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The Rational Optimist: How Prosperity Evolves (P.S.)

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The Rational Optimist: How Prosperity Evolves (P.S.)

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At some point, human intelligence became collective and cumulative in a way that happened to no other animal.

If culture consisted simply of learning habits from others, it would soon stagnate. For culture to turn cumulative, ideas needed to meet and mate.

Specialisation encouraged innovation, because it encouraged the investment of time in a tool-making tool. That saved time, and prosperity is simply time saved, which is proportional to the division of labour.

On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us? THOMAS BABINGTON MACAULAY

Yet looking back now, another fifty years later, the middle class of 1955, luxuriating in their cars, comforts and gadgets, would today be described as ‘below the poverty line’.

Today, of Americans officially designated as ‘poor’, 99 per cent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning. Cornelius Vanderbilt had none of these.

People are not only spending a longer time living, but a shorter time dying.

The improved technology of lighting has liberated you to make or buy another product or service, or do a charitable act. That is what economic growth means.

This is what prosperity is: the increase in the amount of goods or services you can earn with the same amount of work.

So growth will resume – unless prevented by the wrong policies. Somebody, somewhere, is still tweaking a piece of software, testing a new material, or transferring a gene that will make your and my life easier in the future.

‘In civilized society,’ wrote Adam Smith, an individual ‘stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.’

This is the diagnostic feature of modern life, the very definition of a high standard of living: diverse consumption, simplified production.

You are poor to the extent that you cannot afford to sell your time for sufficient price to buy the services you need, and rich to the extent that you can afford to buy not just the services you need but also those you crave.

Prosperity, or growth, has been synonymous with moving from self-sufficiency to interdependence, transforming the family from a unit of laborious, slow and diverse production to a unit of easy, fast and diverse consumption paid for by a burst of specialised production.

There is no such thing as unproductive employment, so long as people are prepared to buy the service you are offering.

The cumulative accretion of knowledge by specialists that allows us each to consume more and more different things by each producing fewer and fewer is, I submit, the central story of humanity.

Without trade, innovation just does not happen. Exchange is to technology as sex is to evolution. It stimulates novelty.

People do their utmost to cut themselves off from the free flow of ideas, technologies and habits, limiting the impact of specialisation and exchange.

Technology was made possible by division of labour: market exchange calls forth innovation.

All it took was an occasional incomer from the mainland to keep technology from regressing.

The success of human beings depends crucially, but precariously, on numbers and connections. A few hundred people cannot sustain a sophisticated technology: trade is a vital part of the story.

A large, interconnected population meant faster cumulative invention – a surprising truth even to this day, as Hong Kong and Manhattan islands demonstrate.

Money is not metal. It is trust inscribed. NIALL FERGUSON

The argument is not that exchange teaches people to be kind; it is that exchange teaches people to recognise their enlightened self-interest lies in seeking cooperation.

Trade with strangers, and the trust that underpins it, was a very early habit of modern human beings.

But is trade made possible by the milk of human kindness, or the acid of human self-interest?

if sympathy allows you to please yourself by pleasing others, are you being selfish or altruistic?

As a broad generalisation, the more people trust each other in a society, the more prosperous that society is, and trust growth seems to precede income growth.

The notion of synergy, of both sides benefiting, just does not seem to come naturally to people. If sympathy is instinctive, synergy is not.

This is the extraordinary feature of markets: just as they can turn many individually irrational individuals into a collectively rational outcome, so they can turn many individually selfish motives into a collectively kind result.

It was Joseph Schumpeter who pointed out that the competition which keeps a businessman awake at night is not that from his rivals cutting prices, but that of entrepreneurs making his product obsolete.

firms are temporary aggregations of people to help them do their producing in such a way as to help others do their consuming.

Good rules reward exchange and specialisation; bad rules reward confiscation and politicking.

‘Rich countries,’ concluded the Bank, ‘are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity.’

Human history is driven by a co-evolution of rules and tools. The increasing specialisation of the human species, and the enlarging habit of exchange, are the root cause of innovation in both.

That is the point of agriculture: it diverts the labour of other species to providing services for human beings.

Farming is the extension of specialisation and exchange to include other species.

For Adam Smith capital is ‘as it were, a certain quantity of labour stocked and stored up to be employed, if necessary, upon some other occasion’.

Once capital had arrived on the scene, innovation could accelerate, because time and property could be invested in projects that initially generated no benefit.

In the conventional account it was agriculture that made capital possible by generating stored surpluses and stored surpluses could be used in trade.

The characteristic signature of prosperity is increasing specialisation. The characteristic signature of poverty is a return to self-sufficiency.

‘Where there are no institutional restraints on such behaviour, systematic killing of unrelated individuals is so common among human beings that, awful though it is, it cannot be described as exceptional, pathological or disturbed.’

Imports are Christmas morning; exports are January’s MasterCard bill. P.J. O’ROURKE

In that sense, the decline of the Roman empire turned consumer traders back into subsistence peasants.

The message from history is so blatantly obvious – that free trade causes mutual prosperity while protectionism causes poverty – that it seems incredible that anybody ever thinks otherwise.

Trade, says Johann Norberg, is like a machine that turns potatoes into computers, or anything into anything: who would not want to have such a machine at their disposal?

Increasing self-sufficiency is the very signature of a civilisation under stress, the definition of a falling standard of living.

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