Among the important points that we have touched upon so far, one of the striking points about our world is that the modern world is remarkably new and different from the long history of humanity. The modern world we live in is only about 250 years old, whereas the world that preceded it is around 250,000 years old (that’s the time since anatomically modern humans appeared on the scene.)
Economic historians like Deirdre McCloskey call it the “Great Enrichment”: the world became around 30 times richer per capita in just two and a half centuries. Economics explains why that astonishing change occurred.
For most of human history, the various regions of the world were nearly equally poor. Different regions of the world had different population numbers. Some regions had high populations while others had low populations. Regardless of that, all existed in conditions of material deprivation that we cannot imagine today.
For about 99.9% of human tenure on earth, people lived in the “Malthusian era”: population numbers increased or declined in step with available food supplies. When food supplies increased, birth rates increased and the population grew till everyone was at the edge of subsistence; and when food supplies fell, death rates increased appropriately. Per capita wealth produced and consumed did not change over thousands of years.
Economics also explains what is called the “Great Divergence”: the fact that now different regions differ greatly in their capacity to create (and therefore consume) wealth. This increase of inequality and the increase in per capita wealth are related and the reasons for that are quite well-understood.
The increase in global inequality is an unavoidable consequence of an increase in global wealth. We will investigate that matter soon. Here’s a small illustration of the increase in inequality.
The graph above is from OurWorldinData.org. US GDP per capita at independence in 1776 was around $1900 (adjusted for 2011 prices.) Around 45 years later by 1820, that figure had gone up just $200 or so. But 240 years after independence, GDP per capita had increased more than 28-fold to $53,000.
It’s an interactive graph (click on the link or the image above) which allows you to choose which countries to plot. I chose the US, India and Singapore. Note that 200 years ago, in 1820, the US per capita GDP was a little over double India’s GDP; by 2016, that gap had increased — US per capita GDP was around 9 times that of India.
I find comparing US, Singapore and India interesting. Here are the numbers (at 2011 prices) for the three:
1870: US $3,736 Singapore $971 India $878
2016: US $53,015 Singapore $67,180 India $5,961
The US per capita GDP used to be 385% of Singapore’s pc GDP; that fell to 79% by 2016. A country almost as poor as India in 1870, overtook the US in terms of pc GDP around 2005. India’s pc GDP fell from being 24% to being 11% of US GDP between 1820 and 2016.
Relative to Singapore, Indian pc GDP was just 9% of Singapore’s pc GDP. The increase in inequality is stark. In 1952, the US pc GDP was $16,400, Singapore $1,600, and India $1,400.
What made Singapore overtake the US in pc GDP? And why has India been falling behind the US and Singapore? One natural objection to my comparing Singapore and India is that Singapore is tiny compared to India. Which means size does not confer any advantage. Or that Singapore is a single-party dictatorship. Meaning, multiparty democracy is a burden.
Or many other excuses. Excuses but no explanations. Check out a post on my blog “Yabbut Singapore is a small country and India is big.” That’s from 11 years ago. Here’s an excerpt from that post:
…The argument that India’s failure to develop cannot be compared with Singapore’s enviable success due to differences in size is meaningless. It is based on an absolute misapprehension of the way the world works. All we need to do to see through the matter is a little bit of common sense, a quiet place, and a bit of time to turn things around in one’s head.
Being large confers benefits. Look at it from any angle, and you will see the advantages. Large entities live longer. Compare a mouse to an elephant. Large corporations persist, and can weather downturns better than small firms. Large ships do better in storms than small boats. Large objects can affect the environment to their own benefit. A candle in the wind goes out; a large forest fire creates its own environment and whips up a storm.
Large corporations can influence policy. Large suppliers can dictate prices and change the market equilibrium. Large universities have access to better faculty and students. Large cities attract the more talented compared to small towns and villages.
Look at it any which way, and you find that large entities have advantages over tiny ones. Especially being “economically” large is a great advantage.
When it comes to economies, larger is better because of some fundamental principles. First there is the notion of specialization. As Adam Smith reasoned over 200 years ago, division of labor and specialization allows the greater creation of wealth. The degree of specialization possible increases with population, which translates into greater productivity and production.
The second matter that confers advantage to size is that large economies have large domestic markets. There are scale economies in most modern production. The more you manufacture, for instance, the lower is the per unit cost. So if you have a large domestic market, you will achieve economies of scale, which lower your costs, and that enables you to be competitive in the world market.
Not just competitive but you can even create a comparative advantage for yourself. Large economies have power to change the terms of trade to their advantage.
As human civilization has progressed, the size of the interacting group has increased. From small tribes, to city-states, to nations, to blocks of nations engaged in mutually beneficial trade arrangements.
The Western European economies not too long ago became part of a large economic union — to obtain those benefits that large size affords. They would not have done so if the benefits did not out weigh the costs.