Podcast interview with Gregory Clark, A Farewell to Alms
Chris Gondek: Hello and welcome to the “Invisible Hand,” the podcast about management economics and strategy. My name is Chris Gondek, and welcome to the beginning of the third series of shows, which means that from now until next spring, there will be new shows every other week.
Today I’ll be speaking with Greg Clark about his new book, A Farewell to Alms, a Brief Economic History of the World, which is published by Princeton University Press.
Greg Clark is chair of the economics department at the University of California at Davis. Stay tuned after the interview for the roundup of the other shows, and some news about the “Invisible Hand” on facebook.com.
I began by asking Greg Clark if any of his own historical opinions were changed by the writing of this book.
Greg Clark: Oh, yes, immensely. This book is actually the product of 20 years of work in this area, and when I came in, I had all the popular misconceptions about the historical past.
I thought the institutions were the key reasons why economies didn’t grow, and I also did think that somebody like England in the 1800s had achieved levels of living standards that were much greater than a hunter-gatherer world.
I was quite surprised when I finally assembled the evidence, and I realized that there actually is no sign of any progress in living conditions before 1800s even all the way from 100,000 B.C.
Malthusian world
UC Davis economics professor Greg Clark says he wrote a book for intelligent readers who can learn new and surprising ideas about the world that they live in. (Karin Higgins/UC Davis photo)
Gondek: Now, the book is divided into three parts. In the first part you look at the world before 1800, a world you called the “Malthusian world” after the early economist Thomas Malthus. What were some of the characteristics of the “Malthusian world?”
Clark: The key thing about the “Malthusian World” is just a very slow rate of technological advance, and for the world as a whole before 1800, it’s something like less than a 5 percent gain in your technological abilities over a whole century. Once that happens, you get trapped in this economy where birth rate has to be brought into balance with death rate by the adjustment of material living conditions.
That varies across societies depending on what’s killing people and what’s causing birth, but it has nothing to do with technology; that’s why you get the fact that you have no technological advance in this long era.
And what that creates is a bizarre upside-down economy, where everything you think is good in the modern world, is bad then, and everything bad in the modern world is good then.
Just to give an illustration — famine, disease, war — societies that were subject to stuff like that actually tended to be richer in the pre-industrial world. Societies like Japan that had very good sanitation, very high standards of hygiene, had absolutely miserable living conditions because to get that balance of birth and death, you needed to have miserable physical conditions to balance out the birth rate. So that’s what defines the “Malthusian world.”
English squalor helped
Gondek: So in an odd way, it was the English squalor that lived up in the 1800s which to a large degree helped their economic growth during the 18th century?
Clark: Yes, it is surprising that the English hatred of bathing is actually an important element. There’s a nice little thing in the book, which is Samuel Pepys kept a diary for 10 years. He registered everything in his life, and he recorded one bath in that entire period. It is noteworthy that his wife once took a bath, and she wouldn’t let him get into bed with her that night because he was still filthy. But he writes also, “We’ll see how long this lasts,” and bathing is never mentioned again in the diary. He was at a very upper-class level of London society in 1650.
Gondek: I’ve done a few shows where Adam Smith has been the focus. We talked back in Episode 14 about the theory of moral sentiments, and he’s showed up in several other shows I’ve had. And yours is probably the first book that says that Adam Smith may have got it wrong. What is it about Adam Smith’s work that you might take issue with?
Clark: Well, one issue is that I’m not an expert on Smith, and he wrote a lot. But what I think is an issue is the popularization of Smith, the godlike figure that economists have erected out of Smith, where it’s been interpreted that the message is: Whatever the culture is in any society, if you get the right incentives, you’ll get economic growth. People are the same everywhere, and it’s just the matter of getting the incentives right.
Contradiction to Smith’s incentive argument
And one of the big things in this book is that if you go through history, you will find contradiction after contradiction to that view. Medieval England was as incentivized a society as you could ever find, it had no growth. Modern Sweden or the Netherlands tend to have enormously high rates of taxation and lots of free handouts, and they do fine in economic terms.
When the British brought a modern incentivized economy to India in the 19th century, it just didn’t produce any goods. India became steadily poorer, relative to Britain. That’s why, in some sense, the book is trying to take Adam Smith off the plinth he’s been put on. But in some sense, I should be fair, that’s a modern interpretation of Smith. I mean Smith spent a lot of time on his Theory of Moral Sentiments, so it’s not necessarily Smith himself.
Gondek: Right, so an example of a “Smithian” thing that you bring out of the book would be something like the Washington consensus when the IMF and the World Bank go into a country, and this is the prescription that’s going to cause this country to grow.
Clark: Right, right, and the interesting thing is when you look at the way they do that, you think that they would include in this “Smithian” view the marginal rate of taxation?
Rich countries have bad institutions?
I mean that’s the big percent of their work. They can’t really include that in measures of what are good institutions or bad institutions because it would imply the rich countries have bad institutions? How much free handouts do you get, like free health, or free education or stuff like that?
In that view, this would always be a disincentive to labor, and so it seems to me that economists have to really contort themselves in the modern world to even hold onto this Smithian view, to the point where it really has become a religious belief as opposed to any kind of scientific doctrine.
Gondek: In part two, you begin to talk about the beginnings of the Industrial Revolution, and I thought very nicely that you laid out a pretty fundamental equation of growth. Could you explain that?
Clark: Well, this is the only part of the book where we have to resort to equations, but it’s a very simple equation.
All growth from two sources
All it says is that it turns out we can reduce all growth since the Industrial Revolution to two basic sources.
If the economy is growing at 1 percent per year, then one element creating that would be the growth rate of stock of capital per person, and we can tell exactly how much effect that would have. We know that if the capital stock grows at 1 percent, it will drive up growth rate by .25 percent.
And so for capital to create growth, it’s actually a relatively expensive source of growth because you have to invest resources, and it has a weak effect overall on growth.
And then all the rest of growth comes from the expansion of technology.
And so, at the first level, we can reduce all of growth to two fundamental elements. But the book tries to show that there’s actually a deeper connection between these things.
In the modern world, economies that have a lot of “efficiency growth” always have a lot of capital-stock growth, and the book tries to show that because efficiency growth is also driving the capital-stock growth.
All about improving technology
And, so, when it finally comes down to it, it turns out that there is only one source of growth since the Industrial Revolution. It’s all about the improvement of technology, and we can trace everything else to just that one fundamental source.
It just says that’s the fundamental thing you have to understand: Why did all societies before the 1800s, which vary enormously in institutional structure, have no rapid efficiency growth, and why there are a whole slew of societies since the 1800s. Why have they managed this constant technological advance?
Gondek: What were some of the long-term forces that led to this change around the 1800s.
Clark: I use 1800s as a marker because that’s when you first get the society that seems to very clearly break from the “Malthusian” past, in the case of England.
Not a crucial point in history
But the book really is concerned to stress that’s more of an appearance as opposed to a crucial point in history, in the sense that England was gradually changing toward more rapid growth.
It’s just that certain accidents prevented that [change] from having much effect on income per person in earlier times.
The book stresses that there were forces in the development of institutionally stable agrarian societies thousands of years before [the Industrial Revolution] that got set in place that started changing the culture of people in these societies.
There was an interplay in the long run between economic systems and the preferences and desires of people. That process for some reason was more rapid in England than in these other economies. The same old incentives began to produce a very different set of results.
A gradual process since the Middle Ages
But that has to necessarily be a relatively gradual process going all the way back to the Middle Ages in Britain.
Gondek: So that changing of preferences, does that explain to some degree this question of efficiency in the labor markets?
Clark: Yeah, the idea here was that it turns out, ever since the Industrial Revolution, societies have been relatively poor at rewarding people who innovated.
And what was interesting about the Industrial Revolution in Britain was that they had no better incentive to innovate than people had in ancient Rome or ancient Greece or medieval England. But people just seemed to have been driven by a different kind of impetus in this world.
Saved at the slightest occasion
By 1800, people have worked very long hours; the interest rate was very low; they saved at the slightest occasion. They really became constitutionally a nation of shopkeepers, and that seems to be what’s underlying our modern world: it’s the way people behave in response to incentives that were offered to them thousands of years before.
Gondek: When you do economic history, because you are in the economics department, this is very well written history. But I get a sense, when I read economic history, that sometimes either it’s somebody that’s working too much in economics or too much in history. How does that unbalance and discipline affect how one gets to an economic theory as far as history goes?
Clark: Well, there is an interesting intellectual split that is going on between the academics departments, where history has moved toward humanities, much more toward literary criticism, literary technique, away from numbers.
Dreadful fear of numbers
There’s a dreadful fear of numbers [in history]. Economics has moved much more toward applied mathematics, and so economic history been in this odd position, it is caught in the middle between these two continents that are drifting apart.
This book is in some sense an attempt to say, “It doesn’t have to be that way.” We get a lot from economics in terms of ideas and thinking that don’t have to be modeled with highly advanced mathematics.
A lot of economic ideas intrinsically are quite simple and quite easy to convey, and then we get a lot from history in terms of actually being able to use a wide variety of sources to look at people’s lives — the diary of Samuel Pepys, the wills of people — all of these things can contribute and can inform economics.
And so this book really is an attempt to say we shouldn’t give up on the possibility of doing economic theories that also regular people can read, and that also can inform people’s views of history.
Developing a scientific theory of history
In some sense, this book is about trying (it probably doesn’t succeed) but it’s about trying to develop a scientific theory of history, a kind of venture that people like Marx or Smith would have thought of back in the 19th and 18th centuries. History [departments] have given up on that possibility.
But the book says no, it’s still possible to think about history in that way.
Gondek: I want to go back to something you said in a previous answer where you were talking about preferences and why there was all of a sudden a great deal of innovation in England, even though the incentives really weren’t any different than one would get, say, back in the classical world.
And you outline, you give a little table showing what actually happened to some of these men who developed some of the great textile innovations in England in the 18th century. I mean, a couple of them did very well, but a lot of them ended up dying in penury. So why weren’t the creators of these innovations able to capture more of that wealth?
Clark: It’s a very interesting feature of Industrial Revolution Britain and later.
It turns out that the mechanisms through rewarding innovation actually tended to be relatively poor.
Who makes money from innovation?
People who make money from innovation are often not the innovators; it’s the people who figure out how to monopolize the market and exploit new technology in a way that there isn’t competition with just the result of all of the benefits going to the customers.
It just turns out that the types of classes, the huge area in Britain in this period was the textile industry, which was just hypercompetitive.
By the 19th century, there were something like 2,000 cotton textile mills in England within a 14-mile radius of Manchester. Innovation was occurring all the time, it was leaking back and forth between these firms, and it meant that most of the benefits of the textile industry actually went to the landowners in these towns when land became very valuable.
In the same way in some ways, in Silicon Valley in modern times, there’s probably more money being made in real estate than is actually being made on the profits of these high-tech firms because of this intense localization where there’s a lot of spillover of ideas from one person to another.
No giant foundations in Britain
This experience explains why in Britain you don’t have giant foundations, we don’t have big private universities. It was because of the fact that the benefits of the Industrial Revolution flowed immediately to workers and to customers.
And the other interesting feature of that is that there was a bizarre belief that stays dominant in the modern world that the Industrial Revolution was somehow a tradeoff between profits and advances, eventually, and losses for the workers.
The book strongly argues that the benefits of all this new technology flowed immediately to the workers, and in fact, even though they had nothing to do with it, they gained much more than the innovators on aggregate in the Industrial Revolution period right from the beginning. The Industrial Revolution has been astonishingly benign in terms of its effects on income distribution.
The poor do better as well
Gondek: So, that really kind of turns Marx on its head, it’s not so much the rich did get richer, but the poor did better as well?
Clark: Yes, in fact in Britain one of the effects of the Industrial Revolution was to eventually just destroy land value, which has been the traditional source of income of the upper classes.
In the pre-industrial period, it accounted for a quarter of all the income in their society. That all just disappeared, and it’s now the case in England that an acre of the farmland rents for no more than it did on the eve of the Industrial Revolution.
But the wage of a worker has gone up by 15 fold per hour, and the payment per unit of capital is about the same as it was on the eve of the Industrial Revolution.
Lowest-skilled workers gained
And so it really has been the workers who gained, and even more than that, surprisingly it was the lowest-skilled workers.
The differential between high-skilled and low-skilled workers has actually narrowed steadily since the Middle Ages. Now, it’s historically at its lowest level that we observed.
There’s a sideline on this; what makes this a little curious is that you would think the Industrial Revolution was based on mechanization of processes, and would sweep away unskilled labor.
And we do see that horses, which were just another form of unskilled labor in pre-industrial and the early industrial economy, were actually destroyed in terms of they were just swept out of the economic system.
Ability to talk to other people
But somehow workers, people, had other attributes that still had very high value in the marketplace. Probably it’s things like our ability to manipulate objects and space, and talk to other people. There are a lot of curious side effects of this huge, modern event but mostly they have been astonishingly benign.
Gondek: I thought one of the more interesting paradoxes that you bring out, and you wouldn’t think about this, was that actually diets weren’t as bad as people think they were back then, and in terms of calories, the average British worker probably put away a lot more back in the 18th and 19th century mainly because the average British worker was a source of horsepower, just as much as a horse was.
Clark: Well, yeah, and that’s actually one thing that protected people from the worst effects of poor diet, which was that agriculture laborers sometimes ate as many as 4,000 or 5,000 calories a day.
And what would happen is their children wouldn’t get that much and they would become relatively stunted.
But once you actually became a laborer, you needed that food, and if you ate enough of this food, you would actually tend to be okay even if it’s not high quality.
The Irish taller than the English
For example, in the 19th century, Irish agricultural labors were a bit taller than English ones. They were living on a diet largely on potatoes. They would eat something like 10 pounds of potatoes a day, and a little bit of yogurt. That’s enough to actually keep you pretty healthy as long as you get plenty of that food.
Gondek: And a lot of exercise, so I don’t want people to think you’re advocating a fad Irish potato diet or something like that.
Clark: The problem with the modern civilization is that we just don’t work in the same way that people did in the pre-industrial world.
Gondek: So the third part of your book looks at the continued divergence in growth among countries. One of the reasons, if in case people keep wondering why you’re talking about England, only the Industrial Revolution was there, but the data out of England, really for us has been a lot of data since it was so steady and so peaceful.
Looking at India
And you begin the shift, as we’ve been talking about textile industries, looking at India and the Indian textile industry during the 19th and 20th century. You point out that India had quite a few advantages going into the textile industry when they did. What were some of these advantages that they had?
Clark: Well, one of the reasons I like looking at India was that it’s very interesting, I mean it’s a very interesting society in general. But it also had a very interesting economic relationship with Britain after the Industrial Revolution.
Once the British took over most of the country in the late 19th century, they essentially entered into a free-trade arrangement with one of the poorest economies in the world (the British were really strongly influenced by the new economic doctrine). They believed in free trade; they believed in free movement of entrepreneurs: they believed in free capital markets, and they applied those doctrines with a vengeance to India. They wouldn’t let the Indian government raise tariff barriers against imports.
But in the same way though they made open markets for all Indian products in Britain, and Britain then was one of the biggest markets in the world.
Because of the political security that the British supplied, Indian railroad manufacturers had access to capital at some of the cheapest rates in the world at that time.
U.S. had significant trade barriers
In contrast, if you look at the United States in the late 19th century, they had very significant trade barriers and very expensive capital because of imperfections in the institutions of the United States and kind of isolation in some ways from the rest of the world.
And so [because] the Indians [had] extraordinarily cheap labor and access because of this kind of security that the British political system provided, it was very easy to get entrepreneurs to move from Britain to India and to actually engage in enterprises there.
And so the astonishing thing was that under the application of all of these doctrines and incentives, I mean Ronald Reagan could not have devised any improvements in terms of economic and political system in India at that time.
India failed to grow
India just failed to grow, and this cotton textile industry just limped along, growing a little bit, becoming reasonably significant, but if the predictions of economics had been correct — and Marx actually comments on this in the 1850s — India would have been the next great industrial power by the end of the 19th century and would have been an industrial colossus under the administration of the British, because everything they were doing was seemed guaranteed to be the industrialization of India.
And so that’s why it’s a great case to study, because you know if you go to some other countries in South America, you can say well, they had 70 presidents over the course of 61 years, there was incredible political turmoil. [In] India all of that is wiped and you are just left with very few differences between its economic system and somewhere like Britain.
Gondek: This book is an economic history, it’s a brief economic history of the world and it’s not a book on public policy, but you do manage two conclusions at the end of the book that might have some policy implications. One of them is regarding immigration. Where do you come out on the immigration issue?
Immigration improves modern income
Clark: Well, my skepticism just from the historical record on our ability to change societies through the conventional economic policy is countered by one thing. The one policy that we do know that actually will improve modern income is the long greater mobility of labor between poor societies and rich societies.
There’s plenty of evidence and historical record of this, so if you in modern America really want to actually transfer income to some poor Africans, then the best-known policy would actually be to allow more people from Africa to come to the United States.
And at present, America’s biggest source of foreign aid is not the official aid program: It’s the remittances of immigrants from Central America living in the United States who are sending money back to their relatives in those countries.
And so, that’s one conclusion this book actually says, it is that the one known policy that we do actually see is that immigration tends to work very well in terms of raising the incomes of immigrants from very poor to rich societies.
So, yes, that’s why the book does end up advocating that.
Cultural time preferences
Gondek: So, now, this is my conclusion — now you don’t write this in the book. Is that change because the immigrants that are moving into these cultures already have, I guess you could say, the cultural time preferences that work better in that society than the society they came from?
Clark: Immigration tends to be relatively selective, but even when it’s not particularly selective, immigrants still do pretty well.
I think what it’s showing and this is what the book is arguing about the modern world is that the local culture of a society can be quite powerful in terms of how well that economics system works, but people can adapt relatively quickly to other cultures.
Now the book does say that some societies may have persistent disadvantages in this kind of competition.
If you look, for example, at the Aborigines in Australia, it’s been shocking how little they have managed to integrate into kind of the modern capitalist world order, and you really can find cases like that and things that societies that have not had a long experience of kind of settled agrarian life. It really is much more difficult for them to adapt.
Difficulty in adjusting
And even when they come to places like the U.S., you often in those cases see much more of a difficulty in adjusting.
But there’s a whole range of societies some like India where we know movement of people from one part, from India to the U.S., it will result in a large gain in world economic output.
Gondek: The second conclusion your book talks about is happiness and the possible relationship between income and happiness. What kind of conclusion did you come to about that?
Clark: Well, I’m really just reporting the work of other people here. But it is, now that we’ve had all this economic growth, people started thinking, well how does that relate to happiness?
And it turns out the only way to measure this is to just ask people, but just asking people seems to actually get at something because those answers are well correlated with other things you would think be associated with happiness or unhappiness.
Happier after winning the lottery
So, if you win the lottery, you’re a little happier for a while, if you get divorced, you tend to be less happy and so those measures seem to be getting at something.
And the astonishing finding is that [since the studies] started being done in the 1950s, the incredible rise of income has not produced any increase in the level of people’s happiness, and also in that period we’ve had major advances in medicine, major improvements in abilities to treat for medical conditions, but the average person is not reporting any increase in happiness.
But what we do find within a society is that your relative income is quite important in predicting what your relative level of happiness would be.
And so the thing that this book is saying to our surprise, and we couldn’t see this until it actually happened, economic growth had actually not shown any real evidence of making us any happier than in a hunter-gatherer world.
How to improve satisfaction?
Maybe in some sense, it’s the new frontier of economics will be to say how would you actually improve the average level of people’s satisfaction within a society, because we know that the future major economic growth, complications probably will not change the way people feel about themselves.
It does give us things all kinds of things like better science, space exploration, all kinds of other things like that are wonderful and great to have, but it doesn’t look like it’s going to change the fundamental nature of human life in any way in some senses from what it was like back in the 100,000 B.C. in the hunter-gatherer society.
Gondek: So, finally, what question should I have asked you but I didn’t?
Clark: I think maybe one question would be what’s the audience of this book?
It’s actually a little bit of a peculiar book because it’s both an attempt to write a new history that is going to be very controversial amongst my colleagues, professional historians, but also to write a book that an intelligent reader could read and understand, and would learn a lot [of] new and surprising [ideas] about the world that they live in.
A fundamental puzzle of human existence
I think what’s nice about the questions this book asks is [although] I’m never going to understand quantum mechanics or string theory or anything like that — I know almost seriously that’s not going to happen — but here is something where it’s one of the fundamental puzzles of human existence: Why was the Industrial Revolution delayed 100,000 years, why are there incredible differences between rich and poor societies in the modern world, and this is a question where people, anyone, can actually understand why it’s a puzzle, what some of the answers are, why it’s so difficult.
And so, that’s I think an important element on this book is that it’s trying to say that you know we don’t have to give up on understanding really fundamental things about the world at a fairly accessible level.
Gondek: Well, Gregory Clark, author of A Farewell to Alms: A Brief Economic History of the World, thanks for being on the Invisible Hand today.
Clark: Sure, thank you, it was a lot of fun.
Gondek: And that was Gregory Clark, author of A Farewell to Alms: A Brief Economic History of the World, which is published by Princeton University Press. Greg Clark is chair of the economics department at the University of California, Davis.