self-reinforcing process (f) small improvements can have important repercussions in unexpected areas. My favourite case study  is how the industrial revolution has lead to the replacement of wool by cotton, and how this has in turn affected labour productivity and accelerated industrialisation (basically, because cotton is easier to wash and itches less than wool, the move to cotton has dramatically improved hygiene and improved the health and strength of the labour force – until cotton was introduced, most people actually wore constantly the same pants until these literally fell apart – it does not take a lot of imagination to see what this must have implied in terms of hygiene).
However , even after the second reading of the book, I am still not sure what the central message really is (apart from the fact that Landes does not like quantitative-minded economists). The book has been described by some reviewers as a “ode to Europe” (less kind reviewers have called the book Euro-centric). (To be fair, the book contains extremely gruesome accounts of the colonization process, so I am not really sure whether the book can really be called an “ode” to the colonizers).
Well, it is clear that Landes does think that the seeds of the industrial revolution were sown in Europe centuries before the revolution really took off. Landes provides detailed accounts of little-known technological advances that were implemented in Europe in the Middle Ages. In my opinion, he rightly emphasizes that the Chinese may well  have had superior scientific and technological knowledge until the 15th century, but that it was their decision (and theirs only) not to use this knowledge to any productive use, while the Europeans did constantly push the frontiers of their own knowledge further and further. Thus, as far as the descriptive issues are considered, I have no problems with Landes. However, he fails to convincingly answer the questions why late-medieval European were so much more open-minded than the Chinese. It is too easy to just refer to cultural factors whenever differences between human societies cannot be explained in terms of genetics.
One point that has really annoyed me is the recurring criticism of economics and quantitative approaches to history. Sometimes, one is left with the impression, that whenever quantitative evidence is at odds with verbal accounts of the same issue, Landes just assumes that the figures must be wrong. Moreover, he repeatedly shows that he definitely does not understand the economic theory of comparative advantage (while he is in good company on this issue, I do not think it is very scholarly approach to assume that any theory that you do not understand0 must be wrong).
In short, while “The Wealth and Poverty of Nations” is worthwhile being read, it is more because of the wealth J of facts that are contained in the book, than because it provides far-reaching insights.
Both the tone and the substance of “The birth of plenty”  couldn’t be more different.  Its author, William Bernstein, is a neurologist and (apparently self-educated) financial analyst, who has written the book after discovering the writings of economist Angus Maddison on long-term economic development.
Somewhat disrespectfully, one could thus state that “The birth of plenty” is the work of a hobbyist. This shows in a (by times) very selective reading of the economic literature and a superficial understanding of economic theory.
This being said, the main advantage of Bernstein’s book is precisely that it has been written by a dilettante who is not bothered by an evaluation by his scientific peers: the book is very succinct and readable, and is very explicit in its central propositions.
In short, Bernstein claims that the simultaneous occurrence of the following four conditions is necessary for economic growth: the protection of private property rights, scientific rationalism, efficient capital markets, and low transport and communication costs. The book illustrates with numerous case studies what happens when the four conditions are not fulfilled simultaneously.
For instance, although individual property rights had already been protected by law in Britain since the Middle Ages, and although the rule of law steadily improved through time, it was not until the end of the eighteenth century that the industrial revolution really took off – in Bernstein’s view, because the other three conditions were not yet fulfilled.
It is certainly easy to criticize this simple message on several accounts.
First, the four conditions are not completely independent from each other. Surely efficient capital markets cannot develop without the protection of property rights (which includes the protection of shareholders and creditors)? And is the spectacular decrease of transportation and communication costs in the last two centuries not the result of mobilizing large capitals to bring the results of scientific progress to the market?
Second, the author does not really give any operational content to the conditions he has identified. Enforcement of property rights has never been perfect and never will be – it is a matter of degree. No one disputes that, back in the 18 century,  the rule of law was stronger in Britain than in France, and stronger in France than in the Ottoman Empire. But what exactly where the differences between these legal systems that explain the larger development gap between France and the Ottoman Empire than between France and Britain?
Similar considerations apply to the other conditions as well. The development of modern capital markets has come gradually, and the basis for them (such as double entry bookkeeping, money creating banks) was already there in Medieval Italy; joint-stock companies and central banks had been around for centuries before the Industrial Revolution took off. Actually, as Bernstein acknowledges, the law imposed extremely stringent conditions on the creation of limited liability companies until late in the 19th century, even in Britain – who would even consider nowadays investing his savings in a joint-stock company with unlimited liability of the shareholders?
As regards scientific rationalism, recall that until the 19th century, science and technology developed more or less independently: what really mattered for technological progress was a mind that was open to new knowledge, and this state of mind already existed in Europe for centuries, as long as this knowledge did not touch upon issues of religion (although Peter Watson has argued in “Ideas” that even in supposedly “dark” Medieval Europe, the intellectual debate on theological issues was much more open than in some areas of the world nowadays). And, to be honest, I have not understood the relevance for economic growth of the long chapter on astronomy, although the discussion in Bernstein is indeed “enlightening” on other issues (with the observational tools at hand at the time, the empirical support for Galilei’s system was not as strong as we think, and Copernic’s system was actually complete nonsense – it is not because the Church was wrong, that its opponents were right).
A third point of criticism that can be levied against the historical analysis is that the central thesis relies very heavily on the quantitative work of Angus Maddison. We easily forget that more or less reliable economic statistics are a recent phenomenon – Maddison’s work is thus based mainly on indirect evidence, and has been criticized for being very speculative.  To be fair to Maddison, he has always acknowledged this specific point, and challenged his critics to find better data. However, Bernstein sometimes gives the impression that he takes Maddison’s figures at face value. This is not an innocuous assumption, as one of the central assumptions in this book is that the growth of income per capita only really took off in the beginning of the 19th century.  Bernstein explanation for this is that, until then, technological progress was always offset by the population growth it induced – in other words, that the world was caught in a Malthusian trap.
In general, Bernstein does not sufficiently acknowledge that, taking into account their quality, we should be very careful in drawing sweeping conclusions from the data that are available. For instance, the absence of hard data on how income inequality has evolved during the industrial revolution means that we have to mainly rely on verbal accounts and indirect evidence – this is quite unsettling, taking into account that this issue was at the heart of the development of Marxism!
The best chapters in this book are the ones that discuss institutions in Britain, France and Spain from the late Middle Ages until the industrial revolution. Bernstein describes vividly how the legal system in Britain improved through time and how it affected incentives for industry positively, while the French and the Spanish kings devised policies that were so daft that one would think that they had been designed with the only purposes to stifle growth.
Bernstein also discusses several contemporary issues, such as the (lack of) the correlation between income levels and indicators of happiness, the link between development and democracy, the trade-offs between income growth and redistribution and possible constraints on future growth. Both left-wing and  right-wing ideologues will find elements in these chapters that they will profoundly dislike – I take this as a strong indicator of Bernstein open and independent mind.
This does not mean that these chapters are without flaws. For instance,  Bernstein heavily quotes from the work of economists Barro and Sala-I-Martin when discussing the relationship between economic development and democracy. Barro and Sala-I-Martin are admittedly reputable references, but, when discussing a highly controversial issue, other sources of information should have been discussed as well.
The weakest point in the analysis of contemporary issues, however, is the cursory treatment of natural resources. I agree with Bernstein that both the predictions and the intellectual framework of the Club of Rome are seriously flawed, but this is not enough to dismiss concerns that the (un)availability of natural resources can constrain income growth in just a few lines.
However, the sloppiness in the argument is hidden by a very fluent narrative – and, as this is not a scholarly book, I think the author should be forgiven for his faults. After all, most of the claims have indeed been vindicated by economic research, especially those concerning the crucial role played by the rule of the law.

All in all, I think anyone interested in a broad discussion of long-term economic development will find the books by Landes and Bernstein interesting and challenging. However, if one has to choose between the two, I would recommend Bernstein.

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