Where do we come from … ?

It is understandable that we consider “normal” what has been the norm for the last 150 years.

But if we look at the same things in a perspective of millennia, then normality may resemble to an exception.

The world Gross Domestic Product (GDP) calculated by Angus Maddison in Keary-Kamis US $ at 1990 Purchasing Power Parity (PPP) was in year 1 AD little about $ 100 million. In 2000 it was more then $ 25.000 million: an increase of 250 times. The increase from 100 million to 600 million took 1820 years of time. The increase from 600 million to 25.000 million took 180 years. The speed of GDP increase in the last 180 years was 400 times faster then in the previous 1800 years (see image 1).

What has changed in the last 180 years ?

One important factor of change was population growth: in the last 180 years it has increased and become ten times faster, compared to the previous 1800 years.
From year 1 AD to 1820 AD, population increased five fold from 165 million to 1000 million.
From 1820 AD to 2000 AD, population increased six fold from 1 to 6 billion (see image 2).

What else changed in the last 180 years in order to explain an increase of more then 40 times of the world GDP ?
The obvious answer, is that the industrial revolution has been transforming the world since 1820.

But the industrial revolution has not spread evenly or synchronously over the globe. Some nations were more eager to embrace it, others could not or didn’t want to. The nations that did not embrace the industrial revolution, generally were not prepared to embrace the social consequences of industrialization, or tried to domesticate its side effects: they erected moral, social and ethical hurdles to industrialization. Such nations never build up a strong industry and, eventually, remained poor.

To build a national industry, there is the need of true industrialists. Bureaucrats, shopkeepers or merchants, will rather prefer to carry on with their usual way of doing business. That is, from their perspective, more effective and even more lucrative: low investment, with the highest possible return, focusing mainly on exploitation of regulation, of informative asymmetries and of scarcity.

A radical change in the use of capital, with the deployment of capital intensive production systems and mass work, requires new social classes with a new mindset. This is what happened most egregiously in the USA during the second half of the XIX century: new rules, a new esthetic and a new ethic were born. The ethics and esthetics of the British gentleman (detached, indifferent, self-sufficient, impractical), was superseded by the ethics and the esthetics of the engaged, professional, effective and essentially squared businessman. A social class with a new mindset was overtaking the existing ruling classes (aristocracy, shopkeepers, artisans and merchants, that have been the backbone of society for seven millennia).

The British Empire (and part of its Commonwealth), started industrialization. But traditional mindset of the British and a conservative social structure of aristocrats and professional military, were quite alien to unrestrained industrialization and eventually contained it. In the USA industrialists were the first local aristocracy, the first ruling class: the United States are a living monument to the triumph of industrialization.

Why did Africa, Asia and Latin America lag behind ? Colonialism certainly held back the industrialization of the colonies in the XIX century. But colonialism alone cannot explain, why industrialization did not happen in four fifths of the globe during the XX century.
In fact many efforts have been made in Asia, Africa, Eastern Europe and Latin America, mostly to no avail.

Industrialization was a success only in open societies. Then more open (to foreigners and to social change) a nation was, the most it benefited of industrialization. It is no coincidence that the United States of America have benefited the most from industrialization. On the contrary, where industrialization was alien to social change and innovation (like in communist or populist or autocratic regimes), it wasted huge investments in infrastructures and industrial assets.

Germany, Japan and, to a lesser extend, France and Italy were the nations that most successfully followed the path of industrialization after the two forerunners (UK and USA). In all these nations the uprising classes expressed a new mindset, new rules, new ethics and new esthetics: libertarianism, utilitarianism, impressionism, realism, existentialism, rationalism, irrationalism, socialism, cubism, nudism, expressionism, …, etc. .

Some explain the social openness of Europe in the last fifteen centuries, with the co-existence of temporal power (the kings) with the spiritual power (the Pope). But the Pope, in the end was just another emperor, at that time: he ruled a nation and assumed to have the moral right to decide who shall rule as a king in other nations (crowning them). Certainly the dualism between religious power and temporal power in Europe is unique, compared to the other great societies (like Arabian, Indian and Chinese).

Personally I believe that the importance of the roman law and its evolution through the class of merchants, should not be underestimated.

Roman law survived the collapse of the Roman Empire for one thousand five hundred years, until 1804, when Napoleon repealed it, with his “Code Civile“. Transforming of the Roman law, the merchants created the Lex Mercatoria (law merchant). For more then six centuries (form the XI century to 1804), the merchant tribunals were parallel institutions, to the state tribunals. Nonetheless their authority was rarely questioned by the citizen and even by absolutist state. Only in 1804 Napoleon transformed the law merchant in a law of the French state and exported it to all European nations that he occupied militarily.

The law merchant was technocratic, evenly and strictly applied all over Europe: look to the court scene in the Merchant of Venice by Shakespeare, written around the year 1599 and describing the workings of the “Supremo Tribunale della Quarantia” in Venice in XVI century). The law merchant protected and enhanced the accumulation of capital, limiting the individual rights of the entrepreneur: the law merchant required merchants to be solvent, better if rich. So, it is no coincidence that many of them were richer that entire states.

It is common sense to say that the success of the western nations, was the success of individualism. There is a great deal of approximation in this assumption. In fact the law merchant was not individualistic at all. The law merchant protected the enterprise (mercatura) and its creditors, at the expense even of the merchant. All partners (even hidden partners) were fully responsible for the all the obligations of the merchant, to which they were associated. A merchant that cooked his books was punished with long prison terms. If he went also bankrupt, then he was put to death. All merchant involved in an enterprise had to be personally and fully liable for all debts of the enterprise. No exceptions. Personal creditors of the merchant had no recourse on the assets of the enterprise, that was exclusively devoted to the relying parties of the enterprise.

These are not individualistic rules. Such rules protected the collectivity of the merchants and all relying parties. They protected the extension of trade, the expansion of credit, the increase of the assets of the enterprise. The property of the merchant was fully pledged to the workings of the merchant’s enterprise.

In comparison to the lex mercatoria, the Arabic law, was much more individualistic: it allowed the merchant to leave at any moment the enterprise and to protect his property from thereto connected risks and liabilities: these are the findings of Timur Kuran (http://econ.duke.edu/people/kuran) in his wonderful “The Long Divergence: How Islamic Law Held Back the Middle East” http://press.princeton.edu/titles/9273.html.

The great leap forwards of western Europe in the XIX century, followed a long preparation, during which the European society became more tolerant, open, individualistic, but at the same time more respectful of collective interests and rights that were nurtured and represented by several legal entities: companies, foundations and other non profit organizations and, last but not least, by several different organs and legal entities of the states.

We cannot take for granted in a difficult time, like the present, what happened in the last twenty centuries. We have to understand the reasons that made possible the road to riches of the western world. We have to ask ourselves how Europe, that was dirt poor after the abolition of slavery and the collapse of the slave-based economy, was able to recover and became more prosperous then all other great civilizations of the world. Western Europe, was dirt poor in the fifth century. At the turn of the first millennium AD, Europe had an income per head that was 10% lower then the average income per head of the rest of the world (Asia, Africa, Latin America, little is known of North America and Australia). Today Africa, Asia and Latin America have less the one fifth of the GDP per head of Europe or USA (see image 3), even if in the last 180 years, the GDP per Head has had an increase of three times in Africa, of eight times in Asia and of more then ten times in Latin America and Eastern Europe.

After the long “Dark Age” between the end of the Roman Empire and the year 1000, the West (at that time, “the west” was Western Europe) kept growing, inventing, innovating. But only with industrialization the income per head increased exponentially.

The same is true for the rest of the world. In Latin America and Eastern Europe, we see the GDP per head grow significantly, with the same steep curve upwards of the West, for the first time, after 1870, with industrialization.
The same is true for Asia, since 1950. In Africa until 2000 there was a more modest increase in personal income.

It is obvious that industrialization has solved a structural problem, that needs to be solved in order to become affluent. And the problem that industrialization solves, is the curse of low productivity of labor. How much crop can a peasant produce, scavenging earth with his bare hands? Can he feed a family of ten ? The obvious reply is, that he cannot.

Slavery was the social engineering solution for that problem: in all human societies of the world, we have slavery in the 7th millennium BC: Mesopotamia, Central America and Asia. Civilizations that had no knowledge of the existence of each other.

The most effective way to feed everybody, was that the owner of the land and of the expensive tools that were necessary for cultivation, was also owning the people on it. A radical change, to the structure of the hunters gatherers, that were stalking earth as free and savage people for the previous 50.000 years.

Even western Europe was able to restart its economy, only reintroducing (in the colonies) slavery, although a practice banned by the Christian religion.

Industrialization has proved itself a much better way to increase wealth, then slave economy or mercantilism, because it treated the cause of poverty (scarce productivity) and not the symptom (low income and thus low accumulation rates). All the rules that had been introduced to regulate trade and consumption from the XI century onwards, had their moral and practical justification in scarcity.

Industrialization made abundance possible, and needed therefore global markets, global rules, less barriers.

Few of those that today advocate in favor of trade barriers, are aware that China and India became poor because they closed themselves to foreign trade. Britain and the Netherlands surpassed Spain and France, because they favored trade and industry, not mercantilism.

I have tried to summarize my last ten years of legal and economic studies in less then 2000 words. So I surely have omitted to mention some other important phenomena that shaped history and economy in the last two millennia. I will be glad to anyone that will point out the relevance of some events that I have not mentioned, so that, together, we can draw a more sharp picture of where are we coming from.

To know where we are coming from is of great importance, today, because it shows an evolution. It shows us a (quite linear) path that the West has been following in becoming what it is. It shows us also the direction of our headway: a social direction, a cultural direction, an economic and a political direction.

In one sentence, the evolution of the West is characterized by the ability to evolve socially, to be culturally open and technically innovative and to breed the greatest social change ever (after the end of the tribal structure of society): the rise of industry and of a class of industrialists, that solved the problem of scarcity and of low productivity of labor.

But something has changed, apparently, in the last 10 years: USA is heading towards a technical default on its public debt, if no political compromise on the federal budget can be found before the end of 2012.
Spain asked yesterday for a massive bailout of their banks.
Greece is, technically, in default.
Ireland and Portugal have been bailed out.
Italy and France look quite shaky because of high public debt.
Growth is slowing everywhere, even in the developing countries.

Has the West become poor again in 10 years … ?

Where are we heading to … ?