Monday, 28 July 2008

Book Review: How the West Grew Rich by Nathan Rosenberg & L.E. Birdzell, Jr

Exactly how have Canada, the USA, the UK and other western countries grown so rich in comparison with the rest of the world? Is it just a matter of luck for if that is the case, inevitably luck runs out and we will lose our edge. This book published over twenty years ago (in 1986) still rings fresh and topical, particularly during the present credit crunch and worsening economic conditions.

And the answer folks, based on my understanding of the book and the fact that I have been convinced by its argument, is that while we cannot relax, we can have confidence that our material well being will not collapse and dissipate like a house of cards.

Another happy and positive message of the book is that we need not feel guilty or morally deficient about the manner in which the wealth has been generated. It is not the result of exploitation of labour, slavery, imperialism or colonialism.

This book is not, however, a polemic or a manifesto. It is a work of scientific research by two scholars, who start with all the suggested explanations and look for evidence to accept or reject individual forces at play. There are many footnotes and an extensive bibliography but they don't get in the way. Very often they are delightful sidelines.

Most interesting is the authors' demonstration of the interplay and interdependence of the many causal factors of growth - none is individually sufficient and all are necessary: science, technology, resources, political freedom, commercial freedom, laws, pluralism, property rights, flexibility of institutions, new forms of corporate organization, the list goes on and on. The primary drivers of growth have evolved over time and today, Rosenberg and Birdzell maintain that innovation is the key. For a book written before the explosion of the Internet, that conclusion seems very accurate and prescient.

The authors' style avoids hyperbole, bombast and breathless drama. There is no mystery or coyness, the conclusions are stated up front. But the story is exceedingly well laid out and I got much intellectual pleasure from seeing how all the parts fit together. It is a book for the curious layman (though I also notice it referenced admiringly in another very serious economic book I am reading now by Richard Lipsey).

One thing that is dated is the recurring discussion of Marxian economic analysis, always to show how wrong it is. The Berlin Wall has fallen since the book's publication and nobody even refers to Marx or takes him seriously anymore, and such discussion seems weird.

  • "... the West has created a powerful system for economic growth, of a sort which could keep generating growth and even substantive advances in material welfare for decades after the spirit had burned out of it." (page 8)
  • "... the West's system of economic growth offered its largest financial rewards to innovators who improved the life-style not of the wealthy few, but of the less wealthy many." (p.27)
  • "Sometimes the success of an innovation means the end of an entire industry, entailing large capital losses as well as the loss to their employees of their human capital of training and experience." (p.30)
  • "... there is no reason to believe that the expansion of knowledge has any inherent limits, so that the growth of technology is especially appealing as an explanation of the persistence of Western economic growth." (p.262)
  • "In a constantly changing world, it is not necessarily a rational investment strategy for employees to invest both their careers (their human capital) and their personal savings in the same enterprise." (p.316)
Surprises and Not-so-Trivial Trivia
  • the accumulation of capital actually contributed very little to the growth that has generated all our wealth - i.e. there isn't much capital in capitalism! success is all about innovation and starting small with little capital
  • famines in France - one of the more advanced regions of the world - were frequent up to the 18th century
  • sieges in the Middle Ages often failed because the besiegers often starved before the besieged
  • the three-masted sailing ship, double-entry book-keeping and the skills of clockmakers were key ingredients to economic growth in the past
  • the Magna Carta principle that property should be protected from arbitrary expropriation by the government arose as an accident of a power struggle between elites of the time, the king and the nobles, though it has been hugely important as a protection for everyone since to retain the benefit of their ingenuity and labours
Lessons and Take-aways
  • our material prosperity is robust, i.e. let's not despair folks, the market will come back sooner or later; one can view the current turmoil as getting rid of the bad stuff, a process the book describes as being as important as the creation of the new
  • our material prosperity is not guaranteed or inevitable; many successful elements play a part and they must be defended against the corrupt, the misguided, the power hungry
  • fast growth can be sustained through innovation in the creation of new products and services; the past of hundreds of years ago or even a only a hundred years ago was not like the present;
  • small companies are the drivers of growth and the winners of the future; many will get launched and fail but a few will succeed spectacularly; big old companies are destined to eventually fade away despite their seemingly unassailable power and prosperity today
This book is a classic, a valuable source of understanding how our current material well-being came about. Its lessons are still very current.

My rating 5 stars out of 5.

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