A few years ago, Robert Lucas, winner of the 1995 Nobel for economics, wrote The Industrial Revolution: Past and Future for the annual report of the Federal Reserve Bank of Minneapolis.
I’m not in the habit of reading the annual report of the Federal Reserve Bank of Minneapolis, but I recommend reading this essay:
There is, to be sure, much poverty and starvation in the world, but nothing could be further from the truth than the idea that poverty is increasing. Over the same period during which population has grown from 3 billion to 6.1 billion, total world production has grown much faster than population, from $6.5 trillion in 1960 to $31 trillion in 2000. (All the dollar magnitudes I cite, from the Penn World Table or any other source, will be in units of 1985 U.S. dollars.) That is, world production was nearly multiplied by five over this 40-year period, growing at an annual rate of 4 percent. Production per person — real income — thus grew at 2.3 percent per year, which is to say that the living standard of the average world citizen more than doubled. Please understand: I am not quoting figures for the advanced economies or for a handful of economic miracles. I am not excluding Africa or the communist countries. These are numbers for the world as a whole. The entire human race is getting rich, at historically unprecedented rates. The economic miracles of East Asia are, of course, atypical in their magnitudes, but economic growth is not the exception in the world today: It is the rule.
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The striking thing about postwar economic growth is how recent such growth is. I have said that total world production has been growing at over 4 percent since 1960. Compare this to annual growth rates of 2.4 percent for the first 60 years of the 20th century, of 1 percent for the entire 19th century, of one-third of 1 percent for the 18th century. For these years, the growth in both population and production was far lower than in modern times. Moreover, it is fairly clear that up to 1800 or maybe 1750, no society had experienced sustained growth in per capita income. (Eighteenth century population growth also averaged one-third of 1 percent, the same as production growth.) That is, up to about two centuries ago, per capita incomes in all societies were stagnated at around $400 to $800 per year.
Until recently, the entire world lived like the least developed nations of today — but that low level of productivity can still produce some amazing accomplishments:
How then did these traditional societies support the vast accomplishments of the ancient civilizations of Greece and Rome, of China and India? Obviously, not everyone in these societies was living on $600 per year. The answer lies in the role and wealth of landowners, who receive about 30 percent to 40 percent of agricultural income. A nation of 10 million people with a per capita production of $600 per year has a total income of $6 billion. Thirty percent of $6 billion is $1.8 billion. In the hands of a small elite, this kind of money can support a fairly lavish lifestyle or build impressive temples or subsidize many artists and intellectuals. As we know from many historical examples, traditional agricultural society can support an impressive civilization.
For a long time, any increases in productivity simply led to increased population, not increased wealth per capita:
Labor and resources combine to produce goods — largely food, in poor societies — that sustain life and reproduction. Over time, providence and human ingenuity make it possible for given amounts of labor and resources to produce more goods than they could before. The resulting increases in production per person stimulate fertility and increases in population, up to the point where the original standard of living is restored. Such dynamics, operating over the centuries, account for the gradually accelerating increase in the human population and the distribution of that population over the regions of the earth in a way that is consistent with the approximate constancy of living standards everywhere. The model predicts that the living standards of working people are maintained at a roughly constant, “subsistence” level, but with realistic shares of income going to landowners, the theory is consistent as well with high civilization based on large concentrations of wealth.This classical theory is not inconsistent with the enormous improvements in knowledge relevant to productivity that occurred long before the 18th century, improvements that supported huge population increases and vast wealth for owners of land and other resources. Increases in knowledge over the centuries also stimulated a large-scale accumulation of productive capital: shipbuilding, road and harbor construction, draining of swamps, and breeding and raising of animal herds for food and power. Capital accumulation, too, played a role in supporting ever larger populations. Yet under the Malthusian theory of fertility, neither new knowledge nor the capital accumulation it makes profitable is enough to induce the sustained growth in living standards of masses of people that modern economists take as the defining characteristic of the industrial revolution.
Developing nations undergo a demographic transition, with dwindling family sizes, where productivity growth outpaces population growth:
As family income rises, spending on children increases, as assumed in Malthusian theory, but these increases can take the form of a greater number of children or of a larger allocation of parental time and other resources to each child. Parents are assumed to value increases both in the quantity of children and in the quality of each child’s life.Of course, both the quality-quantity trade-off in Becker’s sense and the importance of human capital are visible well before the industrial revolution. In any society with established property rights, a class of landowners will be subject to different population dynamics due to the effect their fertility has on inheritances and the quality of lives their children enjoy. Such families can accumulate vast wealth and enjoy living standards far above subsistence. For the histories of what we call civilization, this deviation from a pure Malthusian subsistence model is everything. For the history of living standards of masses of people, however, it is but a minor qualification. Similarly, in any society of any complexity, some individuals can, by virtue of talent and education, formal or informal, acquire skills that yield high income, and as the Bachs and the Mozarts can testify, such exceptions can run in families. For most societies, though, income increases due to what a modern economist calls human capital are exceptional and often derivative, economically, from landowner wealth.
For a landless family in a traditional agricultural economy, the possibilities for affecting the quality of children’s lives are pretty slight. If there is no property to pass on, an additional child does not dilute the inheritance of siblings. Parents could spend time and resources on the child’s education in the attempt to leave a bequest of human capital. All parents do this to some degree, but the incentives to do so obviously depend on the return to human capital offered by the society the parents live in. Where this return is low, adding the quality dimension to the fertility decision may be only a minor twist on Malthusian dynamics. In short, neither the possibility of using inheritable capital to improve the quality of children’s lives nor the possibility of accumulating human capital needs to result in fundamental departures from the predictions of the classical model.
But these additional features do offer the possibility of non-Malthusian dynamics, and the possibility has promise because the process of industrialization seems to involve a dramatic increase in the returns to human capital. People are moving out of traditional agriculture, where the necessary adult skills can be acquired through on-the-job child labor. More and more people are entering occupations different from their parents’ occupations that require skills learned in school as well as those learned at home. New kinds of capital goods require workers with the training to operate and to improve upon them. In such a world a parent can do many things with time and resources that will give a child advantages in a changing economy, and the fewer children a parent has, the more such advantages can be given to each child.
Most human capital yields postitive externalities, so this further accelerates economic development.
Lucas’s conclusion:
Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. In this very minute, a child is being born to an American family and another child, equally valued by God, is being born to a family in India. The resources of all kinds that will be at the disposal of this new American will be on the order of 15 times the resources available to his Indian brother. This seems to us a terrible wrong, justifying direct corrective action, and perhaps some actions of this kind can and should be taken. But of the vast increase in the well-being of hundreds of millions of people that has occurred in the 200-year course of the industrial revolution to date, virtually none of it can be attributed to the direct redistribution of resources from rich to poor. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.