The Rational Optimist: How Prosperity Evolves

Crunch

And yet, good as life is, today life is not good. Happy statistics of recent improvement sound as hollow to a laid-off car worker in Detroit or an evicted house owner in Reykjavik as they would to a cholera victim in Zimbabwe or a genocide refugee in Congo. War, disease, corruption and hate still disfigure the lives of millions; nuclear terrorism, rising sea levels and pandemic flu may yet make the twenty-first century a dreadful place. True, but assuming the worst will not avert these fates; striving to continue improving the human lot may. It is precisely because so much human betterment has been shown to be possible in recent centuries that the continuing imperfection of the world places a moral duty on humanity to allow economic evolution to continue. To prevent change, innovation and growth is to stand in the way of potential compassion. Let it never be forgotten that, by propagating excessive caution about genetically modified food aid, some pressure groups may have exacerbated real hunger in Zambia in the early 2000s. The precautionary principle – better safe than sorry – condemns itself: in a sorry world there is no safety to be found in standing still.

More immediately, the financial crash of 2008 has caused a deep and painful recession that will generate mass unemployment and real hardship in many parts of the world. The reality of rising living standards feels to many today to be a trick, a pyramid scheme achieved by borrowing from the future.

Until he was rumbled in 2008, Bernard Madoff offered his investors high and steady returns of more than 1 per cent a month on their money for thirty years. He did so by paying new investors’ capital out to old investors as revenue, a chain-letter con trick that could not last. When the music stopped, $65 billion of investors’ funds had been looted. It was roughly what John Law did in Paris with the Mississippi Company in 1719, what John Blunt did in London with the South Sea company in 1720, what Charles Ponzi did in Boston in 1920 with reply coupons for postage stamps, what Ken Lay did with Enron’s stock in 2001.

Is it possible that not just the recent credit boom, but the entire postwar rise in living standards was a Ponzi scheme, made possible by the gradual expansion of credit? That we have in effect grown rich by borrowing the means from our children and that a day of reckoning is now at hand? It is certainly true that your mortgage is borrowed (via a saver somewhere else, perhaps in China) from your future self, who will pay it off. It is also true on both sides of the Atlantic that your state pension will be funded by your children’s taxes, not by your payroll contributions as so many think.

But there is nothing unnatural about this. In fact, it is a very typical human pattern. By the age of 15 chimpanzees have produced about 40 per cent and consumed about 40 per cent of the calories they will need during their entire lives. By the same age, human hunter-gatherers have consumed about 20 per cent of their lifetime calories, but produced just 4 per cent. More than any other animal, human beings borrow against their future capabilities by depending on others in their early years. A big reason for this is that hunter-gatherers have always specialised in foods that need extraction and processing – roots that need to be dug and cooked, clams that need to be opened, nuts that need to be cracked, carcasses that need to be butchered – whereas chimpanzees eat things that simply need to be found and gathered, like fruit or termites. Learning to do this extraction and processing takes time, practice and a big brain, but once a human being has learnt, he or she can produce a huge surplus of calories to share with the children. Intriguingly, this pattern of production over the lifespan in hunter-gatherers is more like the modern Western lifestyle than it is like the farming, feudal or early industrial lifestyles. That is to say, the notion of children taking twenty years even to start to bring in more than they consume, and then having forty years of very high productivity, is common to hunter-gatherers and modern societies, but was less true in the period in between, when children could and did go to work to support their own consumption.

The difference today is that intergenerational transfers take a more collective form – income tax on all productive people in their prime pays for education for all, for example. In that sense, the economy (like a chain letter, but unlike a shark, actually) must keep moving forward or it collapses. The banking system makes it possible for people to borrow and consume when they are young and to save and lend when they are old, smoothing their family living standards over the decades. Posterity can pay for its ancestors’ lives because posterity can be richer through innovation. If somebody somewhere takes out a mortgage, which he will repay in three decades’ time, to invest in a business that invents a gadget that saves his customers time, then that money, brought forward from the future, will enrich both him and those customers to the point where the loan can be repaid to posterity. That is growth. If, on the other hand, somebody takes out a loan just to support his luxury lifestyle, or to speculate on asset markets by buying a second home, then posterity will be the loser. That is what, it is now clear, far too many people and businesses did in the 2000s – they borrowed more from posterity than their innovation rate would support. They misallocated the resources to unproductive ends. Most past bursts of human prosperity have come to naught because they allocated too little money to innovation and too much to asset price inflation or to war, corruption, luxury and theft.

In the Spain of Charles V and Philip II, the gigantic wealth of the Peruvian silver mines was wasted. The same ‘curse of resources’ has afflicted countries with windfalls ever since, especially those with oil (Russia, Venezuela, Iraq, Nigeria) that end up run by rent-seeking autocrats. Despite their windfalls, such countries experience lower economic growth than countries that entirely lack resources but get busy trading and selling – Holland, Japan, Hong Kong, Singapore, Taiwan, South Korea. Even the Dutch, those epitomes of seventeenth-century enterprise, fell under the curse of resources in the late twentieth century when they found too much natural gas: the Dutch disease, they called it, as their inflated currency hurt their exporters. Japan spent the first half of the twentieth century jealously seeking to grab resources and ended up in ruins; it spent the second half of the century trading and selling without resources and ended up topping the lifespan league. In the 2000s the West misspent much of the cheap windfall of Chinese savings that the United States Federal Reserve sluiced our way.

So long as somebody allocates sufficient capital to innovation, then the credit crunch will not in the long run prevent the relentless upward march of human living standards. If you look at a graph of world per capita GDP, the Great Depression of the 1930s is just a dip in the slope. By 1939 even the worst-affected countries, America and Germany, were richer than they were in 1930. All sorts of new products and industries were born during the Depression: by 1937, 40 per cent of DuPont’s sales came from products that had not even existed before 1929, such as rayon, enamels and cellulose film. 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. I cannot know who or where he is for sure, but let me give you a candidate. In the week I wrote this paragraph, a small company called Arcadia Biosciences in northern California signed an agreement with a charity working in Africa to license, royalty-free to smallholders, new varieties of rice that can be grown with less nitrogen fertiliser for the same yield, thanks to the over-expression in the roots of a version of a gene called alanine aminotransferase borrowed from barley. Assuming the varieties work in Africa as well as they do in California, some African will one day grow and sell more food (for less pollution), which in turn means that he will have more money to spend, earning the cost of, say, a mobile phone, which he will buy from a Western company, and which will help him find a better market for his rice. An employee of that Western company will get a pay rise, which she will spend on a new pair of jeans, which were made from cotton woven in a factory that employs the smallholder’s neighbour. And so on.

As long as new ideas can breed in this way, then human economic progress can continue. It may be only a year or two till world growth resumes after the current crisis, or it may for some countries be a lost decade. It may even be that parts of the world will be convulsed by a descent into autarky, authoritarianism and violence, as happened in the 1930s, and that a depression will cause a great war. But so long as somewhere somebody is incentivised to invent ways of serving others’ needs better, then the rational optimist must conclude that the betterment of human lives will eventually resume.

The declaration of interdependence

Imagine you are a deer. You have essentially only four things to do during the day: sleep, eat, avoid being eaten and socialise (by which I mean mark a territory, pursue a member of the opposite sex, nurse a fawn, whatever). There is no real need to do much else. Now imagine you are a human being. Even if you only count the basic things, you have rather more than four things to do: sleep, eat, cook, dress, keep house, travel, wash, shop, work…the list is virtually endless. Deer should therefore have more free time than human beings, yet it is people, not deer, who find the time to read, write, invent, sing and surf the net. Where does all this free time come from? It comes from exchange and specialisation and from the resulting division of labour. A deer must gather its own food. A human being gets somebody else to do it for him, while he or she is doing something for them – and both win time that way.

Self-sufficiency is therefore not the route to prosperity. ‘Which would have advanced the most at the end of a month,’ Henry David Thoreau asked: ‘the boy who had made his own jack-knife from the ore which he had dug and smelted, reading as much as would be necessary for this – or the boy who had attended the lectures on metallurgy at the Institute in the meanwhile, and had received a Rodgers’ penknife from his father?’ Contra Thoreau, it is the latter, by a mile, because he has far more spare time to learn other things. Imagine if you had to be completely self-sufficient (not just pretending, like Thoreau). Every day you must get up in the morning and supply yourself entirely from your own resources. How would you spend your day? The top four priorities would be food, fuel, clothing and shelter. Dig the garden, feed the pig, fetch water from the brook, gather wood from the forest, wash some potatoes, light a fire (no matches), cook lunch, repair the roof, fetch fresh bracken for clean bedding, whittle a needle, spin some thread, sew leather for shoes, wash in the stream, fashion a pot out of clay, catch and cook a chicken for dinner. No candle or book for reading. No time for smelting metal, drilling oil, or travel. By definition, you are at subsistence level and frankly, though at first you mutter, Thoreau-like, ‘how marvellous to get away from all the appalling hustle and bustle’, after a few days the routine is pretty grim. If you wish to have even the most minimal improvement in your life – say metal tools, toothpaste or lighting – you are going to have to get some of your chores done by somebody else, because there just is not time to do them yourself. So one way to raise your standard of living would be to lower somebody else’s: buy a slave. That was indeed how people got rich for thousands of years.

Yet, though you have no slaves, today when you got out of bed you knew that somebody would provide you with food, fibre and fuel in a most convenient form. In 1900, the average American spent $76 of every $100 on food, clothing and shelter. Today he spends $37. If you are on an average wage you knew that it would take you a matter of tens of minutes to earn the cash to pay for your food, some more tens of minutes to earn the cash to buy whatever new clothing you need and maybe an hour or two to earn the cash to pay for the gas, electricity and oil you might need today. Earning the rent or mortgage payment that ensures you have a roof over your head might take rather more time. But still, by lunchtime, you could relax in the knowledge that food, fuel, fibre and shelter were taken care of for the day. So it was time to earn something more interesting: the satellite television subscription, the mobile phone bill, the holiday deposit, the cost of new toys for the children, the income tax. ‘To produce implies that the producer desires to consume’ said John Stuart Mill; ‘why else should he give himself useless labour?’

In 2009, an artist named Thomas Thwaites set out to make his own toaster, of the sort that he could buy from a shop for about £4. He needed only a few raw materials: iron, copper, nickel, plastic and mica (an insulating mineral around which the heating elements are wrapped). But even to get these he found almost impossible. Iron is made from iron ore, which he could probably mine, but how was he to build a sufficiently hot furnace without electric bellows? (He cheated and used a microwave oven.) Plastic is made from oil, which he could not easily drill for himself, let alone refine. And so on. More to the point, the project took months, cost a lot of money and resulted in an inferior product. Yet to buy a £4 toaster would cost him less than an hour’s work at the minimum wage. To Thwaites this illustrated his helplessness as a consumer so divorced from self-sufficiency. It also illustrates the magic of specialisation and exchange: thousands of people, none of them motivated by the desire to do Thwaites a favour, have come together to make it possible for him to acquire a toaster for a trivial sum of money. In the same vein, Kelly Cobb of Drexel University set out to make a man’s suit entirely from materials produced within 100 miles of her home. It took twenty artisans a total of 500 man-hours to achieve it and even then they had to get 8 per cent of the materials from outside the 100-mile radius. If they worked for another year, they could get it all from within the limit, argued Cobb. To put it plainly, local sourcing multiplied the cost of a cheap suit roughly a hundred-fold.

As I write this, it is nine o’clock in the morning. In the two hours since I got out of bed I have showered in water heated by North Sea gas, shaved using an American razor running on electricity made from British coal, eaten a slice of bread made from French wheat, spread with New Zealand butter and Spanish marmalade, then brewed a cup of tea using leaves grown in Sri Lanka, dressed myself in clothes of Indian cotton and Australian wool, with shoes of Chinese leather and Malaysian rubber, and read a newspaper made from Finnish wood pulp and Chinese ink. I am now sitting at a desk typing on a Thai plastic keyboard (which perhaps began life in an Arab oil well) in order to move electrons through a Korean silicon chip and some wires of Chilean copper to display text on a computer designed and manufactured by an American firm. I have consumed goods and services from dozens of countries already this morning. Actually, I am guessing at the nationalities of some of these items, because it is almost impossible to define some of them as coming from any country, so diverse are their sources.

More to the point, I have also consumed minuscule fractions of the productive labour of many dozens of people. Somebody had to drill the gas well, install the plumbing, design the razor, grow the cotton, write the software. They were all, though they did not know it, working for me. In exchange for some fraction of my spending, each supplied me with some fraction of their work. They gave me what I wanted just when I wanted it – as if I were the Roi Soleil, Louis XIV, at Versailles in 1700.

The Sun King had dinner each night alone. He chose from forty dishes, served on gold and silver plate. It took a staggering 498 people to prepare each meal. He was rich because he consumed the work of other people, mainly in the form of their services. He was rich because other people did things for him. At that time, the average French family would have prepared and consumed its own meals as well as paid tax to support his servants in the palace. So it is not hard to conclude that Louis XIV was rich because others were poor.

But what about today? Consider that you are an average person, say a woman of 35, living in, for the sake of argument, Paris and earning the median wage, with a working husband and two children. You are far from poor, but in relative terms, you are immeasurably poorer than Louis was. Where he was the richest of the rich in the world’s richest city, you have no servants, no palace, no carriage, no kingdom. As you toil home from work on the crowded Metro, stopping at the shop on the way to buy a ready meal for four, you might be thinking that Louis XIV’s dining arrangements were way beyond your reach. And yet consider this. The cornucopia that greets you as you enter the supermarket dwarfs anything that Louis XIV ever experienced (and it is probably less likely to contain salmonella). You can buy a fresh, frozen, tinned, smoked or pre-prepared meal made with beef, chicken, pork, lamb, fish, prawns, scallops, eggs, potatoes, beans, carrots, cabbage, aubergine, kumquats, celeriac, okra, seven kinds of lettuce, cooked in olive, walnut, sunflower or peanut oil and flavoured with cilantro, turmeric, basil or rosemary…You may have no chefs, but you can decide on a whim to choose between scores of nearby bistros, or Italian, Chinese, Japanese or Indian restaurants, in each of which a team of skilled chefs is waiting to serve your family at less than an hour’s notice. Think of this: never before this generation has the average person been able to afford to have somebody else prepare his meals.

You employ no tailor, but you can browse the internet and instantly order from an almost infinite range of excellent, affordable clothes of cotton, silk, linen, wool and nylon made up for you in factories all over Asia. You have no carriage, but you can buy a ticket which will summon the services of a skilled pilot of a budget airline to fly you to one of hundreds of destinations that Louis never dreamed of seeing. You have no woodcutters to bring you logs for the fire, but the operators of gas rigs in Russia are clamouring to bring you clean central heating. You have no wick-trimming footman, but your light switch gives you the instant and brilliant produce of hardworking people at a grid of distant nuclear power stations. You have no runner to send messages, but even now a repairman is climbing a mobile-phone mast somewhere in the world to make sure it is working properly just in case you need to call that cell. You have no private apothecary, but your local pharmacy supplies you with the handiwork of many thousands of chemists, engineers and logistics experts. You have no government ministers, but diligent reporters are even now standing ready to tell you about a film star’s divorce if you will only switch to their channel or log on to their blogs.

My point is that you have far, far more than 498 servants at your immediate beck and call. Of course, unlike the Sun King’s servants, these people work for many other people too, but from your perspective what is the difference? That is the magic that exchange and specialisation have wrought for the human species. ‘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.’ In Leonard Read’s classic 1958 essay ‘I, Pencil’, an ordinary pencil describes how it came to be made by millions of people, from loggers in Oregon and graphite miners in Sri Lanka to coffee bean growers in Brazil (who supplied the coffee drunk by the loggers). ‘There isn’t a single person in all these millions,’ the pencil concludes, ‘including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how.’ The pencil stands amazed at ‘the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being.’