How nations become wealthy

"Not until all four of these legsóproperty rights, science and reason, effective capital markets, and efficient transport and communication-are in place can a nation prosper."

Once upon a time, in 1800, nothing moved faster than the speed of a horse. No human being, no manufactured item, no bag of rice, no side of beef, no letter, no information, no idea, order, or instruction of any kind moved faster. As far as our great, great grandparents knew, nothing ever would.

Then, all of a sudden, beginning around 1820, the pace of economic advance picked up noticeably, making the world a better place to live in. The Industrial Revolution caused an explosion in technological innovation that had never been seen before.

There was a story of an anonymous schoolboy who was asked to define the revolution. He was supposed to have replied, “In 1760, a wave of gadgets swept over England.”

That boy was on to something. New technology is the powerhouse of per capita economic growth; without it, increases in productivity and consumption do not occur.

What is needed then to develop gadgets?

Prosperity is not achieved merely by possessing hydroelectric dams, roads, telephone wires, factories, fertile farmlands, or even great quantities of money. Nor can prosperity be transplanted from one nation to another by simply transferring the key components of an economic infrastructure. In all but the most exceptional cases, national prosperity is not about physical objects or natural resources. Rather, it is about “institutions”—the framework within which human beings think, interact, and carry on business.

Economic history tells us that there are four institutions that are the prerequisites for economic growth. I consider them as the four legs of the table of economic wealth: The first leg is secure property rights, not only for physical property, but also for intellectual property and one’s own person—civil liberties.

Innovators and entrepreneurs must rest secure that the fruits of their labors will not be arbitrarily confiscated, by the state, by criminals, or by monopolists. The assurance that a person can keep most of his just reward is the right that guarantees all other rights. A government that fails to control inflation or maintain proper banking controls, such as present-day Venezuela’s, steals from its citizens as surely as any thief would. In 15th to 18th century Europe, government-granted monopolies, while highly profitable to those who exercised them, sapped the incentive of the rest of the nation.

The second leg is a systematic procedure for examining and interpreting the world—science and reason.

Economic progress depends on the development and commercialization of “ideas.” The inventive process requires a supportive intellectual framework—an infrastructure of rational thought, with a reliance on empirical observation and on the mathematical tools that support technological advance. The scientific method that we take for granted in the modern West is a relatively new phenomenon. Only in the last four hundred years have Western peoples freed themselves from the dead hand of the totalitarian, Aristotelian mind-set. Even today, particularly in parts of Africa, Asia, and the Middle East, honest intellectual inquiry places life and property at grave risk from the forces of state and religious tyranny.

The third leg is a widely available and open source of funding for the development and production of new inventions—the modern capital marketplace.

The large-scale production of new goods and services requires vast amounts of money from others—“capital.” Even if property and the ability to innovate are secure, capital is still required to develop schemes and ideas. Since almost no entrepreneur has enough money to mass-produce his inventions, economic growth is impossible without substantial capital from outside sources. Before the 19th century, society’s best, brightest, and most ambitious individuals had scant access to the massive amounts of money necessary to transform their dreams into reality.

The fourth leg is the ability to rapidly communicate vital information and transport people and goods.

The final step in the creation of gadgets is their advertisement and distribution to buyers hundreds of kilometers away. Even if entrepreneurs possess secure property rights, the proper intellectual tools, and adequate capital, their innovations will languish unless they can quickly and cheaply put their products into the hands of consumers. Sea transport did not become safe, efficient, and cheap until two centuries ago with the development of steam power, and land transport did not follow suit until about fifty years later.

Not until all four of these legs—property rights, science and reason, effective capital markets, and efficient transport and communication—are in place can a nation prosper.

These four legs were not securely in place in the English-speaking world until about 1820. Not until much later did the four legs begin to spread all over the globe.

The absence of even one of these legs endangers economic progress and human welfare; kicking out just one of these legs will topple the table upon which the wealth of a nation rests. This occurred in the world’s communist states with the loss of property rights, and in much of the Middle East with the absence of capital markets and Western scientific rationalism. Most tragic of all, in much of Africa, all four legs are still essentially absent.

If our political and economic leaders fail to strengthen the nation’s institutional legs and learn from economic history, we will surely be left in its wake.

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Topics: Industrial Revolution , Middle East , transport , communication , Africa , Asia
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