Reinventing Prosperity. Graeme Maxton
of inputs remains unchanged (workers, energy, and raw materials), the volume produced increases.
We can use Smith’s pin factory as an example: Let’s assume ten workers in a pin factory make one thousand pins a day. If they divide the tasks and specialize, however, they may produce ten thousand pins a day—a tenfold increase in productivity. This means the price of the pins can be reduced, making it possible to sell more pins. People get more pins per dollar, so consumption increases. The rise in productivity creates economic growth.
As long as more jobs are created, then the overall output and well-being of society tends to increase. This is what Smith believed would happen when he made his pin factory observations. But even at the time Smith was writing, and in the decades that followed, things did not turn out this way. Despite the dramatic increase in output, the effects of the first phase of the industrial revolution were awful for the vast majority. The average standard of living did not improve. In many cases it deteriorated, with millions of people worse off than before.
The cotton mills and factories were ghastly places, where children also worked, the hours were long, and the air was often so bad it was life threatening. Accidents were common and often fatal. The consequent rise in urbanization also brought slums, as well as the spread of disease and violence. Those who were unable to find work, as well as the homeless, destitute, or infirm, were typically sent to workhouses. Farmers were replaced by machines and thrown off their land. Life expectancies barely improved, and wages also remained pitifully low, because factory owners kept the profits for themselves.
There was much faster economic growth in the nineteenth century, and a progress of sorts, but almost all the benefits went to the rich. The early decades of the industrial revolution, which heralded the era of faster economic growth, did not improve the living standards of the majority.
Toward the end of the nineteenth century, the situation began to improve greatly because of the influence of the labor movement, which emerged in response to the terrible working conditions. Legislative reforms were gradually introduced to make the mills and factories safer. Thanks mostly to German engineering, the machines were made less dangerous and more efficient. Working hours fell and wages began to rise. But this particular change was not down to any benevolence on the part of the factory owners. It was because of the growing labor shortage. Faced with the choice between working in a dark satanic mill and poverty, almost a quarter of the British population emigrated, mostly to the United States, Canada, Australia, and New Zealand. Rather than live in industrial misery or destitution, they fled the country.
By the early twentieth century, the broader acceptance of workers’ rights and a host of inventions gradually began to boost living standards. Cars and aircraft changed mobility. Telegraphs and telephones lowered the cost of communications. Indoor toilets, piped water, and electric light transformed people’s homes. Labor shortages and the efforts of the growing trade union movement meant wages began to rise faster and eventually kicked off the virtuous cycle that the rich world enjoyed until very recently. With increasing wages there was increasing demand. This required higher output and brought higher rewards for those who paid the wages. This is one reason why Henry Ford announced in 1914 that he would pay his workers five dollars a day, far more than any of his rivals.7 Better pay would not just make them work harder, he reasoned, it would also make them better off. Then they could buy one of his cars.
As the twentieth century progressed and standards of living rose, the slums gave way to better housing and safer streets. Healthcare improved dramatically, and infant mortality declined, increasing average life expectancies. The rich world’s population increased,8 first rapidly, then more slowly as fertility rates sank. During the twentieth century, the same demographic transition—from many children and short lives, to fewer children and longer lives—spread to the rest of the world. The well-known result was a rapid increase in the world’s population, a rise that is unlikely to stop before the middle of the twenty-first century.
GRAPH 1: POPULATION GROWTH WILL SLOW
Source: Jorgen Randers, 2052, Chelsea Green, Vermont, 2012
Scale: Population in thousands of persons
The population of the world is expected to reach a peak around 2040. Most rich-world countries (OECD less the U.S.) will experience decline from now on; only the U.S. will continue to grow slowly. China is expected to remain stable at around 1.3 billion people for a decade after 2015 and then decline. Fourteen big emerging economies (BRISE) are predicted to peak in the 2030s. Only the rest of the world (ROW—140 mostly small and mostly poor nations) will continue to grow beyond 2050.
The population increase led to further economic growth.
In 1900, the United States overtook China to become the world’s biggest economy. Fifty years later, the United States accounted for more than a third of global output and led the world not just economically but politically and militarily, too.9 The effects of the relentless focus on boosting productivity, as well as openness to trade and the magic of the free market, were abundantly clear. By the last few decades of the twentieth century, they had become clearer still. The Soviet Union, with its focus on state-controlled economic growth, was close to collapse. Communist China, which had been the world’s biggest economy for most of the previous thousand years and had a population five times the size of the United States, accounted for barely 3% of global output.
GRAPH 2: GDP (TOTAL OUTPUT) WILL GROW, BUT MORE SLOWLY
Source: Jorgen Randers, 2052, Chelsea Green, Vermont, 2012
Scale: GDP in trillions of 2005-PPP-$ per year
The annual output of the world (its gross domestic product) is expected to grow, but ever more slowly, toward the middle of the twenty-first century and peak sometime after 2050. Most rich-world countries (OECD less the U.S.) are expected to peak around 2030 and be at 2015 levels in 2050. The U.S. will continue to grow slowly, because of immigration. China is predicted to increase its GDP by a factor of four. Fourteen big emerging economies (BRISE) will expand their GDP by a factor of three, as will the rest of the world (ROW—140 mostly small and mostly poor nations) because of rapid population growth.
In terms of GDP per person, which is a much better way to look at this transformation if you are concerned about the fate of the average citizen, the rich world leapt far ahead of every other region in the world. By 1900, the GDP per head in Western Europe, the U.S., Australia, Canada, New Zealand, and Japan10 was four times bigger than anywhere else. By 2000, it was six times greater. For almost 100 years, the developed world accounted for more than half the world’s GDP, despite never having more than a quarter of the population.11
GRAPH 3: GDP PER PERSON WILL GROW AT DIFFERENT SPEEDS
Source: Jorgen Randers, 2052, Chelsea Green, Vermont, 2012
Scale: GDP in 2005-PPP-$ per inhabitant per year
The output per person (GDP per inhabitant) will hardly grow in the rich world in the years to 2050. It is expected to explode—increase by a factor of five—in China. Half of the fourteen big emerging economies (BRISE) are predicted to follow suit; the other half will not succeed in takeoff. Growth in the rest of the world (ROW—140 mostly small and mostly poor nations) is expected to remain low toward 2050, because there will be little change in conditions for growth.
TABLE 1: THE IMPACT OF RAPID ECONOMIC GROWTH, 1820 VS. 2001
Source: Professor Angus Maddison FBA, February 20, 2005.