The question of what causes economies to grow is theoretically interesting and practically important. If we could discover the secrets of economic growth—what causes income per person to increase over time—we might be able to make growth happen at will, abolishing poverty and creating a world of universal abundance.
Until about three hundred years ago, periods of economic growth had always been reversed, leaving long-term income levels unchanged: the standard of living of a European agricultural worker in the sixteenth century was little higher than it had been in Roman times. In his Essay on Population (1798) the Reverend T.R. Malthus explained why. Whenever food supply grew, population grew, but even faster. This meant that income per head—or food per person—was constantly being forced back toward subsistence levels. But from the late seventeenth century onward “perhaps for the first time in…history…both the Dutch and the British economies …succeeded in increasing the per capita income of a growing population despite the continued pressure of diminishing returns in agriculture.”1 Malthus’s population theory was by then explaining only past history. In the century after he wrote, emigration to the Americas, the Industrial Revolution, and falling birth rates banished, or at least postponed, his “problem” in the Western European countries of the world. Wealth could be made to grow faster than population.
Adam Smith, the founder of scientific economics, was the inventor of growth theory. The question he asked in The Wealth of Nations (1776) was: What laws, institutions, and public policies does a society need to experience economic growth? Smith had no doubt that “little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.”2 Over fifty years later, and well into the Industrial Revolution, John Stuart Mill listed three requirements for the “less civilized and industrious” nations to catch up with the advanced ones: better government and property laws; the “decay of superstition” and “growth of mental activity”; and hospitality to “foreign arts” (technology) and foreign capital.3
Behind these economists’ assertions lay the thought that economic growth is natural because, except for some monks and other ascetics, “love of gain” is universal. The main “obstacle to growth” was what Karl Marx called “ancient and venerable prejudices.” However, these would yield to scientific knowledge. In this view, no change in human motives is needed to explain economic growth, merely a change in the circumstances in which the self-interested motives are translated into action. Prescriptively, “scientific” economics tries to tell you what the required circumstances are.
However, the economists’ accounts left one huge question unanswered: Why has Western civilization been so much more successful than any other in removing the obstacles to economic growth? An equal love of gain cannot explain the highly unequal patterns of growth we have in fact observed. Sociologists argued that for growth to happen a…
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