Pethokoukis, Economics, U.S. Economy

The most important economic chart in Western civilization — and how it happened

Credit: Economic Growth: Unleashing the Potential of Human Flourishing

Credit: Economic Growth: Unleashing the Potential of Human Flourishing

It’s sad that the case for economic growth needs to be made. But it seems that too many people have lost sight of why growth is good as they fret about issues such as the environment and inequality (both of which growth actually helps).

In response, AEI’s Values & Capitalism series has published a little book, Economic Growth: Unleashing the Potential of Human Flourishing, that explores the benefits of growth and addresses common concerns regarding how growth impacts the poor, the environment, and culture.

Think about it: In real terms, the average income of Americans over the past two centuries went from $2,000 per person to $50,000. Here is the book’s formula for growth:

Governments seeking to unlock long-term growth should eschew command-and-control policies. Instead, they should craft economic institutions that reward all types of investment in physical and human capital, and that help markets function securely and inexpensively. For instance, an impartial judicial system that defines and enforces clear property rights gives firms and individuals the right incentives for work and investment; they know the courts will adjudicate property claims and contract disputes fairly, and uphold the rule of law.

Other key institutions include a stable, relatively corruption-free government, one that is able to provide for national defense and other public goods; a market system for the production and distribution of most goods and services, to provide monetary incentives for efficient allocation of resources and creation of jobs and incomes without need of government control or subsidy; and a financial system, modestly regulated for safety and economic growth paired with a sound currency, to encourage savings and to channel those savings into loans for large and small firms.

All good stuff, but I would boil it down to this: Respect and reward innovators and innovation. As Deirdre McCloskey has put it, the West became a business-admiring civilization and that changed everything:

What changed were habits of the lip. It’s not a “rise of the bourgeoisie,” but a rise in other people’s opinion of the bourgeoisie that makes for economic growth — as it is now doing in China and India. When people treat the marketeers and inventors as having some dignity and liberty, innovation takes hold. It was so to speak a shift in “constitutional political economy,” as James Buchanan puts the point. People agreed on the meta-rule of letting the economy go where it will. This contrasted with the earlier mentality, still admired on the left, that treats each act of innovation as an occasion to go looking for its victims. Victims there were, but they were greatly outnumbered by winners. It was ideas, not matter, that made the winners, and brought our ancestors from $3 to over $100 a day.

33 thoughts on “The most important economic chart in Western civilization — and how it happened

    • Great! Lets go colonize Africa, India, china, the Middle East, and the rest of North America! We can use the wealth won from conquered nations to pay down the debt, just like Britian… Mercantilism is the best, I’m glad you approve of it, too!

  1. $2,000 to $50,000? Is that adjusted for inflation? Since 1913 the Federal Reserve has caused the value of the dollar to decline roughly 97%. “[S]ound currency”, that’s a laugh.

  2. Median income should be reported instead of average income. The median income in 2012 in the USA is approximately $28,000. The average is much higher due to multi-milionaires and billionaires.

    • “Median income should be reported.” Even better would be to report the income of the poorest quintile including government transfer payments. I suspect that the very poor today would have been the most enriched group relative to poor of 1800, before food stamps, SSI disability, Aid to Families with Dependent Children and Medicaid. All of these programs were made possible by the increase of the “average” income.

    • GDP per person is, by its very definition, an average. You’re taking total GDP and dividing by total population. To compute a median, you’d have to find some way of estimating how much each individual contributes to the GDP. I don’t think that would be an easy task.

      That being said, this chart isn’t about income anyway. It’s about how much the average person CONTRIBUTES to the GDP. It’s an indicator of how productive the population is. While certainly there will be some correlation between income and the portion of GDP for which a given individual is responsible, I doubt there’s nearly as much variability as there is in income. Warren Buffet may make 50,000 times my income, but I doubt he’s single-handedly responsible for 50,000 times as much domestic product. Average and median probably aren’t that different in this case.

  3. I’m of the opinion that central control of the economy is wildly NP-Hard.

    Having a group of economists get together with some computer scientists and -proving- that would seem to be quite useful.

  4. Well, an excellent standard of living in agrarian society wasn’t much dependent on having or using money, so I’m not sure how you can make valid comparisons here.

  5. If it took the Enlightenment plus both the Industrial and Scientific Revolutions to spark that civilizational spike, what might it take to hack it down?

    In today’s world, info-tech alone stands out– for half a century now, there have been no great artists, authors, composers remotely comparable to those of the late 19th Century. Though hubristic arrogance, conceited self-esteem, are de rigeur for the crass and vulgar elitists infesting contemporary Establishments, over several generations not a single man of genius has emerged in any humanistic area.

    Amidst this Great Dearth, grubby little Luddite sociopaths from Climate Cultists to zero-population advocates consider humankind “a mass of seething maggots” (John Holdren), virtually a “cancer on the Earth” (Kentti Linkola). Whatever it takes to excrete such coprophagic proctocranials from Gaia’s body politic, halfway decent, rational citizens had better apply the enema as soon as possible.

    • Please don’t hold back, Mr. Hendaye; tell us what you really think! ;)

      Seriously, you do make a good point about our present dearth of world-class artists. About the best we can get lately is good entertainers, and no more…

    • In today’s world, info-tech alone stands out– for half a century now, there have been no great artists, authors, composers remotely comparable to those of the late 19th Century.

      I disagree with this statement. Art isn’t something I can speak a lot to, but for authors I’d put JRR Tolkien and Hunter S. Thompson up against anyone from the late 19th century you care to choose. And as far as composers go, it’s hard to find a period in history where music was as prolific and memorable as it was from 1967 to 1983. A hundred years from now, people will still be listening to the music of the Beatles, the Rolling Stones, The Who, Led Zeppelin, Pink Floyd, The Doors, and many of the other staples of classic rock.

    • It’s tempting to agree with you. But I have some doubts. Great artists? – I don’t know enough about art to gainsay you. Authors? – I know a little more: Updike, for example. Capote. Horton Foote, Tom Stoppard and August Wilson among playwrights. Pynchon, or so I’m told. Composers? Again, I know just a little, but clearly John Adams. Point is, greatness in these areas often requires some distance to identify.

      Further, I think that pop culture has bled off a great deal of potential accomplishment in these areas. I’m not one who thinks that Dylan, the Beatles, or graphic novels are comparable to their high culture counterparts, but I think that the talent is at the same level.

      We’ve always had the lunatic faddist strains in our culture. The Climate Chicken Littles, the Malthusians, are not at all unusual. They are normal byproducts of any civilization. You always get astrology alongside astronomy.

      I’m more concerned that Jacques Barzun is right – that what we are experience is decadence. In other words, nothing strikes the spike down. It just runs out of steam.

    • Lloyd, I must interject a comment as there HAVE been many great artists, authors, composers, in fact, I personally know some of them. You are just not looking hard enough. They are not being supported by media, churches, communities…they are on welfare, drugs, and alternative airwaves. There is brilliance in art and music in hidden corners…and yes, i’m talking mind-blowing historical brilliance…to me, your comment reminded exactly what an economy needs to move forward. I’d share it with my friends on the internet, but then it would be ™’d ©’ed and sold to Oprah and I’d still be on welfare. So for the moment, I will share it with my loved ones and trusted friends and bask in my brilliant smile :)

  6. Much credit should go to James Watt. http://www.educationscotland.gov.uk/scottishenlightenment/jameswatt/index.asp

    In addition to the prosperity that followed, his invention made slavery uneconomical and brought about its well-deserved demise after standing as a human institution for thousands of years in almost all cultures. The steam engine and king coal: humanity is greatly indebted to these.

    Also, opinions likely changed because machine power worked much better than the power of livestock and men. He should get a mention here, I think.

  7. The cause was science and technology plus protection for private property. Put another way, it was respect for the mind and respect for the individual. It took both and both occurred in the West and especially in Britain.

  8. More care should be taken with the “The most important economic chart in Western civilization.” Extrapolating down from the top labeled lines, the bottom line on the graph would be at -$5000, indicating that the early GDP/person was negative. I suspect that the early GDP/person was actually nearly zero, so the graph either needs to be redrawn or relabeled. This sloppiness detracts from the message of the chart.

  9. Of course, ceding economic control to rapacious corporations, allowing them to amass fortunes based upon cronyism (patent law, regulatory capture, restraint of competition, and outright purchase of legislation), and calling that “capitalism,” isn’t going to spur growth.

    As government pushes out more and more “self-governance,” bread, circuses, and dependency, will become the norm.

  10. I’d like to see a line that is the “rest of the world” rather than “the world” because “the world” line is probably being drawn upward by the US and Europe. I’d like to know by how much.

  11. Did the invention of moveable type and fuel coke in the 11th century, the compass in the 12th, eyeglasses in the 13th, and printing presses and double entry bookkeeping in the 15th really have so little economic impact? I have difficulty in swallowing the idea we can discern with any exactitude gdp per person in 2012 US dollars world-wide in the 13th century.

  12. In your words, we need “a stable, relatively corruption-free government,” but I found nothing to show that you value a stable, relatively corruption-free private corporate structure.

    What steps are need to divert private entrepreneurs from the prevalent and growing temptations to employ fraud and monopoly to “control and command” their sector of the world economy? How can we deal with the prevailing and growing power of financially endowed institutions to assume control not only of their market sector but of governments as well.

    In short, what role does moralty have in the future, and why don’t you at least hint that these are issues to confront?

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