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The Birth of Plenty: Book Review

The Birth of Plenty: How the Prosperity of the Modern World Was Created (2004), William Bernstein. Interesting analysis of what can be called the Great Divergence. Bernstein’s model has four parts: property rights and rule of law, scientific reason, capital markets, and fast transportation and communication. In his telling it works well. I have no complaints as a model, except to note the many additional complex factors.

Preface. “Angus Maddison, who found a startling discontinuity in world economic growth around 1820: before that date, growth was essentially nonexistent; after that date, it was sustained and vigorous” (L57). One definition of the start of the Industrial Revolution. This required technology, trade, finance, human capital, and exploiting natural resources.

Introduction. Technology (1730-1850) including the chronometer for determining longitude at sea, modern canal systems, steam engine, and telegraph. Railroads sped up transportation, the telegraph (Cooke and Wheatstone in England and Morse in the US) made communication almost immediate. Progress can be measured in literacy, longevity, and wealth. The Renaissance had almost no effect on average people. Gutenberg and Bacon gave us information storage and a foundation for scientific theory.

In total, the four major factors for sustaining economic growth are property rights (and rule of law), scientific rationalism, capital markets, and transportation and communication. These were mainly European in origin.

Section I: The Sources of Growth. Institutions, “the framework within which human beings think, interact, and carry on business” are needed. Property rights include intellectual property and civil liberties.

Chapter 1: A Hypothesis of Wealth. Empathy for average people is not Bernstein’s strong suit. We can measure welfare, but that’s different from major attempts to improve it beyond trickle down. [That also matches the history of civilization which has been brutal.] “The England of the aspiring economist’s formative years [Thomas Malthus] seemed as Hobbesian as Smithian—a time of worsening food shortages and not a little famine, particularly in neighboring Ireland. In 1795-96 and 1799-1801, war and poor harvests combined to cause food riots in England” (p. 11). The “Malthusian Trap”: when population rose in pre-industrial England, product per head fell. That stopped soon after Malthus’ 1798 essay on population.

Economics picked up around 1820 because of technology. Property rights meant innovators secured their profits. Invention happens based on ideas (scientific rationalism [but done by craftsmen]). Vast amounts of money are required: capital markets. Goods need to get to market, requiring fast and efficient communications and transportation.

Per capita GDP did go up from 1000 to about 1800, but at a snail’s pace per annum. How to measure progress: actuarial data to determine life expectancy. Subsistence levels are hard to determine, but amount of food exports, and per cent of population in cities (urbanization ratio), and the related per cent of farmers are indicators. Productivity growth averaged 2% a year in the 19th century.

Bernstein overstates the problems with feudalism, claiming it was close to slavery with no property rights or individual liberty. It was more complicated than these bald statements. Serfs could get property and have rights, although this depended on local conditions. It was mostly moneyless until later in the Middle Ages. Bernstein says the money economy destroyed feudalism, which I agree with. He claimed a lack of law enforcement, but there were enforcement officials like sheriffs (shire reeves). Bernstein reviewed the rise of the Reformation, including Wyclif, Tyndale, and Calvin.

Interest rates were part of commercial law, like Hammurabi’s Babylonian Code. Interest rates were high early in civilizations, then dropped at their peak, then rose as they decayed. Interest rates were low in Holland, at 8% as early as 1200. Saint Augustine held that business was evil and Saint Jerome claimed that merchants seldom pleased God. Aquinas claimed large-scale commercial activity was sinful. The Church banned usury for extended periods, but lifted usury (interest) prohibitions with the Fifth Lateran Council of 1571.

“Before 1500, the well-being of the average human being was stagnant. … There were no incentives to create wealth, … no European dared to think creatively or scientifically … Third, even had wealth-creating inventions and services been conceived, the capital necessary for their development was unavailable” (p. p. 41). The needed inputs were land, labor, and capital. Bernstein added knowledge. He pointed out that science produces “technological externalities.” Hunting and gathering relied on land and labor. Farming increased productivity, but depended on land for population growth.

Crop yields may have quadrupled from 1000-1500, a productivity rate of .28% annually. By 1500 manufacturing meant textiles, creating trading from English wool to completed clothing in Italy, still not very capital intensive.

Chapter 2: Property. “Without property rights and civil rights, little motivates the inventor or businessman to create and produce beyond his immediate needs” (p. 52). Sumerian, Egyptian, and Israelite historical sources document property transactions. Greece developed democracy based on Greek small farmers, who grew grapes, cereals, legumes, and fruits, plus livestock. That required inherited wealth and valued private property. Socrates noted geometry allowed the measure of farm size. Solon organized a judicial system around assemblies of ordinary citizens and independent of the state’s power. That was destroyed by the Peloponnesian War, and the economic opportunity of a majority.

Rome was a republic until around 60 BC with Caesar, Pompey, and Crassus. This included statutes from popular assemblies, including commercial transactions and property rights. England would use limited liability companies some 1,500 years later. Foreign conquest became the driving economic force for Rome. They “taxed” farmers by conscripting them into the legions. The empire eliminated public accountability. Small farmers typically sold their land to wealthy families exempt from conscription and taxes. King John of England took from barons arbitrarily rather than by due process. Under common law, rights and duties were established for all levels of society. Magna Carta included the idea of taxes only with representation: the consent of the general council of the nation. Lawyer Edward Coke wrote basically a compendium on British Law beginning in 1600 (also used for colonial legal training). John Locke on Treatise of Government after 1675, including natural contracting including the preservation of property, with the state’s legitimacy based on its ability to discharge its responsibilities. Intellectual property means invention (patents), written material (copyrights), and trademarks. Granting monopolies common in Spain, France, and England to lesser extent. Economic growth started in Holland where competition was allowed, then England. Florence granted patents in 1421, then Venice in 1474. Court favorites were likely to get monopolies in many countries, including Elizabeth I. Patents in America required novelty and limited duration. The first patent act passed in 1790, administered by Jefferson as Secretary of State, then a patent office was created.

Chapter 3: Reason. “Mankind combats ignorance and fear by devising belief systems, and civilizations amplify these belief systems into organized religion … [which] rarely tolerated worldviews” (p. 92). Economic growth was mainly associated with new technology. The Ptolemaic system was a model, just not correct. Neither Greece nor Rome used the scientific method, especially inductive reasoning. Tycho Brahe had observational skills. Kepler used these observations to disprove Copernicus and created a new model based on ellipses. Galileo was the first to use a telescope to look at the sky. Newton wrote Principia, on gravity and planetary motion using the calculus he invented. Most inventors were craftsmen rather than scientists.

Chapter 4: Capital. Industry means a long delay from outlay to revenues, requiring capital markets. Edison and electric lights: he needed a reliable source of electricity and the ability to produce large numbers of light bulbs. That meant JP Morgan and syndicates for the capital creating Edison Electric. Westinghouse later licensed the Thomson-Houston AC power system and competed with Edison. Thomson-Houston and Edison merged to form General Electric. Edison sold. Key points for capital markets: cost, risk, and information.

Josiah Child in 1668 understood the economics of interest rates; economic development quickened with lower rates. When stock prices are high, the cost of equity capital is low. In 1980s, stock prices were so low that companies borrowed using junk bonds to buy back shares. Joint-stock companies allowed syndication and diversification of risk. Early capital markets were inefficient, often considering the “just price.” Medieval trade fairs increased efficiency, making greater information and competition available. 17th century Dutch made use of specialized districts including financial exchanges in Amsterdam. The telegraph made information almost immediately available.

A problem with equity financing is information asymmetry. Coined money simplifies exchange. The medieval trade fair solved the trade problem of scarcity of coins using clearing methods which counterbalanced buying and selling, then paying the difference in coins. Big business in the Middle Ages meant family business like the Medicis. Bills of exchange were important to pre-Renaissance Italian banks. Bills were handled like cash, except discounted based on creditworthiness and location (the closer the better). The Fugger family used mining and moneylending in Hansa cities, from Bremen to Hamburg in Germany.

Antwerp became important, then Amsterdam. Dutch cities issued “obligation,” short-term notes, perpetual annuities, and annuities ending with the death of the holder. Holland’s chief magistrate in 1671, used Pascal’s theory of probability to determine interest rates. Low interest rates allowed capital projects like canals and shipbuilding, and merchants keeping large inventories of goods. Interest rates were quoted regularly in specialized newspapers. Amsterdam had a stock exchange, commodities exchange, and insurance, broker, and trading companies all near city hall. Investment banking was born. Amsterdam did not have a central bank or regulatory bodies protecting investors, resulting in defaults.

England joined the ranks of financial powerhouses and capital flowed to London after the Restoration in 1660. Dutch financial elite including the Baring and Hope families came to London after the Glorious Revolution brought William of Orange to rule, then Portuguese Jews came. Long-term government debt was established backed by excise taxes. Parliament increased trust and businessmen packed the House of Commons. Consols were perpetual bonds, still traded in London. Government bonds became a measure of a “risk-free” investment.

Economies dominated by huge multinationals are more economically stable, including syndication and risk diversification. Factories required a workforce performing specialized tasks. Management interests resulted in agency costs, like the looting of Enron. An early joint-stock company was Staple of London in 1248 to control wool trade. The first modern one was Dutch East India Company (VOC), started in 1601. VOC raised capital with permanent dividend-paying shares. The English EIC used the triangular trade of Asian spice and cotton. Added were sugar, coffee, tea, indigo, and silk in other Asian ports. Each voyage was 16 months with high mortality of crew. They later kept much of the trade within Asia to increase profit and lower risks.

The Bank of England was initially a private joint-stock company, not nationalized in 1946 under the Labor government. The bank started buying government debt in 1697, with bondholders exchanging government bonds for Bank of England shares. The infamous South Sea Bubble happened in 1719. Limited liability status did not come until 1862. Regulations came after the bubble, gradually eliminated beginning in 1820. Parliament repealed the Corn Laws in 1846 which had protected producers against consumers. Walter Bagehot showed how big the London financial market was compared to others. Deposits in London totaled 120 million pounds in 1873, versus 13 million in Paris and 40 in New York. France and Germany did not trust their financial institutions. Financial intermediaries in London were anonymous, complex, and efficient.

Chapter 5: Power, Speed, and Light. The missing items in Britain and other parts of Europe were fast transportation, communication, and reliable power. That required the steam engine and telegraph. Waterwheels worked reasonably well as did windmills. The concept of steam heating started with Hero of Alexandria around 100 BCE. Inefficient steam engines came in the 17th century. Thomas Savery designed a steam-operated pump. Thomas Newcomen joined with Savery and an improved steam engine built in 1712 was used for pumping water from coal mines. Newcomen used steam, cold water injections producing a vacuum using valves to draw the piston down for pumping. The cylinder was alternately heated and cooled and not efficient and used large amounts of coal (no problem at a coal mine).

James Watt was an instrument maker who repaired a Newcomen engine, recognizing its inefficiency. The idea was to condense the steam outside the engine, so the cylinder remained hot. He partnered with Matthew Bolton in 1774, then using John Wilkinson’s boring technique to mass produce engines. The first one went to Wilkinson to ventilate his blast furnace. Better steel and improved manufacturing increased efficiency. They produce 496 engines. Richard Trevithick patented an improved engine in 1802.

England constructed a thousand miles of canals late in the 18th century, then joined by the US including the Erie Canal. The first paddle-wheel was built in 1787, but the steam engine in a boat had problems. The boats were unstable with the heavy engines and huge amounts of coal. High-pressure marine engines and screw propellers came later.

Land was scarce in Britain and therefore expensive and abundant in the US. Labor was abundant in Britain and cheap and scarce in the US and therefore higher wages. With steamboats and easy emigration to the US, these leveled out.

By 1804 Trevithick used an engine to power a short tram. Coal cars ran on wooden rails, then converted to iron track, pulled by draft horses. George Stephenson built railroads and improved the engines up to the Rocket going 30 miles an hour. A rail line connected Darlington to Stockton-on-Tees was completed in 1830, then Manchester to Liverpool. Thousands of miles of track were completed within a decade.

Alessandro Volta created the first electric battery. In 1820 it was discovered that electricity could move the needle on a compass. The next step was the telegraph with William Cook and Charles Wheatstone in England and Samuel Morse in the US competing, later joined by Leonard Gale and Alfred Vail. The two groups used different methods to transmit messages over long distances. Patents were filed. Morse added the relay and his design was the more workable. Congress funded a demonstration line from Washington to Baltimore and a working line completed in 1846. There were 12,000 miles by 1850, then across the country and with transatlantic cables, around the world.

“The half century from 1825 to 1875 saw more thoroughgoing change in the way people lived their lives than any other period in history” (p. p. 187). From 1500 to 1820 per capita GDP rose 0.15% a year. After that, the institutions and tools were in place for productivity growth averaging 2%.

Chapter 6: Synthesis of Growth. “It is institutions—property rights, individual liberties, the rule of law, the intellectual tolerance implicit in scientific rationalism, and capital-market structure—that matter” (p. 189). Starting in the late 19th century, big corporations became the prime mover.

Section II: Nations.

Chapter 7: The Winners—Holland and England. Holland’s growth started in the 16th century, with GDP per capita going from $754 in 1500 to $2,110 in 1700 (0.52% annual). England and France grew slower while Italy and China not at all. Holland had to fight Spain for freedom. Holland (the largest of 7 Dutch provinces) had barrier sand dunes, with land below sea level. They used windmill pumps to build dikes which left rich farmland and free peasants. A Spanish invasion in 1568 (against Reformation) sparked a rebellion which lasted 80 years. After Antwerp fell, Amsterdam became the commercial hub. The Catholic South of Holland gained independence as Belgium. The north tolerated all religions, allowing scholars and merchants there.

Food prices rose beginning about 1450, increasing the value of farmland and the fate of farmers. Holland moved goods efficiently: it was flat with canals and waterways. The Dutch built a system of finance, transport, and urban infrastructure. The tax base used sales taxes and a population willing to pay them. Dutch prosperity was based on property rights, religious freedom, capital markets, and flat, rich farmland with easy transport. By chance this was aided by the rise in commodity prices. Their technological advances were limited, while success came from trade, including the Baltic and East Indies. Given low interest rates, they borrowed too much money.

Four Dutch-Anglo wars were disastrous for the Dutch. William of Orange came after the disruptions of the Stuarts (1688) and England became a constitutional monarchy with power to Parliament. The monarchy had met most of its needs through private landholdings, customs duties, and sale of monopolies. Parliament provided a stable tax base. The percent of population in agriculture dropped from 60% about 1700 to 40% in 1800 and continued dropping with the Industrial Revolution. This was based on an agricultural revolution (not necessarily good for farmers, often kicked off their farms): crop rotation, harvesting, hand implements like seed drills, harvesting tools, and Rotherham triangular plow in 1830. Add clover and legumes for nitrogen fixing and later guano from the New World.

The enclosure movement stopped the “open field system as land was privatized (with ownership rights) and farmers driven off their land. Small landholders could now sell or continue farming. Enclosed land was more productive, but threw lots of farmers out of work, with many going to cities as factory laborers. This increased labor specialization. The first factories were in textiles mainly around Manchester. Cotton was added to linen, wool, and silk for cloth.

Textile technology started with the flying shuttle by John Kay in 1733. Leris Paul invented two machines for carding raw fiber in 1748. Spinning was more difficult. Lewis Paul used steel rollers, then Richard Arkwright added a second pair of rollers in 1769 to his “water frame.” Samuel Crompton combined Hargreaves rotating wheel with Arkwright’s rollers into the “self-actuating mule” in 1779. Then factory owners used the Watt-Boulton steam engines to spinning machines. This initially meant lots of spun yarn for the weavers. Eli Whitney invented the cotton gin to remove seeds in 1793, increasing the demand for cotton.

Iron initially required smelting with charcoal. Britain had coke which required more ventilation to increase heat. Watt’s steam engine was hooked to Wilkinson’s bellows. Then Henry Cort’s puddling increased wrought iron and Wilkinson invented a steam hammer. The process continued. Case law favored commerce and industry. Working in these industries (including children) was horrendous, noted by Friedrich Engels. Add the squalor of industry slums. The country was rich, the workers poor. Living standards overall fell. Simon Kuznets analyzed wealth inequality with the “curve hypothesis,” showing inequality as temporary. One reason for industrializing with cotton was it was unregulated as a new commodity.

The East India Company monopolized trade with India and China into the 19th century. The Navigation Acts were repealed in 1849.

The US developed a well-functioning constitutional government and then an advanced patent system. Capital formation started and the US had more people than England by 1855 and a larger economy by 1870. Real per capita GDP grew at 2% annually. One advantage was good institutions (similar to England). Slavery was a major flaw. Per capita GDP matched England later: 1950 or later for France, Japan, and Spain. “States with enlightened taxation, rule of law, and secure property rights prospered” (p. 235). Taxation should not interfere with free markets. Excise tax like the value added tax works well, while Bernstein thinks income taxes are moderately distorting because they decrease incentives to earn and invest.

Before the pre-modern era rulers considered only conquest as the source of greater wealth, not commerce and industry. Any lost revenue meant taxes on farmers, who were forced to sell their plots. Wealth would be enhanced by education, police protection, justice by independent courts, and roads. [Add these to the four fundamentals.]

France lagged England because of deficiencies with the growth factors. The primary source of revenue was a tax on land and buildings, with nobility and clergy exempt. Peasants had to sell, remaining as tenants, usually tax-exempt nobles. Tax farmers collected: they paid the government a fixed amount, then collected what they could get away with. Wars (like the Hundred Years War) left France broke. Louis XIV finance minister was Jean Baptiste Colbert, a mercantilist seeking accumulated gold: expand exports, cut imports (mainly with tariffs); encouraged by the guilds. This was a zero-sum game and other countries retaliated and trade fell off. This choked off innovation and expanded corruption. France used steam power, rail, and telegraphy. Problems included religious intolerance. Louis XIV revoked the Edict of Nantes which protected French Huguenots. Also protestant banks. Those leaving included craftsmen and scientists. Thousands of people were executed for violating (seemingly minor) regulations. Entrepreneurs did not trust banks or capital markets; they often invested in government bonds or abroad. Internal tariffs existed based on custom zones. The French Revolution gave peasant farmers land titles, resulting in many small farms. Agriculture was inefficient. France increased import duties on grains and cattle, resulting in costly food.

Spain was worse that France. “If ever a great nation wished to intentionally throttle its economic growth and geopolitical influence, it could not have done so more effectively than premodern Spain did. The primary goal was economic plunder not commerce. Spain expelled Jews and Moors. Ferdinand’s orders to conquistadors: get gold. Mining operations helped exterminate the population in Caribbean islands, then found more in Mexico and the Andes. The metal went to the House of Trade in Seville. It peaked before 1600. Charles spent it all and more warring with France, England, and Holland, then defaulted on borrowing.

There was no focus on industry or commerce and Spain lagged on all four major factors beginning with property rights. Sheep were controlled by the largest landowners (grandees), given a grazing monopoly for tax revenues. The sheep deforested the countryside. The sale of monopolies was common, plus huge tracts of land to favorites and military. Taxes went up. Shelter was found by joining the clergy or buying into the nobility, increasing taxes more on farmers and merchants. Coins of gold and silver disappeared from Spain, and coins were debased. One result was the collapse of trade by 1640. The Spanish Inquisition meant no scientific rationalism. Given defaults, interest rates soared. This crowded out the private sector. Given a big country with few usable waterways, transportation was poor.

“The Habsburgs wrote the script for the destruction of great national wealth and power: pursue conquest and treasure over agriculture, industry, and trade. Next, finance that pursuit to the hilt, tax unmercifully, fix prices, and default often. Finally, close borders and minds to outside influence and neglect the transport and communications infrastructure. … Spain burdened itself with ruinous economic institutions and passed these on to its colonies in the Americas” (p. 257). Slowly Spain divested the Church of its holding and privatized common land. Spain finally modernized in the 20th century. Solutions required tax reform, defanging the church, empowering the legislature (Cortes), tax relief for laborers, and capital projects.

Japan sealed itself and created their own form of feudalism. The Meiji Restoration started in 1868, which brought in European machines and civil engineering like railroads and privatized industries (into big conglomerates called zaibatsu). With opening of trade, “price convergence” created winners (rice, tea, and silk) and losers (cotton and industrial equipment [opposite for consumers]. Property rights were created and education expanded, sending students to foreign countries. Then they sought prosperity through military conquest, especially by invading China, then more and started World War II with the US. McArthur’s economic reforms brought in democracy and land reform, plus rule of law.

Chapter 9: The Last. How the four factors faired in the Ottoman Empire and Latin America (hint: not well). The military technology of the Ottomans lagged Europe. They bought weapons and advisors. But they lacked property rights and capital market foundations. Lacking clear property rights, factories failed. They lacked intellectual curiosity, largely from Muslim doctrine and freezing of Koran doctrine. They depended on plunder and conquest. High taxes make farmland nonviable. Islam prohibits interest. The sultan could seize property, making capital scarce and banking was nonexistent. Western-style rights proved to be unpopular in the Middle East. Most of these are police states. Middle Eastern deserts created from lack of clear titles to land. Irrigation schemes were abandoned, while nomadic herding was common. Goats spread soil erosion. Ayatollah intolerance an additional bureaucratic problem.

Latin American countries could be successful. Financing from the US and Europe set up shipping, railroads, and telegraph systems successfully in Argentina. The big problem was property rights. Independence came mainly from large landholders and included brutality. Property rights must be available and efficient. Ronald Coase pointed out the need for ownership defined (including liabilities) and bought and sold. Efficiency includes low transactions costs. Government’s role is to enforce contracts and transactions. Landholders in Latin America were large hereditary estates difficult to break up and establish property rights. Costa Rica did not have large holdings and proved long-term successful. Clear title required complex steps, affordable only by the wealthy. Banks can’t depend on foreclosures and don’t make loans, creating “dead capital.” Land reform would promote prosperity.

Mexican capital markets are not efficient. Before WWII the Mexico City stock exchange had only 14 stocks. Business success meant elite connections, but government positions were tenuous. When Porfirio Diaz was president (1877-1910) companies had government ministers on the payroll. Property rights and rule of law were not well structured and suffered from corruption. The drug industry is a current scourge. Chili and Spain are now the most democratic after passing through right-wing dictators (Pinochet in Chili and Franco in Spain) that did secure property rights.

Ironically, there seems to be an inverse correlation between natural resources and strong democracy. Nigeria, Saudi Arabia, and Zaire have natural resources, while commercial enterprises thrive in Singapore, Holland, and Switzerland. “The wealthiest nations of 1500 would be later colonized—the Mughals of India, Aztecs, and the Incas—are now among the poorest, while the poorest nations of 1500 that were later colonized—the rest of the Americas, Australia, and New Zealand—are now among the richest” (p. 291). They had western institutions and an agricultural-industrial economic base. Colonization did not produce poverty; it was the form it took. Interestingly, the economic growth of both the US and England grew after American independence. It’s institutions that determine economic winners and losers.

Section III: Consequences. Chapter 10: God, Culture, Mammon, and the Hedonic Treadmill. Wealth and education levels strengthen democracy. Max Weber stressed the Protestant Ethic, which matched northern Europe and Calvinist hard work. But wealth seems more related to cultural factors (partly based on geography). Islam is not inherently anti-capitalist, while Catholic church leaders like Augustine and Aquinas were hostile to business. Hinduism created a caste system, insuring poverty for the lower classes.

Abraham Maslow created the “hierarchy of needs” in the 1950s, from physiologic needs like food and water to personal security and income, then belonging including a family, and esteem needs including respect. The highest point is self-actualization like lacking ego, knowing means from ends, solve rather than complain, and ignore corrosive effects like peer pressure. The World Values Survey (WVS) attempted to measure this. Wealth seems to link to democracy (Freedom House score for civil rights and Transparency International’s corruption index) and self-expression. According to WVS traditional societies are usually “authoritarian, devout, and male-dominated” (p. 308). Wealthy nations were described as “outspoken secularists.” English-speaking nations tended to be more conservative. The degree of trust in others is a key factor of self-expression.

Bernstein’s synthesis is: four basic needs (property rights, rationalism, capital markets, transportation/communication leads to prosperity then citizen empowerments then democracy. Then add helpful stuff like education and efficient economic incentives. According to Amartya Sen “famine does not occur in functioning democracies because a free press and ambitious politicians are strongly motivated to uncover and rectify hunger” (p. 308).

GDP growth drops for advanced countries. “Prosperity is primarily responsible for democracy, while democracy itself does little for prosperity” (p. 319). Bernstein notes socially useful charities that he notes are economically unproductive. Education spending at some point may not be economically productive. Ditto for R&D and infrastructure. [Also, the move from industrial to service economies doesn’t enhance productivity growth.]

Happiness is synonymous with “well-being” according to psychologists. These relate to economic status, employment, health, and state of the family. Unemployment, political and military stress increase unhappiness. Richer folk according to surveys are more satisfied and poor the least. Gains in happiness increase at low incomes and taper off at higher incomes. Money does buy happiness, at least to an extent.

“Societies with the smallest inequalities of wealth should be the happiest. … The nations at the top of WVS well-being scale—Iceland, Netherlands, Denmark, Switzerland, Finland, Sweden, Ireland, and Norway—all have avowedly redistributionist tax policies and narrow income distributions” (p. 330). He measures this with the “neighborhood effect” (income at the 90th percentile to the median, 50th). There is a slight negative correlation to happiness.

[I might add income equality is measured by country using the Gini Index with the lower the score the more equal. The World Bank reported scores by country for about 2020.For example, Finland scored 27.1, South Africa 63.0 (2014), and the US 39.7. The US scores have been going up since the 1980s when income tax rates were cut.]

Life expectancy, literacy, and child mortality have improved over time for all, but differed between rich and poor.

Chapter 11: The Great Trade-Off. The mechanisms that create economic growth increase income inequality. Private property (broadly defined) is a great incentive for producing wealth for oneself but not others. Thus, the tradeoff between economic growth and income inequality. Property rights have “enforcement costs,” judicial system, police, and so on.

In 1833, the Factory Act required government to oversee industry safety in England. The Corn Laws repealed in 1846. The Railway Acts improved transportation safety. Progressive taxes and redistribution reduced economic inequality. In the US government spending rose to about 30% of GDP by 1995, compared to 51% for Denmark. “The European social welfare system has created a solid reservoir of stakeholder-citizens who willingly observe their society’s norms, respect the rule of law, and pay their taxes” (p. 344). This is mainly transfer payments with low wastage. The European tax system is somewhat regressive but efficient, relying on consumption (value added) taxes. The US saw the “misery index” (inflation + unemployment rates) rise above 10% in the 1970s.

Chapter 12: Mammon and Mars: The Winner’s Curse. Prosperity can bring power. Dictatorships converted peasants into cannon fodder. Britain ran its empire spending below 3% of GDP on the military. WWII became a war of industrial competition. Bernstein viewed the winner’s curse as the expenses to plunder were extreme and painful after the plunder stops (“imperial overstretch”). Portugal and the Netherlands won independence because: “The Hapsburgs simply had too much to do, too many enemies to fight, to many fronts to defend” (p. 355). French kings were reckless and profligate, and neither had efficient capital markets or tax systems. The French aided the Americans in their Revolution, causing insolvency and arguably much of the blame for the French Revolution. Napoleon paid for his conquests by plunder. England, with the four factors in place, became the world’s largest economy, then faded. The British economy still increased considerably from 1870 to 1998.

Paul Kennedy: “Being Number One at great cost is one thing; being the world’s superpower on the cheap is astonishing” (p. 365). Bernstein viewed the USSR having “its economy hobbled by a system of perverted incentives and run by a collection of sadistic ideologues” (p. 365) … spending a sixth of their output on the military, while the US spend about 3.5% for the same total military cost.

Chapter 13: The End of Growth? Chapter 14: What, Where, and Whither. According to Adam Smith, the necessary conditions for prosperity were “peace, easy taxes, and a tolerable administration of justice” (p. 379). In sum: institutions.


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