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Western capitalism and demographics

Discussion in 'The Americas' started by Picard, Sep 5, 2014.

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  1. Picard

    Picard Lt. Colonel RESEARCHER

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    The Islamic future of Britain - The Commentator

    The Islamic future of Britain
    Britain is in denial. If population trends continue, by the year 2050, Britain will be a majority Muslim nation


    Britain is in denial. There is no real public debate on a historic event that is transforming the country. Mention of it occasionally surfaces in the media, but the mainstream political class never openly discuss it.

    What is that historic event? By the year 2050, in a mere 37 years, Britain will be a majority Muslim nation.

    This projection is based on reasonably good data. Between 2004 and 2008, the Muslim population of the UK grew at an annual rate of 6.7 percent, making Muslims 4 percent of the population in 2008. Extrapolating from those figures would mean that the Muslim population in 2020 would be 8 percent, 15 percent in 2030, 28 percent in 2040 and finally, in 2050, the Muslim population of the UK would exceed 50 percent of the total population.

    Contrast those Muslim birth rates with the non-replacement birth rates of native Europeans, the so called deathbed demography of Europe. For a society to remain the same size, the average female has to have 2.1 children (total fertility rate). For some time now, all European countries, including Britain, have been well below that rate. The exception is Muslim Albania. For native Europeans, it seems, the consumer culture has replaced having children as life’s main goal.

    These startling demographic facts have been available for some time (see ‘Muslim Population “Rising 10 Times Faster than Rest of Society”’, The Times, 30 January 2009. Also the work of the Oxford demographer David Coleman). But on this historic transformation of the country there is silence from the political establishment.



    Not everyone agrees with these demographic figures. Population projection, some say, is not an exact science. Perhaps the Muslim birth rate will drop to European levels.

    But this seems to be wishful thinking. For years it was believed that Muslims would enter what is known as “demographic transition”, with European Muslim birth rates falling to native European levels. But that demographic transition has not happened. In Britain, for example, the Pakistani and Bangladeshi communities continue to have significantly higher birth rates than the national average, even after more than 50 years in the country.

    Over the short term (a few generations) demographic forecasting is as scientific as any social science can be. Britain and the rest of Europe are in native population decline and European Muslim birth rates are up. If that trend continues, then the projection of a majority Muslim population in Britain is sound. Even the highly respected economist and historian Niall Ferguson accepts the figures.

    Many British people find it hard to believe their country could become majority Muslim. After all, it was never what they wanted so why, in a democracy, should it be happening? But we’ve had such disbelief before. Back in the 60s and 70s, many people scoffed at the notion that London could ever be majority non-white. But today it is.

    The fact is that the deathbed demography of native Britons has come up against increasing Muslim birth rates and the result is a classic Malthusian geometric increase in the Muslim population. As Malthus emphasised, populations increase geometrically, not arithmetically. Given two populations, one declining one increasing, within a few generations the geometric increase of one over the other can be substantial.

    Why has the Muslim birth rate not fallen to native levels? Just as there may be consumerist-cultural reasons for the low birth rates of native Britons, there may be strong cultural reasons for higher Muslim birth rates. As the journalist Christopher Caldwell puts it: “Muslim culture is full of messages laying out the practical advantages of procreation. As the hadith saying has it: ‘Marry, for I will outnumber peoples by you.’”

    Yassir Arafat understood the political power of high birth rates. The Palestinian population increased sevenfold in one generation from 450,000 in 1967 to 3.3 million in 2002. The wombs of Palestinian women, Arafat said, were the “secret weapon” in his cause. The Israeli government is very much aware of Palestinian demographics.

    Population projections over the long term can be wrong. But for Britain, over the short term, whatever way you do the numbers, they all point in one direction: Britain will be a majority Muslim state by the year 2050.

    The political and social consequences of all this will be significant. Britain’s traditional foreign policy, particularly regarding the US and Israel, would very likely change. In fact the US and Israel are already anticipating the consequences of a majority Muslim Western Europe.

    Britain’s social landscape would also be changed. The Adhan, the Muslim call to prayer, would very likely be heard throughout most of Britain. The traditional iconic sights and sounds of the country would also change from church bell-towers to minarets.

    Very likely all of this would happen gradually but there can be little doubt that it will happen, and it would be perfectly democratic.

    Given that such a historic change is taking place, the silence of the political class is curious, to say the least. Britain, until the 1950s, could trace its ethnic and cultural ancestry back thousands of years. In 1903, in Cheddar Gorge Somerset, the remains of a pre-historic man were found. Known as Cheddar Man, DNA tests on this almost 9000 years old skeleton showed that he has living descendents today, still in Somerset.

    In fact, genetic studies show that the populations of the British Isles (and Western Europe) have been stable for millennia, giving the lie to the oft quoted liberal comment that “Britain has always been a country of immigrants.” That’s false. Until the mass immigration of the 1950s, Britain was ethnically homogeneous. (See Bryan Sykes’s Blood of the Isles.)

    The long stretch of Britain’s exclusively European identity is now coming to an end, yet the political class refuse publicly to discuss such a culturally transforming event. Why the silence from the politicians? Are they not proud of their achievement?

    The answer is that the demographic projections of a majority Muslim Britain show the British political class to have been catastrophically wrong on multiculturalism and immigration, and they are genuinely afraid to admit it. The British political establishment cannot give the full truth about immigration.


    The former Conservative MP George Walden, considering the fears of his fellow MPs in discussing particularly Muslim immigration, wrote:

    “I’d be so alarmed by the situation I’d do everything possible to suggest it was under control. It’s up to politicians to play mood music in a crisis, and up to the people to understand that there’s little else governments can do. The last thing they can say is that we face a threat to which we can see no end because it’s based on a clash of cultures. On the IRA we told the truth; on the Islamic problem, we lie.” (Walden, Time to Emigrate? p.120)

    Back in the 60s and 70s, the British political establishment united in condemning Enoch Powell, not just as a racist but as being factually incorrect in his demographic predictions. Since then, the subject of immigration has split British politics between the truth-denying, but morally superior, political mainstream and the truth-telling legacy of the bogeyman Enoch Powell.

    For good or bad, the history of the last 40 years has vindicated Powell on many issues and shown the political establishment to have been wrong. Some major figures on the liberal-left now acknowledge this fact.

    David Goodhart, the founder of Prospect magazine, in his new book The British Dream, argues convincingly that he and others on the liberal-left got it wrong on immigration.

    But they also got it wrong on democracy. The projection of a Muslim majority by the year 2050, coupled with the fact that the vast majority of the British people have consistently opposed large-scale immigration, post-war British politics must represent the greatest ever failure in democracy. If ever the “Iron Law of Oligarchy” were proved right, then it is post-war British politics that has done it.
     
  2. Picard

    Picard Lt. Colonel RESEARCHER

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    Human Capitalism Markets, Babies and Institutions: The European Marriage Pattern and the Rise of the West - Human Capitalism

    Markets, Babies and Institutions: The European Marriage Pattern and the Rise of the West

    Recently I have been writing a lot about economic history, especially in the posts on Britain’s rise as an industrial power and the rise and fall of the Spanish empire. I have also commented on the inherent features of capitalism which make it an evolutionary system fulfilling human needs, and written about the effects of democracy and other policy inventions on growth. A logical next step to continue this thread of posts is something I am working on for my upcoming book, namely: how did Western Europe’s demographic history set it apart from other regions and lead up to modern economic growth.

    Adam Smith vs Joseph Schumpeter
    Before I move on to describing the specific features of European demography in the Middle Ages and Early Modern Period, which were one of the direct causes eventually inducing a growth take-off, I believe a few words of context are needed.

    When we speak about the Malthusian Period, before the Industrial Revolution and the simultaneous (or prior) changes in demographic behaviour, we usually say that it didn’t experience any economic growth as a general rule. This is a simplification for several reasons. Firstly, there were specific regions and times when per capita growth did occur, such as during the Renaissance in northern Italy, during the Dutch Golden Age or in England in the centuries before the Industrial Revolution. But this wasn’t modern economic growth, due to two main factors. First, it wasn’t sustained for a very long period (and wasn’t sustainable). Second, it was so-called Smithian, rather than Schumpeterian, growth. The difference is a fundamental distinction in economic history.

    As I have argued in most of my previous posts, and this is common knowledge in the field of economics, technological progress has always been the underlying cause of growth, both in Malthusian and post-Malthusian times. The difference between these two periods was how technological progress impacted economic growth (directly or indirectly) and whether economic growth generated a sustainable feedback loop for more technological progress. Smithian growth was mostly about population growth. An improving technological level, under Malthusian rules of the game, led to population growth rather than per capita increases in income. But a larger population enabled further specialisation in the productive process, which led to efficiency gains, and allowed for obtaining a critical mass of population size for some technologies to be feasible. Thus, indirectly, technological progress sometimes led to increases in per capita income, albeit sporadically and without creating a feedback loop.

    Meanwhile, Schumpeterian growth, first attained in Europe, and ultimately the economic phenomenon which decided its economic primacy, acted directly on income per capita, producing population growth as a by-product of its dynamics. Schumpeter style growth is characterised by the leading role of efficiency gains caused by technological progress and innovation, not by population growth.

    If so, what were the conditions specific to North-Western Europe, which allowed it to leave Malthusian constraints, and other world regions, far behind?
     
  3. Picard

    Picard Lt. Colonel RESEARCHER

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    The European Marriage Pattern
    In his seminal paper, John Hajnal described a phenomenon unique to Western Europe, which in many ways broke the established rules supposedly guiding human demographic behaviour in the Malthusian era. While before demographers and economic historians assumed that it was the rich who first limited fertility, this specific fertility and nuptial behaviour was first pioneered by the poor. While the quality-quantity trade-off, as in having less children but investing more in their education, was supposed to be a reaction to incentives recently in place right before and during the Industrial Revolution, this same behaviour was found to exist as early as the late Middle Ages and early Modern Period. So what was this marriage pattern exactly and why is it a key to understanding the origins of sustained growth?

    The European Marriage Pattern (EMP) was behaviour based on late and non-universal marriage, something which contrasted heavily with the predominant demographic and household formation of the Malthusian era. It was, perhaps unconsciously, a fertility limiting strategy (older parents can have less children during their reproductive lives) and was also, to some extent, based on the premise that a marriage should be formalised when the young (or not so young) couple could be economically self-sufficient, which in most cases meant income generated both by men and, amazingly, women, selling their services on the labour market.

    A very good description of this phenomenon can be found in the important book by Jan Luiten van Zanden, “The Long Road to the Industrial Revolution: The European economy in a global perspective, 1000-1800“:

    In brief, it was a reproductive strategy developed by wage earners – male and female – and it was embedded in a larger institutional framework in which market exchange and trust in the functioning of markets were of fundamental importance. Not only did wage income become a very large part of household income, but these households also had access to capital markets and to markets for consumer goods, a large part of which they did not produce themselves, as their main income consisted of wages. At the same time, they developed new strategies for long-term survival to enhance their success and that of their children in the new market environment. Among these strategies were increased investment in formal schooling, in training as apprentices or as servants in other households, and in social capital to ameliorate the problems attendant on old age or single parenthood. The result was a society in which 30 to 60% of the population was partly or completely dependent on wage labour (men, women, and children), in which markets permeated all aspects of economic life, and in which small, conjugal households became increasingly interwoven with a social infrastructure which sustained their reproduction. This society emerged in the late Middle Ages in the North Sea region, in England and the Low Countries in particular.

    The same author goes on to claim that the dynamism of this social institution was the key factor in explaining the success of the region of Europe in question. In short, three conditions made the EMP possible and at the same time were its success factors: consensus versus parental authority in forming unions, the features of intergenerational transfers of property and access to the labour market. The first point, emphasis on consensus between the spouses as opposed to a marriage arranged by the father, led to the conclusion that marriage was, in fact, a contract between equals, at least in theory. This in turn meant that the bargaining position of women increased greatly and they could limit the fertility of the marriage itself, as many studies have found lower desired fertility levels among women than their respective figures in men. The same social phenomenon meant that parents didn’t have much power over their children and couldn’t force or coerce them, as was the case in nearly all the rest of the world, to live with them, take care of the house and support them in old age. Thus, they hired other peoples’ children as servants, expanding the labour market, to which we will return.

    The second enabler of the EMP, the way intergenerational transfers of wealth were handled in North-Western Europe, further eroded parental authority. Europe as a whole afforded its women as early as the Middle Ages broad rights linked to inheritance, as opposed to other major regions of the world, such as India, China and Japan. In Southern Europe these rights were more limited, where a daughter’s share of the inheritance was transferred to her upon her marriage in the form of a dowry, with a set of limitations on how this could be used and how it would be disposed in the event of becoming a widow. Meanwhile, in Northern Europe, a daughter typically received her inheritance at the end of her parents’ marriage, but with the important condition that this part of wealth was considered to be hers and, in the event of becoming a widow, a woman could fully benefit from this wealth. The key difference here influencing demographic behaviour was the form of holding wealth. In the South, a dowry was brought into the marriage and, while it was considered separate from the wealth of her husband, a widow had little rights to it after his death, whereas in the North the two sources of wealth, from the bride’s and groom’s families, were brought together into a common marital fund, to a share of which the widow had access should her husband die. This in turn gave her incentives to increase the size of the common marriage funds.
     
  4. Picard

    Picard Lt. Colonel RESEARCHER

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    In the South, a woman’s wealth was more or less fixed no matter what she did, while in the North her efforts could lead to profits which she could actually enjoy. These marriage practices had a very real effect on the age of marriage and independence from parents, as best described again by van Zanden:

    Firstly, we claim that there was probably a direct relationship between marriage age and property transfer between parents and children, and one that did not only influence the parents’ desire to marry off their girls as soon as possible, but also had impact on the brides’ possible wish to postpone the marriage. If women had a right on part of their parents’ inheritance without having to marry, there was no financial incentive for hurrying into marriage. In contrast, the southern dowry system created incentives for both parents and the girls to marry young; women acquired their share in the estate as dowry (which was to return to the wife after her husband’s death); moreover, the size of her dowry was also dependent upon the goodwill of her parents, which created the leverage for parents to control the marriage process. Thus in areas with partible inheritance, where women were certain about their share of the parent’s cake, women could wait. We even may suggest that they used this time in a useful way by collecting some funds to make themselves more attractive as a marriage partner. In those areas where women were dependent on marriage to receive part of the parent’s cake, this process could be shortened by marrying. One could argue that dowry systems were also more paternal; it is here however that again the mutual consent argument comes into play: the presence of the Catholic Church – at least in theory – assured that also in the South of Europe, women had a right to decide upon their marriage partner. One could argue – on the basis of evidence for example England – that in the North girls did also get endowments without or before getting married (Smith, 1986). This only reinforces our argument as it could only diminish the importance of other marriage-related property transfer and thus make marriage age even less important in relation to intergenerational property transfer. The essential aspect of this argument hence is that property transfer in the North may have been more ‘detached’ from the event of marriage than in the South, which also fits into the picture of the consensus marriage, neolocality and the high number of singles in the North.

    In short, in the South women had an incentive to marry early and their parents, likewise, wanted to marry them off soon. In the North the opposite was true and that is where the EMP emerged. Furthermore, in the South women had no real incentive to work, as their share of wealth was fixed, while in the North their effort could be rewarded.
     
  5. Picard

    Picard Lt. Colonel RESEARCHER

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    And yet, women in the North couldn’t have been as independent as they were in the late Middle Ages and early Modern Period, and couldn’t consequently alter fertility behaviour, if it weren’t for not only the opportunity to work, but also a broad and deep labour market. The rise of such a labour market is often linked to the Black Death, which from the year 1348 dramatically changed Europe’s population and economy. While before that date the continent was a capital-scarce and labour-abundant economy, these relations reversed with the massive scale of tragedy which unfolded. This in turn greatly increased real wages and created demand for women to also enter the labour market, which had dramatic workforce shortages. Again, due to the incentives for work in the North and disincentives in the South, real wages remained sustainably high in the long term only in England and the Netherlands, and female participation in the workforce rose in those countries, while in other regions very much afflicted by the Plague, such as northern Italy, women remained outside the workforce.

    Thus, in the Netherlands in the 16th century as much as 60% of the working population derived their income from wage labour, with much lower levels in Southern Europe and levels as low as 1-2 percent in Ming China, the largest economy of the time. Furthermore, nowhere in the world except North-Western Europe was female labour common. This had profound consequences for the power dynamics between generations:

    The expansion of the labour market, especially for women, fundamentally changed the power balance between generations. In China and elsewhere households were organized around the collaborative exploitation of a farm, and the material basis for the authority of the father was his control over productive resources. If, as happened in northwestern Europe during the late Middle Ages, the household did not own any substantial productive resources, the economic basis for parental authority was undermined. Moreover, if at the same time young adults gained access to a labour market, and it was possible to live in another household as a servant or maid, to be a casual day labourer in agriculture, to migrate to cities for the summer or a longer period – when, in short, young people had a variety of options to escape the authority of their parents, the power balance between generations would have to be fundamentally affected. Young adolescents, those older than 16 or 18, would be able to earn a considerable surplus over what they needed for subsistence: they could work hard, had probably finished their training, but their level of consumption was still relatively low, and they did not have the fixed costs that come with setting up a household. It was in the interest of parents to bind them to the household, as they were net contributors to the family income. At the same time, the youthful labourers were very attractive to employers, and often found it relatively easy to find jobs once labour markets were relatively well developed. This suggests that the rise of the EMP and the changing power balance between generations may to a large extent have been caused by the growth of labour markets and the proletarianization of the working population in town and countryside of late medieval Europe. This dramatic change was made possible by the doctrines of the Church: they gave the necessary ideological support to the emancipation of the young (women), but the growth of the labour market created the material basis for it.

    Thus the European Marriage Pattern, which before 1348 and the Black Death was just a niche nuptial possibility for the poor, became near-universal for everyone but the rich, who had assets enabling them tighter control over their offspring.
     
  6. Picard

    Picard Lt. Colonel RESEARCHER

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    The EMP and Economic Development

    The EMP was a specific adaptation of household structures and marriage patterns to market opportunities. As such, it included a longer period of wage labour and apprenticeship before forming a union, which in turn led to higher human capital accumulation. This was one way in which the EMP prepared Britain for the Industrial Revolution. Secondly, marriages based on consent rather than parental authority shifted the behaviour of parents. Before this change, working-age couples invested their surplus in supporting their elderly parents. Yet with the EMP, and ‘love marriages’, they no longer lived with their parents and had a smaller number of children, which induced heavy investment in the learning and general human capital accumulation of their offspring, further putting in place a system of accumulating human capital over the generations. New parents were freed from the burden of caring for their parents, as was the case in India and China, and had the means (acquired via the labour market) to invest in their children. This was also possible because North-Western Europe had developed dynamic capital markets, where households could save for their retirement, rather than depend on their children.

    The rules of the game changed:

    The measure of success in this new environment was no longer to succeed the father in managing the family farm (and continuing the lineage), but was linked to success in the market economy through maximizing the income that could be earned by wage labour. In such an environment investing in the education of children became critical.

    Thus literacy rates rose significantly, as the economy of England and the Netherlands now had incentives for systematic accumulation of skills. Furthermore, trust in institutions and the markets was key to the survival of nuclear families, without the support of extended family networks. This led to developing better institutions and deeper markets, another key ingredient for economic take-off. The same broader markets were also co-created by households saving on the market, the capital market, for their old age. This is turn made available a much larger stock of capital than in other regions of the world, which depended on children as their old-age insurance.

    As a result of the changes in demographic behaviour I describe above, North-Western Europe entered a sustainable pattern of human and physical capital accumulation. This spawned modern growth in two ways: it increased labour productivity (as there was more physical capital per worker and workers had higher levels of human capital) and, more importantly, the growing stock of human capital moved the economy to a new equilibrium, where technological progress was now a sustainable phenomenon and moved income per capita at a higher rate than population growth. The Industrial Revolution, which was a series of labour-saving or labour-enhancing inventions, was a logical step in a high-wage economy with an abundance of capital. And once a critical mass of human capital had been achieved, its accumulation, and incentives to invest in less children but of a ‘higher quality’, became firmly entrenched.

    As a consequence, Schumpeterian growth overtook Smithian growth and England entered a period of modern economic expansion. Increased labour participation by both sexes, more investment in human capital, a strong development of labour and capital markets, all linked to the European Marriage Pattern and its quantity-quality trade-off, changed incentives for good and freed North-Western Europe from Malthusian constraints.
     
  7. Picard

    Picard Lt. Colonel RESEARCHER

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    Why Did Spain Fall? The Economic History of Empire Building and Decline

    Human Capitalism Why Did Spain Fall? The Economic History of Empire Building and Decline - Human Capitalism

    I recently came across an excellent paper by Carlos Álvarez-Nogal and Leandro Prados de la Escosura on the economic history of Spain, its relative and absolute rise and decline in the years 1270-1850. As is well known, Spain was one of the major European powers after completing most of the Reconquista around the year 1270. It went on to build an impressive American empire and by the year 1600 Spain ruled over most of the Iberian Peninsula, Southern Italy, present day Belgium, the current territory of Western Sahara, the Philippines, and, most importantly, the majority of South America, from the northern tip of Colombia to the southern reaches of Patagonia and Tierra del Fuego, not to mention the entire region of Central America, most of the Caribbean, present day Mexico, the US Southwest, together with lands all the way up to the Mississippi and including Florida.

    Yet from 1600 onwards it was all downhill for the Spanish empire, whose agony would stretch all the way to the Spanish-American war of 1898. The great question here is why did decline strike Spain, and more so at the very height of its power, when it seemingly had all the tools to keep on growing and maybe even experience a growth take-off, which was ultimately achieved by Britain roughly two centuries later, and which we now call the Industrial Revolution.

    This question plays very nicely into one of the central issues I tackle in the book I’m currently writing. In short, the book is mainly about the way that demographic trends, and the associated accumulation or non-accumulation of human capital, have conditioned first a long phase of stagnation, where the entire world was largely stuck at the same per capita income for millennia, only to experience a burst of growth starting with a slow take-off in Britain at the beginning of the 19th century. For the case of Spain, a missing link to answer the question – why Britain? – can be found in the paper I mention above.

    Spanish Rise and Fall

    Álvarez-Nogal and Prados de la Escosura have presented research based on painstaking calculations and estimates, which identify two regimes of Spanish economic growth, the first ranging from the end of the Reconquest in 1264 to the 1590s, and the second stage spanning the period of 1600-1810. They estimate that per capita income in Spain during the first period was relatively high in comparison with its European peers and experienced spells of growth, interrupted by the Black Death and the Spanish phase of the Hundred Years War. This is significant for two main reasons. First, Spain, as the rest of the world back in the 13th century, was supposedly in the Malthusian regime, where technological progress or economic surplus translated not into per capita income increases but a larger population. Second, the Black Death, which in other parts of Europe has been dubbed as one of the long-term causes ultimately leading to the Industrial Revolution (see here for an excellent discussion of the debate), actually hampered Spanish performance rather than boost its growth prospects.

    Why was this? Both problems can be answered by one important factor. In the book, I argue that the interplay between demographics, human capital accumulation and a growth take-off was in line with the following: in a Malthusian regime, slow endogenous technological progress meant that the population grew, albeit at a very slow pace. A larger population in the major civilisation centres (Europe, China, Japan, India) led in turn to a slowly accelerating pace of this technological progress, as more people generate more ideas both through purely probabilistic considerations and due to network effects. Adopting new technologies had two major impacts: speeding up the rate of progress and requiring a larger pool of human capital to implement these technologies in the service of generating value. Thus, in time, a critical mass of human capital and innovation speed was achieved, leading to modern economic growth. Why this happened precisely in Britain in the 19th century is an issue I’ll leave for the book, here I’d like to focus on Spain.

    Spain, for some reason, didn’t follow this pattern of transition from Malthusian regime to modern economic growth. This is even more puzzling if we take the estimates made by Álvarez-Nogal and Prados de la Escosura for per capita income in Spain and Britain (or rather Castille and England for the relevant period) for the years 1300-1600. In 1300, Spain’s per capita income was twice its British counterpart. Even in 1600, when England had gained considerable ground, its per capita GDP estimate is roughly 69% of Spain’s relevant number. And yet, it was Britain which went on to becoming the first country to break free from Malthusian constraints and transforming itself into an industrial powerhouse.
     
  8. Picard

    Picard Lt. Colonel RESEARCHER

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    Labour Scarcity vs Land Scarcity

    Again returning to the mentioned paper, the key to this puzzle lies in the underlying features of the Spanish and other Western European economies. At the time of the Black Death outbreak (1348 for Spain), the Netherlands and British Isles were relatively densely populated, while Spain was still pretty much a ‘frontier economy’, meaning that it had sparsely-populated and plentiful land (capital), which in turn had serious implications for income growth and Malthusian constraints. While presumably Holland and Britain were at their Malthusian limits in terms of population (meaning that their land stock could not support a larger population at their level of technological development), Spain didn’t face that constraint. Thus, the relative prices of the main factors of production in those times (land and labour) were very different in the two cases. Britain and the Netherlands had lower per capita income, because land was relatively scarce and labour plentiful, i.e. land (capital) could command higher returns than wages. The opposite was true in Spain, where high per capita incomes were the result of the fact, that the country was far from achieving its Malthusian constraints and had plentiful land. Why this was (the Reconquista, significant emigration following the defeat of the Muslim Iberian states, etc.) is not relevant to our discussion. What is important is the fact of labour scarcity.

    So as the Plague took its considerable toll in human life all around Europe, it was in effect a supply shock for the factor of labour. In the case of Northern Europe, it freed it (for some time) from its Malthusian constraints, leading to a more capital-intensive economy, and, in time, labour-saving technology, which was the essence of the Industrial Revolution. The same technology also encouraged human capital accumulation, albeit at a scale which we would currently consider as marginal. Meanwhile, Spain went in the opposite direction. Its already scarce labour became even scarcer, in effect destroying many trade networks and setting back Spanish development by a few centuries. Furthermore, even centuries after the Black Death, Spain’s economy remained a frontier, labour-scarce phenomenon. This was due to the American conquests of Spain, the very same which, on face value, would be considered as a symbol of Spanish affluence.

    Yet, even as the Iberian peninsula’s population density rose, it didn’t rise anywhere near fast enough, as significant migration to the colonies slowed down the process of populating the land. And even when near-Malthusian population levels were achieved, the American possessions of the Spanish crown remained largely unpopulated. A case in point is New Spain, currently Mexico, whose indigenous population was decimated by European diseases. With an estimated population of 15 million at the time of the Europeans’ arrival, the lands of the former Aztec Empire experienced probably the proportionally worst episode of human tragedy, with a total population falling to as low as 1 million by 1600.

    Lessons from Spanish Decline

    There are many lessons from the decline of Spain’s might. Many scholars have pointed to the role of the Dutch Disease caused by American silver in Spain’s gradual and relative decline. But there were many more forces at play here. Paradoxically, acquiring a vast empire and depopulating it (albeit non-intentionally for the most part) had negative consequences for the Spanish economy. It didn’t allow the Iberian country to achieve the requisite population density, Malthusian constraints and economic inter-linkages, which turned out to be prerequisites for an industrial take-off and sustained growth of per capita incomes.

    Perhaps most importantly, the paper I mention, combined with the theoretical framework I am developing for my upcoming book, point out that in the long run, the only sustainable way of producing consistent per capita economic growth is through technological progress, leading to increased total factor productivity. This progress can’t be achieved without an accumulation of human capital, which is the prime generator and implementation mechanism of new technologies in the economy. Surprisingly, these conclusions hold true both for the Malthusian regime, whose prime expansion mechanism was an extensive use of factors of production, and for the modern growth regime, whose raison d’être is increasing the intensive use of these factors and maximising the use of human capital in the process of value creation.
     
  9. Picard

    Picard Lt. Colonel RESEARCHER

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    Why England Rose and China Slept

    http://janfabisiak.com/2014/03/england-rose-china-slept/

    We live in a period without precedent in the majority of human history, a period, where we experience per capita growth in our income. This means that each generation is better off than its parents and that our standard of living keeps growing. And yet, as recently as the 19th century the world had never before experienced sustained per capita increases, also known as modern economic growth. What changed so suddenly in our economic history that an explosion of technological progress and rising income became possible? And why did this process start on a small island at the western fringe of the Eurasian landmass, rather than in the mighty and populous Chinese empire?

    Human Capital Stock and the Onset of Growth

    There is an untold number of theories which aim to explain why growth started. I strongly agree with those which propose the key role of human capital accumulation, and the leading theory in this field is Unified Growth Theory, devel0ped by Oded Galor and David N. Weil in their seminal papers available here and here. In short, as this theory isn’t the subject of the current blog post, the theoretical proposition of Galor and Weil puts forward the notion, that the absolute size of a population was the key determining factor of the pace of technological progress in the Malthusian regime. The Malthusian regime’s key feature was that any technological progress translated into higher population rather than per capita income increases. This, in turn, further sped up innovation, creating a virtuous circle of accelerating progress, ultimately leading to sustained modern economic growth when a certain level of technological progress, and a threshold of corresponding human capital, had been achieved.

    Thus the Unified Growth Theory predicts that it should be the most populous (and simultaneously largest) economy of the Malthusian world which should first achieve the critical mass needed for an economic take-off. Up to the Industrial Revolution and for some time after it began, the top spot in economy size was nearly always claimed by China. And yet, it was Europe that first freed itself from Malthusian shackles. In other words, empirical evidence clearly contradicted the central tenets of the leading growth theory used to explain the most important economic phenomenon in history.
     
  10. Picard

    Picard Lt. Colonel RESEARCHER

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    The Virtues of Fragmentation

    In trying to reconcile empirical data with theory, a new paper by Chiu Yu Ko, Mark Koyama and Tuan-Hwee Sng puts forward a novel explanation. The authors argue that China’s political centralisation was, paradoxically, the main factor behind Europe’s competitive advantage, as the Old Continent, due to its political fragmentation, was uniquely robust to major external shocks, which in the Chinese case manifested themselves in huge population losses and economic setbacks during times of crisis. Thus, while China’s centralisation favoured quicker technological progress and a larger population during peacetime, political and military turmoil invariably set it back to levels of human capital accumulation not conducive to igniting growth.

    The central idea is the following: while a larger population is more conducive to innovation and thus growth, China’s political centralisation meant that at times of large-scale warfare and collapse of central authority, as was the case when Chinese dynasties fell, the Middle Kingdom experienced much larger material and human losses than in the respective conflicts fought by Europe, whose political decentralisation buffered many areas of the continent from crisis. This is confirmed by a figure from the cited paper, which plots the number of deaths in major Chinese and European wars.

    [​IMG]
    As we can see from the two graphs, while Europe had many more military conflicts in the 15th to 18th centuries, their death toll was an order of magnitude lower than in China. This leads us to the conclusion, that it is not only the absolute population size that matters in fostering modern growth, but also its variability.
     
    Last edited: Sep 5, 2014
  11. Picard

    Picard Lt. Colonel RESEARCHER

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    The Perils of Large-Scale Meltdown

    As the authors argue in the paper:

    As a result China’s population fluctuated widely during the preindustrial period and this undermined the gradual accumulation of technological knowledge that plays such an important role in generating the transition to sustained growth in the theoretical growth literature.

    There are several channels through which we argue negative population shocks in China could have impeded technological innovation. First, technological knowledge was embodied in individuals therefore the large-scale collapses in China’s population were associated with a fall in the stock of technology. Thus a more volatile population will be associated with a lower level of technological knowledge than an equally size but more stable population.

    Alternatively, a complementary mechanism is present in the framework Aiyar et al. (2008) develop to explain episodes of technological regress. Aiyar et al. (2008) argue that many technologies require a minimum efficient scale. Therefore negative shocks that cause the extent of the market to contract, including a fall in the population, can bring about technological regress. Both of these explanations are consistent with our argument; if these mechanisms were operative then political centralization did not only make China more vulnerable to negative economic shocks, it also reduced the possibility of modern economic growth emerging in East Asia.


    This is a very persuasive explanation for why modern economic growth started in a relatively small but well-connected European state (England), rather than in China. For all its rapid population growth and technological prowess, each time China entered a major crisis, a significant number of its people were wiped out, and with them their human capital. Meanwhile, in Europe, even one state’s failure didn’t collapse the system and lead to significant human capital losses, thanks to the greater robustness of politically fragmented entities. At the same time, transaction costs in trade, while higher than in China, were low enough to create one single European (rather than national) market. Armed with the human capital stock of the entire European economy and more robust to catastrophic failure, Western Europe prospered. It is significant that one of the European nations most open to trade, with the simultaneous and unique advantage of protection by the seas, was the one where the story of modern economic growth ultimately began.Thus, England rose, while China slept.
     
    Last edited: Sep 5, 2014
  12. Picard

    Picard Lt. Colonel RESEARCHER

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    Conclusions:
    1) European Union should be disbanded, or at least reformed as a loose alliance or confederacy
    2) Immigration should be strictly limited
    3) Immigrants should be integrated into countries they immigrated into, both socially and culturally (massive immigration and lack of cultural cohesion actually destroyed Western Roman Empire)
    4) Multiculturalism is a suicidal bullshit.
     
  13. Picard

    Picard Lt. Colonel RESEARCHER

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    Is Capitalism Broken?

    Human Capitalism Is Capitalism Broken? - Human Capitalism

    Recently a great article by Nick Hanauer and Eric Beinhocker was bouncing around the web, ‘Capitalism Redefined’, exploring the nature of prosperity – what does it really mean to have a prosperous society?, the functioning of markets – how and why do they work?, and the intrinsic tension between prosperity and morality. I found the read very entertaining and I recommend it highly, I’d also like to make a few points of my own on the subject and weave the column into a broader framework for understanding what prosperity is and how we should go about measuring and growing it. And, most of all, I would like to examine the question of whether our current economic system can deliver better lives for us all, or do we need a change.

    A Broken Economic Measure

    The authors start with a strong note, arguing that growing prosperity is a thing of the past in the American economy:

    For everyone but the top 1 percent of earners, the American economy is broken. Since the 1980s, there has been a widening disconnect between the lives lived by ordinary Americans and the statistics that say our prosperity is growing. Despite the setback of the Great Recession, the U.S. economy more than doubled in size during the last three decades while middle-class incomes and buying power have stagnated. Great fortunes were made while many baby boomers lost their retirement savings. Corporate profits reached record highs while social mobility reached record lows, lagging behind other developed countries. For too many families, the American Dream is becoming more a historical memory than an achievable reality.

    While the analysis conducted in the piece is great and insightful, here they make a basic (maybe intentional) mistake. When writing about the disconnect between the statistically improving life of ordinary Americans and stagnant median real wages, they forget about a very important feature of technological progress. Today, we can buy much more better quality goods and services for the same real wage than, say, in 1980. This is because as technology advances, many formerly expensive needs can be satisfied more cheaply or even free. This fact of life is recognised in the calculations of the so-called hedonic adjustments to GDP and inflation. What this means is that while a price of a good, e.g. a TV, remains unchanged year-on-year, important improvements to its quality and functionality make it worth more for the same price.

    So how does this affect the quality of life the American consumer can buy with his real wage? After all, real wages by definition are inflation-adjusted, so hedonic change should not affect them. True, but only up to a point. If a good becomes free, it no longer has any bearing on the consumer price index, but it may be providing a great deal of utility to a consumer. For a much-used example we can turn to the internet, which provides vast amounts of knowledge, analysis (including this humble blog post), literature, music, art, entertainment, etc., absolutely free. Not forgetting about all those cat videos. And it is true that hedonic adjustments are too subjective, but when the price falls to zero you are obviously getting a lot of ‘bang for your buck’, in fact, you don’t even have to take that buck out of your pocket.

    This is relevant for two reasons. First of all, stagnant median real wages aren’t that big of a problem, because our ability to fulfil our needs has kept expanding, as many needs are now satisfied for next to nothing. Inequality is, of course, a very different subject, which I will return to later on in this piece. Secondly, we can very clearly see that the Gross Domestic Product measure is becoming increasingly decoupled from what we could call real prosperity, as the economy evolves into a more complex and intangible structure. True, GDP has never been and was not meant to be a comprehensive benchmark of prosperity but of economic flow, as I have pointed out and linked to in the past, but it served as a rough proxy for our living standards, starting out approximately after the Second World War. Indeed, the calls for developing a new measure of prosperity by politicians and scholars isn’t just pure demagoguery, they are answering to a genuine need, as of yet far from being met.

    The issue is well described by Hanauer and Beinhocker, who point out a whole array of problems with GDP calculation:

    How can it be that great wealth is created on Wall Street with products like credit-default swaps that destroyed the wealth of ordinary Americans—and yet we count this activity as growth? Likewise, fortunes are made manufacturing food products that make Americans fatter, sicker, and shorter-lived. And yet we count this as growth too—including the massive extra costs of health care. Global warming creates more frequent hurricanes, which destroy cities and lives. Yet the economic activity to repair the damage ends up getting counted as growth as well.

    The above paragraph is a description of a problem well known to economists – that of negative externalities. In short, if I’m the owner of a large coal plant in China which pollutes the air, I pretty much keep all the profits to myself. However, the cost of the polluted air (healthcare, shorter lives, lower quality of life, even less productivity, etc.) is shared among all the residents of the area. This isn’t fair and in effect is a subsidy for the coal producer. But what this isn’t is a failure of the capitalist system – it may not be regulated by the ‘invisible hand’ of the market, but public policy can right this wrong, introducing regulations on emissions caps or making the polluter pay for the costs he imposes on society. For example, the European Union has been at the forefront of establishing an emissions trading scheme. And while policy is currently far from perfect, I wouldn’t go as far as to say that the problem of economic externalities disqualifies the capitalist system altogether.

    The real problem and the profound meaning of the current debate goes further:

    Our economic policy discussions are nearly always focused on making us wealthier and on generating the economic growth to accomplish that. Great debates rage about whether to raise or lower interest rates, or increase or decrease regulation, and our political system has been paralyzed by a bitter ideological struggle over the budget. But there is too little debate about what it is all for. Hardly anyone ever asks: What kind of growth do we want? What does “wealth” mean? And what will it do for our lives?

    Hanauer and Beinhocker are really asking what purpose does economic growth really serve today? Will increasing our wealth to infinity make us lead happier and more fulfilling lives?

    And finally – is the current version of capitalism the road to take us to real prosperity?
     
  14. Picard

    Picard Lt. Colonel RESEARCHER

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    Is There Something Wrong with Capitalism?

    Maybe capitalism is the wrong concept to be attacking here. Maybe, what really lies at the bottom of this problem is the way we go about achieving the goal of more prosperity. We measure improvement in our lives by GDP, which doesn’t account for the above mentioned externalities, irreversible damage done to the natural environment, the value of unpaid labour (housewives, caring for the elderly), it is also linked only tentatively and subjectively to improved product and service quality, which is not reflected in price change. Furthermore, GDP seems to raise well-being and health to a point (the jury is still out on this one), after which further increases are at best neutral to a population’s general welfare. Once again, it is worth turning to Hanauer and Beinhocker:

    Our issue isn’t with GDP per se. As the English say, “It does what it says on the tin”—it measures economic activity or output. Rather, our issue is with the nature of that activity itself. Our question is whether the activities of our economy that are counted in GDP are truly enhancing the prosperity of our society.

    They certainly don’t do that in all cases. While GDP has been an invaluable tool in understanding the rise of Britain, and then the rest of the current developed world, from a Malthusian world of subsistence-level lives, there comes a time in the maturity level of an economy and the technological progress we now enjoy, when guiding our decisions based on GDP alone becomes a costly error.

    To challenge the notion that GDP is the best possible guide for prosperity-maximising decisions is to state that markets don’t always allocate prices in line with the value of a certain good to human beings. In other words, water may be very cheap, but its value to human life is beyond measure. Conversely, a new Ferrari P4/5 may be extremely pricey, but its intrinsic value to my life is not that high – after all, I could even take the bus to work. This goes against everything the efficient-market hypothesis stands for, which equates price with value in very competitive markets, and was, mind you, one of the intellectual foundations of the financial deregulation leading to the Great Recession. To be clear, I’m not arguing against leaving markets to themselves, but what I do suggest is that not always market price equals value to the consumer. Market price is determined by the interplay of supply and demand, while how we value goods, services and more intangible elements of our lives, such as our relationships with other people, is determined by the structure of our needs and their relative importance in our hierarchy of values.

    Which leads us to a fundamental question:

    An emerging twenty-first century view of the economy is that it is a dynamic, constantly evolving, highly complex system—more like an ecosystem than a machine. In such a system, markets may be highly innovative and effective, but they can sometimes be far from efficient. And likewise, people may be clever, but they can sometimes be far from rational. So if markets are not always efficient and people are not always rational, then the twentieth century mantra that price equals value may not be right either. If this is the case, then what do terms like value, wealth, growth, and prosperity mean?

     
  15. Picard

    Picard Lt. Colonel RESEARCHER

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    Non-monetary Prosperity
    I share the view of Hanauer and Beinhocker that prosperity goes beyond and not always correlates with monetary wealth. I see meeting our needs as the primary function of the economy. Money is just a distraction for anyone hoping to analyse the underlying rationale of becoming wealthier. After all, the economy was created before money was invented. And money was invented well before the ‘invention’ of capitalism. The economy emerged as a way to meet the basic needs of our ancestors in a more efficient way. Some would specialise in providing food, others in creating tools, others still would offer security. Since these prehistoric times our economies have become too complex to fully grasp and technological progress has broadened the range of needs we can satisfy (or even the range of needs we are aware of), but the basic concept has remained the same. The economy exists, because there is demand for goods and services which are required to satisfy our needs, which is what Hanauer and Beinhocker call ‘solutions’. Thus, monetary measures of prosperity will always be just a rough approximation, even more so if price and value diverge.

    A simple thought experiment can be used to better understand this concept of a monetary vs. non-monetary understanding of prosperity:

    But the idea that prosperity is simply “having money” can be easily disproved with a simple thought experiment. (This thought experiment and other elements of this section are adapted from Eric Beinhocker’s The Origin of Wealth, Harvard Business School Press, 2006.) Imagine you had the $38,001 income of a typical American but lived in a village among the Yanomami people, an isolated hunter-gatherer tribe deep in the Brazilian rainforest. You’d easily be the richest Yanomamian (they don’t use money but anthropologists estimate their standard of living at the equivalent of about $90 per year). But you’d still feel a lot poorer than the average American. Even after you’d fixed up your mud hut, bought the best clay pots in the village, and eaten the finest Yanomami cuisine, all of your riches still wouldn’t get you antibiotics, air conditioning, or a comfy bed. And yet, even the poorest American typically has access to these crucial elements of well-being.

    Extreme monetary wealth is not much use if you can’t employ it to solve many of your basic needs. Thus, even the poor in contemporary United States live much better lives than the incredibly rich elite of, say, ancient Rome.

    This is why prosperity in human societies can’t be properly understood by just looking at monetary measures of income or wealth. Prosperity in a society is the accumulation of solutions to human problems.


    Following this line of argument, economic growth is barely a monetary manifestation of the accumulating stock of solutions to human needs. But, it is far from capturing all this build-up of satisfied wants, because, as we have seen, many needs are met on non-monetary markets or are provided outside a market structure altogether, i.e. their market value is zero, but they still may be incredibly valuable to many people. Hanauer and Beinhocker rightly conclude, that GDP growth captures only part of growing prosperity and that to truly know how well off we are, we should measure all the ways in which our needs are being satisfied. Constructing such a measure will definitely be a challenge and we’re far from reaching anything close to a consensus, but at least we know which way to go.
     
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