In a comment to part 4 of the essay on poverty, Shri Kalra asked, “if just existence of markets and process of exchange brings prosperity, why societies did not become prosperous soon after agriculture came to be practised and exchange markets came up to trade the surplus? Why is it that prosperity started coming in only around 18th century?”
Indeed it is true that for nearly all of human history that stretches back at least 200 to 300 thousand years, there was little improvement in the material prospects of life. The total output of the world economy for the last 2000 years was nearly flat until around the year 1500, and then it slowly started creeping up before it took the hockey stick shape around the year 1800, when it crossed one trillion international dollars.
Given that the scale on the horizontal axis is 2000 years, it appears that total world GDP took off vertically life a rocket. And seen from the perspective of thousands of years, it was indeed a sheer climb. A related graph about world population is instructive.
The shape of the two graphs is similar but note that the timelines differ: the population graph starts at 10,000 BCE (12,000 years ago) while the GDP graph starts 10,000 years later. Still there is a necessary connection between the growth in GDP and the growth in population. More people, greater prosperity.
It is generally believed that the transition from hunter-gatherer to settled agricultural life happened around 10,000 BCE. Between then and year 1 CE, the population grew from 4 million to 190 million. That’s an annual growth rate of 0.04% annual growth rate over 10,000 years. That’s a really low population growth rate. Humanity was trapped in the Maltusian age. Compare that to the annual population growth rate of 2.2% in the late 1960s, when population growth rate peaked — a whopping 55 times the previous rate.
Here’s how rapidly humanity multiplied. Milestones in billions of people and the year they were reached:
So that’s the data. What’s the reason for the growth? The short answer is growth in productivity and the growth in population.
Productivity measures how much a person produces per unit of time. If production increass from harvesting one acre a week to two acres a week, then productivity has doubled. Productivity increase is always due to better technology. For example, a combine harvester increases the productivity of a farm worker. That machine is a product of technology. Technology is knowledge of how to make something. A machine is “embodied” knowledge.
Technology itself has to be produced. It takes time to produce technology and the more people work on invention and discovery, the faster technology accumulates.
When settled agriculture began, most of the people were engaged in agriculture. Over centuries, people figured out better methods of growing crops and that gradually increased the productity of farming. That increase allowed some people to focus on producing technology, which in turn further increased productivity.
Increases in agricultural productivity is the key to the gate that leads to the path to prosperity. The fewer people that have to be engaged in producing food, the more people can do other things. Regardless of what one does for a living, we all — the porter and the philosopher — have to eat.
With time, the percentage of labor engaged in agriculture falls nearly monotonically. For example, just 150 years ago in 1870, farm labor was 50% of total US labor; today it is around 1.3%. That’s remarkable considering that the US is a net food exporter. That means, 1.3% of the US labor force produces more food than is consumed in the US.
The phenomenal productivity of US agriculture allows the non-agricultural sectors to be so advanced. The relationship between agricultural productivity and the prosperity of a nation is robust and easily explained. The larger the proportion of total labor engaged in farming, the poorer is the country. Here are a few countries with approximate percentage labor force participation in agriculture:
- US, Canada: 1
- Netherlands, Norway: 2
- Australia, Switzerland, Japan: 3
- Finland, Spain: 4
- Ireland, South Korea: 5
- Mexico: 13
- Sri Lanka, China: 25
- Thailand: 32
- India: 42
- Kenya: 54
- Nepal: 65
- Niger: 75
- Somalia: 83
[Source: The World Bank.]
There is a kind of a virtuous cycle of progress and prosperity. Increases in farm efficiency releases labor for non-ag sectors. Non-ag sectors produce, among other things, technology that enables further advances in farm productivity, and so on.
One important output of the non-ag sector is the development of energy technology. Agriculture in the advanced industrialized countries is highly productive because of the extensive use of energy. One can think of them transforming (mainly fossile fuel sourced) energy into food.
(As an aside, I have been insisting that in about 15 years, energy will become extremely cheap. And since the cost of anything — food, transportation, manufacturing, whatever — is the cost of energy, everthing will become cheap in a couple of decades. Poverty will be practically eliminated across the world.)
In summary, here’s the answer to the question posed at the top of his post. Exchange in markets has been around for at least a few thousand years. But it took time for people to gradually develop the technology that increased productivity. Simultaneous with the growth of world population was the growth in non-farm labor, part of which creates technology. The causation is bidirectional — more technology to productivity increases which leads to more technology.
Here we have to define technology very broadly. The cast iron plow (invented in 1797 in the US) was an advancement in technology. But so was the constitution of the US, effective 1789. It’s an advancement in institutional technology — how to construct a government. So also, double-entry bookkeeping was a technological breakthrough. Another advance in institutional technology was the invention of the modern corportation — those entities that produce the majority of what we consume. The world’s first commerical corporation was the East India Company which was granted the Royal Charter by Queen Elizabeth I in 1600.
Lots of factors had to come together for the world to start becoming prosperous. Hundreds of fundamental inventions and discoveries had to be made, many of them totally fortuitously. The industrial revolution could not have occurred without a lot of luck. Reverend Malthus was finally laid to rest. And that is why it took so long.
It won’t be long before the only remaining scourge of humanity are governments and their war machines. That I am afraid will lead to humanity’s ultimate demise.