Why are some nations rich and others poor?
In Australia, over the past fifty years, average household income, in constant prices, more than doubled. We live in one of the freest and most prosperous societies in the history of mankind. Why should we be so lucky?
Prior to 1800, most people lived subsistence existences. Dirt poor, their lives a drudgery, they suffered high rates of child mortality, starvation in poor seasons and ever present violence. It had been that way for centuries. As Hobbes put it, life was solitary, poor, nasty, brutish, and short.
Since then, the wealth of the average person has increased twelve-fold. (See Mark Rosser’s graphs of GDP per capita throughout history). Concurrently, the world’s population increased six-fold and life expectancy has extended by over forty years.
What makes some nations rich and others poor? Why are resource-rich Tanzania and Argentina poor, while resource poor Singapore, Hong Kong and Switzerland are rich? Why is there such a disparity in wealth between adjacent countries with similar cultures such as the former East and West Germany, or North and South Korea? Why is North America so much more prosperous than South America? Why has Botswana thrived and but not Zimbabwe nor the Congo? Why are formerly prosperous centres such as Baghdad, Venice and Florence not so fortunate today? What has changed recently in China and Brazil?
The reasons are complex and the factors interact. There are many alternative explanations. Prosperity is like a jigsaw puzzle. There are many pieces that contribute to the end result.
Jared Diamond, in Guns, Germs and Steel, posited that it all begins with geographical good fortune. Those nations that had access to arable crops and animals they could domesticate thrived.
Adam Smith identified that labour productivity could be improved if everyone specialized in what he was good at and traded his produce with others. Leonard E. Read, in his delightful essay, I, Pencil, explained how the division of labour worked in practice, with millions of people collaborating, blissfully unaware of the final result, in the production of a pencil. Max Weber argued that the protestant ethic of frugality, hard work and thrift, together with the notion that man had a calling and was obligated to use his talents appropriately created the environment for capitalism to thrive.
Civil liberties such as the right to private property, legally enforceable contracts, and the right to choose one’s occupation and to form voluntary associations (especially businesses) are significant enablers. Changing social values with regard to the dignity of work and respect for the entrepreneur also have an influence.
Other factors include: energy – coal replacing the slave, the ox and the horse; accumulated capital – being able to use the infrastructure, resources and ideas created previously; urbanization; innovation; trust and cooperation; and employing everyone’s talents.
Of all these, the division of labour and our willingness to exchange with strangers are crucial. The more people diversify as consumers and specialise as producers the more prosperous they become.
But perhaps the most important is property rights. Entrepreneurs need to be confident that they can keep the results of their efforts.
In Why Nations Fail, Acemoglu and Robinson explain:
Secure private property rights are central, since only those with such rights will be willing to invest and increase productivity. A businessman who expects his output to be stolen, expropriated, or entirely taxed away will have little incentive to work, let alone incentive to undertake investments and innovations.
Or as Matt Ridley put it more succinctly in The Rational Optimist:
Merchants and craftsmen make prosperity: chiefs, priests and thieves fritter it away.
For more, read my book The Fragility of Freedom: Why Subsidiarity Matters