The Birth of Plenty | William Bernstein | Talks at Google

It's my great pleasure to introduce Bill Bernstein today. He's going to give an author's Google talk on his book, the Birth of Plenty. Let me just tell you real quick. He's actually a neurologist, but he's also a really smart guy. And as a result, he's also an investment advisor. And he is the author of two earlier books, the Intelligent Asset Allocator and the Four Pillars of Investing, and the creator of the Efficient Frontier website. And I guess the best quote I found was a great quote. He's the grassroots hero to independent investors everywhere, and he's also a hero to a bunch of the people internally who often recommend and quote his books on our internal Google mailing lists. And it's our great pleasure to listen to his talk on the Birth of Plenty. And just as a quick point, if you have questions, we're going to save them for the end. And there's a microphone on the side. Remember to go up and use that mic so everyone can hear you. Thanks a lot.

Me? No, can you all hear me now? Okay, yeah. I'll just do it this way.

Okay.

Well, I'd like to thank Carl for having me here today. I've just spent the past hour or so telling people how to get rich, or at least my opinions about how to do it. And so what I'll be spending this hour on is how the world got to be a rich place, and perhaps what we can do about those parts of the world that have not yet gotten that way. Now, if you're interested in the question of economic development, this is the man you come upon very, very rapidly.

This is Angus Madison, who is the.

Professor of Economic History Emeritus at the University of Groningen in the Netherlands. And he is the giant in the field that this man, David, didn't describe it.

It didn't happen.

And if you want to subsume somebody's entire life's work into a single slide, this is what Madison's slide would look like. It's a grossly unfair thing to do, of course, but it's still a cool slide. What you're looking at here is the per capita GDP of the average person on the planet over the past two millennia. And what we see is that things really didn't improve very much during the first millennia. And then during this next 800 years, from about 1000 AD until about 1800 or 1820 AD, things improved a little bit, but not very much. And then sometime around the year 1820 or so, things take off and the world becomes a very much more wealthy place on a per capita basis. Now, this isn't an arithmetic illusion for those of you who are wondering, because that last scale was a semi log scale. So I annualized it, I annualized these data. And what we see is that during the first millennia, there's no growth at all. During the next 800 years, there's growth of about 1/10 of 1% per year. And then after about 18, 20 or so, things start to improve. The material well being of the average person on the planet starts to improve at about 2% per year on a real basis. Now, you're all very smart people, I'm told, and so you understand all immediately what this means. It means that the standard of living doubles once every 35 or 36 years. The life of the child is on average twice as prosperous as the life of the parent. And this is a very new state of affairs. It's only been going on the past two centuries. One of my favorite graphs is this one here. This is per capita GDP in the United States over the past 200 years. And this straight line that's drawn through it, I'm sorry, is the, is the Trend line, the 2% trend line. And it is remarkable how closely the actual curve adheres to this 2% trend line. This little dip right here is the Great Depression. And then within 10 years or so, things get back to normal. So it's almost as if there's an invisible hand, to coin a phrase, which is pushing per capita GDP up at 2% per year. And we see this in just about every developed nation on the face of the earth that we've looked at. I don't have the plot here. I should have put it in my talk. But if you look at what happened to Japan and Germany during World War II, obviously their curves deviated down very radically during the years between 1940 and 1945. But within 15 years they got back up to that trend line. This is a very powerful phenomenon. And to me, this is one of the great questions of macroeconomics, one of the deep questions of macroeconomics, and it's one that I've never heard asked, which is, why 2%, why not 4%, why not 1 1%? And I've never gotten a good answer to the question. I've posed this to any number of macroeconomists. Now the immediate objection gets raised. How can you possibly talk about these sorts of data? How can you possibly know what the per capita GDP was in the United States going back even to the year 1800? Because we've only had these data for the past 60 or 70 years. Years when the Bureau of Economic affairs.

Began collecting these data in 1929.

How can you possibly know what per capita GDP was in Florence during the quattrocento? How can you possibly know what the per capita GDP was in the late Roman Empire? And the answer is that this is the job of the Cliometrician. Now, for starters, there actually are good data for per capita GDP in England going back to about the year 1200, almost to the decade Domesday Book. Because the British are very, very fine records keepers. They have fine economic records. They have excellent cadastral records, I.e. records kept by the church on the population and on incomes and on taxes. But the other major tool of the Cliometrician is the urbanization ratio. Now imagine for a moment you have a society in which 100% of people work on the farm and no food is exported. This country by definition exists at the subsistence level. That is to say, there's nobody left to produce any industrial goods or any other consumption goods aside from food. They're busy feeding their bellies and they have no other goods. So this is a nation that exists at the subsistence level, which is defined these days as about $800 or $900 a year by UNESCO and at about $500 a year by Madison. When and what you're looking at here is a plot of the percent of the British labor force that is engaged in agriculture all the way back the year 1700. And when we look at 1700, we see that about 55% of people were.

In fact engaged in agriculture. What does that mean?

It means that Britain existed slightly above twice the subsistence level at that point. And then over time it has taken a smaller and smaller and smaller portion of of the British population to feed it. Right now only 2% of people work.

In agriculture in Britain.

In the United States, it just fell.

Below 1% of the population.

All right? So it's not much of a stretch to realize that the productivity of these workers, of these farmers has increased. When you adjust to the fact that England is no longer in net, is no longer self sufficient in food, that agricultural productivity and the standard of living and industrial productivity have all gone up.

By about a factor of 20 during.

The past 300 years. So this is one of the ways we know how well nations are doing. A nation in which everybody's a farmer is a poor nation. If you're interested in these data, you can't do any better than to buy this book.

This is Madison's.

Summary volume published about four or five years ago, the world economy. And there's no greater, no more smudged, folded, spindled post it noted volume in my library than this one. I look at it almost every single week.

It's available in acrobat format as well.

It's fully searchable. It's a wonderful volume.

Now, when we look around the world.

Today, it is apparent what cleaves the haves from the have nots, the rich from the poor. I see the nods most everybody recognizes. This is a night satellite photo, of course, of the Korean peninsula. And you see South Korea lit up like a Christmas tree. You see one eensy bitsy little dot here, up here in the north, that's Pyongyang. That's probably Kim's palace. And if a picture is worth a thousand words, this one's worth a million. Certainly more than the million or so that Karl Marx ever wrote. And really, you know, if you want to say to yourself, well, all right, it's obviously the presence of institutions of property rights, but there's still people around.

Who don't believe it.

Jared diamond doesn't believe it. He believes it's all geography, it's all culture.

Well, there's not a lot of difference.

In geography between what's north of this.

Line and south of this line. There's not a lot of cultural difference.

Between what's north of this line and what's south of this line. I think that if Jared diamond looked at this slide, his head would probably explode. So perhaps we can get some idea about how things became prosperous in the year 1800 by examining the history of property rights. And it's an interesting exercise to undertake, and it's something that I did when.

I wrote the book.

It was the first thing I thought that this was certainly the key to.

Finding out why things happened in 1820.

There must have been some key improvement in the institutional framework of the human race that occurred about that time. And I was astonished to find that in fact, the very notion of property rights, property rights and property rights institutions go all the way back probably into the prehistoric history of mankind. If you believe, as I do, the books of the first books of the Bible, and particularly the books of Genesis encapsulate our creation myths, then you can find evidence going back that far which probably takes you back to at least five or 10,000 years ago. And there's this wonderful story of Abraham and Ephron, the Hittite neighbor of Abraham. Abraham's wife Sarah dies, and he needs a plot of land in which to bury her. And ephron's a good guy. He says, I'll give you the plot of land. And Abraham thanks him very much and says, but, you know, I want to purchase it from you, and I want to do it in the presence of witnesses. And so he does it, and in the presence of witnesses, he obtains this property.

And at a stroke, we see the.

Three essential elements of property rights. One is he's got clear title to the property because it's been done in the presence of witnesses. Number two, he's been released from any further obligation. He doesn't have to return the favor. Number three, most subtly, most powerfully, most importantly, he now has alienable right to that property in the legal sense. That is to say, he can do with the property whatever he pleases. He can give it to his heirs. He can sell it, he can give it to the bill and Melinda gates foundation. He can do whatever he pleases with that property. So at a very early stage, we see the essential elements of property rights. And as we go forward in history, we see continual improvements in it. We see the commercial code of Hammurabi for 3000 years ago, 3500 years ago or so, we see evidence in some rather fascinating stories from these Egyptian pharaohs, stories of how the pharaohs actually could not violate the property rights of their citizens because there was a land records repository in Egypt many thousands of years ago that prevented the pharaoh and his pharaoh's officials from doing it. And then finally, 2,500 years ago, we see the key innovation in the western system of property rights, which is the formation of an independent judiciary by the athenians, by the lawgiver solon, who set up a jury system that was completely independent and could do whatever it wanted.

To, and whose rulings were not subject.

To review by the archonship, I.e.

The executive, or by the legislative assembly.

And finally, we see this man come on the scene. This is sir Edward Coke. Edward Coke was a man who lived around the year 1600, and he was the John Marshall and the Thurgood Marshall.

And the Felix Frankfurter and the Richard Posner of his age, and I don't use those names lightly.

He was the John Marshall of his age because he was an institutional fountainhead. He was the Thurgood Marshall of his age because he was an indefatigable crusader for civil liberties. He was the Felix Frankfurter of his age because he was a towering legal figure. And finally, he was the Richard Posner of his age because he was a towering legal scholar.

And he did battle with the divine.

Right of kings present in the form of the Stuart monarch of the time, James I. James I wanted to subvert his rulings and he refused to buckle under. Now he lost the battle, but he won the war. He wound up getting thrown out of his office, but he kept his head, which was a remarkable thing at that time. And he winds up in Parliament, which.

Was the last place that James ever.

Wanted to see this guy because he was such an impressive composing and well liked political figure that he soon becomes speaker of the House of Commons and leads the charge for legislative supremacy against the King. And within, we all know what happens after that. The Commons turns on the monarch within a generation, which is now Charles I, the successor to James I, he loses his head, there's a revolution. And then finally about a generation after that, we see the glorious revolution of 1688, which is the start of the English constitutional monarchy and the the end of divine right of kings and the solid establishment of judicial supremacy and more importantly of legislative supremacy. So we have an independent judiciary. So the question really is why didn't the Greeks and the Sumerians or the ancient Israelites, let alone the medieval English.

Obtain.

Solid and persistent economic growth? And obviously the reason is something else is going on. As somebody once asked me at lunch two or three hours ago, are property rights necessary or sufficient? They're necessary, but they're not sufficient.

And obviously when you talk about economic.

Growth, what you're really talking about is making workers more productive. And you're talking about more efficient machines. More efficient machinery. And this is the primary machine of the industrial era. There's a wonderful story from T.S. ashton's history of the industrial revolution. It's a little 90 page book which is just a wonderful little read of the same title. And he has a small boy, a 10 year old boy, asked to go.

To the front of his class and.

Explain what the Industrial revolution was. And he shuffles to the front of the room and he looks at his.

Shoes, he turns around and he stammers.

That around the year 1760, a wave of gadgets swept over England. Well, these were the gadgets that he was talking about.

He wasn't talking about the sort of consumer gee gaws that we talk about today.

He was talking about industrial machineries.

Does anybody know what this is?

Yeah, it's a spinning wheel. Specifically it's a Crompton's mule. It was called a mule because it was a combination of Richard Arkwright's water frame and the Hargrave spinning jenny.

This Machine basically, at a stroke, improved the spinning efficiency by about an order and a half to two orders of magnitude. To make cotton, one had to go through three steps. One had to card the wool, to card the cotton, that is, to get the seeds out and to clean it, one had to spin it into thread, one had to weave it into cloth. Now, cotton cloth was the primary product.

Of the Industrial Revolution.

The economic historian Eric Hobsbawm very famously.

Said that whoever says industrial revolution says cotton. This was the growth industry of its age.

It became very much cheaper because of this machine, and people started buying more.

Of it because it became cheaper and cheaper.

Pretty much the same thing had happened.

300 years later to the microchip and to computer systems. And so this drove the Industrial Revolution.

So the question really then occurs, what are the steps in the invention of gadgets? Well, if you operate from first principles, you come up with four. The first step is that you need to have incentive.

You need to want to be able to innovate.

The second thing is you have to have a system, a physical model of.

The universe that enables you to innovate.

Because this is a intensely technological activity. Now, once you've done these two things, you can produce prototypes, but then you need to scale, and to do that, you need massive amounts of capital. When Thomas Edison invented his first incandescent bulb, he did not spend a lot of money doing that, but he needed hundreds of millions of dollars to produce all the light bulbs and more importantly, all of the electrical generators that were needed to power these light bulbs. So that's the third step, is you need capital.

Then finally, once you've got all these.

Hundreds of thousands of widgets sitting in your factory, you need to be able to transport and advertise them. So you need communications and transport. So let's give these things names. When we talk about incentive, we're talking about property rights, and specifically, we're talking not just about physical property rights, but we're talking about intellectual property rights as well. Now, when we talk about intellectual infrastructure, what we're really talking about is scientific rationalism.

One of the things that is truly.

Remarkable about the intellectual history of the west is that what we call scientific rationalism is really a point source invention. Sir Francis Bacon was the person the year was 1600. It was the year, more or less, that he published the Novum Organum. Bacon had the genius and the foresight to realize that the intellectual system that had been used prior to then, the Aristotelian system of deductive logic, where you started from first principles. And you worked forward and got your models of the universe and didn't ever test them was the road to stagnation. And he realized that the first thing he realized was that in fact there was a problem. That in fact that economic stagnation and intellectual stagnation was not the normal state of affairs. And then he identified the problem and then he proposed the cure, which is what we now call the scientific method. This inductive system where you gather facts on the ground in the morning, minutest detail, you formulate models and then you test those models. Observe, formulate, test, observe, formulate, test. A never ending cycle. So that was the second big step. The third big step was the availability of the capital markets. Now if this were a financial audience, I'd launch into about a 15 minute history, starting with the Dutch and going through the glorious revolution of 1688 and what that did for the English capital markets. But I don't want to put this audience to sleep. Suffice to say this occurred between the years 1600 and the years 1800. And then finally you have to be able to advertise, coordinate and transport. And of course there you're talking about the steam and telegraph revolutions. So let's take a look at a schematic that shows when these things came online. Property rights we've already talked about, they winked in and out, they didn't do so well during the Dark Ages. And then finally they have the rebirth under the English common law, under the tutelage of Coke and his successors, scientific rationalism occurring right on the scene, oops, at around the year 1600, the capital markets at about that time. And then finally we have power, transport and communication coming online here during the beginning of the 19th century. And this schemata I think explains several different things. The first thing it explains is why 1820, 1820 is simply when this last piece of the puzzle came online. Alright. The second thing it explains is why the Protestant nations of Europe were first. Now, when I was growing up, and we all probably read this when we were growing up, we read about Max Weber's theory of the Protestant ethic. Protestants were somehow more industrious and harder working and more frugal than Catholics were. And that certainly Protestantism was more receptive to capitalism. I never really bought that because most of the Catholic guys that I was raised with wound up at places like Fordham and Villanova and St. John's and they were chained to their rooms, their dorm rooms, for four years studying engineering. Most of the Protestant guys I knew were drunk, Yales So it really, I really, you know, it's probably my sample, but this schematic certainly explains, and explains well, I think, why, why the Catholic nations of Europe were second and why the Protestant nations were first. First of all, the Catholic Church was no friend of the capital markets. They really weren't overly fond of people borrowing and lending at interest. Secondly, the Catholic Church was no friend either of scientific rationalism, as Galileo found out to his chagrin. Now, in the Catholic Church's defense, they did finally apologize to Galileo in 1993. And then finally, the Catholic Church was no friend either of property rights. They were a classic back then, a classic rent seeking monopoly. If you didn't buy into them, then you couldn't go to heaven and you couldn't do business and you couldn't be part of the community. So this explains really quite nicely, I think, why the Protestants were first. Finally and most important, importantly, it explains why when we look around the world today, property rights seems to be the most important factor and the only factor. And the reason for that is really very simple.

These other three things are just darn.

Easy to get these days. Okay, you can borrow money no matter how poor a nation you are. You can buy infrastructure, jet planes, cell phone towers, what have you. You can send your best and your brightest to MIT and to University of Chicago and Harvard and I'm told even to Stanford.

And you can get all these things.

And you can, you know, these three things are very easy to get. But this last thing, property rights, emanates from a nation's culture and they're not.

So easy to get.

And this is why some nations are poor and some nations are rich today. Now, I want to talk about one or two things that have really nothing to do with economic growth. One of them is colonialism. The great psychological illness of the rest of the world is guilt. And we worry a lot that what we did in our colonialism had a lot to do with how underdeveloped nations are today. That's a testable hypothesis. If that's true, then the richest nation.

On the face of the earth, one.

Of the richest nations on the face.

Face of the earth ought to be.

Ethiopia, because it's been largely independent for the past 2000 years. Two of the poorest places on the face of the earth ought to be.

Hong Kong and Singapore. Okay?

Now a much more interesting experiment was done in the Western Hemisphere because you can say, well, maybe the cultural geographic factors, what have you, but the geography and the culture and the racial makeup and the cultural makeup of The Caribbean islands is very homogeneous. These were all monoculture societies. They made sugar. They had the same mix of African.

Slaves ruled over by a thin crust of white folks. And the only thing that really is.

Different about them today is when they got their independence. The first nation to get its independence was Haiti, okay? And it is also the poorest nation in the Western Hemisphere. The richest nation in the Caribbean is, of course, Barbados. It didn't get its independence until 1996. Now, you can look at this from the other point of view, from the point of view of the colonial nations. If colonialism really was a factor in wealth and poverty, then almost certainly the richest nation in Europe right up until the modern era should have been Portugal, because it had the biggest empire relative to its size. This is only a nation of about a million people in the year 1500, and yet it ruled over half of the globe. Sun never set on its empire about the year 1550 or so. The poorest nations in Europe ought to be Switzerland, Sweden, Norway, Denmark. No colonies. Okay, so doesn't fit. All right. And you can say, well, I cherry picked the data. Well, here's somebody who looked. Here are two people who looked at the data comprehensively, and they look only at islands for their own particular reasons. But again, the regression slope here of number of centuries is a colony and of wealth is a positive slope. It's not a negative slope. I'm always amused when people talk about a poor country and say, but, you know, it has resources. It should be rich.

Resources are a curse.

When all of your wealth comes from a couple of holes in the ground, then the quickest way to get wealthy and what everybody becomes focused on is control of those holes and access to those holes in the ground. And it breeds corruption and it breeds poor government, and it also drains the entrepreneurial spirit. So the best way to get rich is to have no natural resources at all.

Think Singapore, think Japan.

Okay, Foreign aid, aid from abroad is probably a curse as well for reasons that we'll get into. Also, here's a nice little slide. Two curves, a red curve and a blue curve. The red curve is the percent of the GDP supplied by foreign aid to the nations of Africa starting at around 5% in the 1970s, going up to around 17% in the recent decade. And this is Africa's. The blue curve is Africa's economic growth. All right, this doesn't prove causation, but there are some pretty good data that suggest that once foreign aid becomes more than 8% of your GDP, it adversely impacts growth. This is not what we're hearing from almost everybody who's in the public debate, although this is no secret, I think, in economic development historians, and this is part of one of their dirty little secrets. Now, you can look at this from the other perspective. You can say, what were the best growers over the past two or three decades? Here they are. Next column is their economic growth rates, the real economic growth rates, all very respectable. And these are the percentage of their GDPs coming from foreign aid, with one exception, all less than 1%. Okay? So this is not the way to get rich. It's to receive aid from abroad. Now, so far, we've been in the realm of this guy here. This is Adam Smith, of course, but when you're talking about the developing world, the person you want to talk to is this guy here. This is Thomas Malthus. Now, Malthus doesn't get a lot of respect these days because he was basically wrong about Europe. He said that Europe's population couldn't grow without getting developed, desperately poor, without impinging upon its resources. And at just the moment that he was penning it, as we'll see in another couple slides, it turned out that this was becoming false in the continent of Europe. But unfortunately, this is the regime that most of the world is in. This is a hypothetical nation in the.

Grips of the Malthusian trap. It's got a fixed amount of resources.

A fixed amount of agricultural production, more or less. And the more people you get, the lower its per capita GDP becomes. It falls into this Malthusian trap. Now, it's interesting to look at the medieval nations of Europe and of Asia, because we do have some good economic data on these. And the first place to visit when you're thinking about this is the island of Tahiti.

When Europeans first got to Tahiti, they.

Thought it was paradise.

And it wasn't just all the beautiful.

Naked women running around. It was the fact that these were a prosperous people. They lived very well. They didn't starve. They were very well fed. In fact, obesity was a problem in Polynesia back even then. They didn't have to work for their food. They lived in great big houses. They had very harmonious societies. And Rousseau and Gauguin had all sorts of wonderful theories pertaining to natives, to the. To the. To the noble savage about why this was true and the simple and pure lifestyle they led. That wasn't the reason. The reason why they had such a prosperous lifestyle is because they killed three out of four of their infants and kept their populations down that way. Now, the opposite Pole from that was medieval Japan. One of the things that's not commonly realized about Japan's economic history is that during the medieval period, it was one of the poorest nations on the earth on the face of the earth. When Europeans first visited there, they were amazed at how miserable their houses were and how little they had to eat. And the reason was because the Japanese were doing the opposite of what the Polynesians were doing. The Japanese are the most fastidious among the most fastidious, hygienic people on earth. They bathe regularly and they are very rigorous about disposing of their human waste. Consequently, they had very long lifespans. Consequently, there were millions of them. Consequently, they impinged upon their resources and consequently they were very poor. Now, the situation of the place that's in between was England and England was an even more interesting situation because the English, the medieval English were pigs. They did not dispose of their waste. They lived over.

They basically accumulated entire lifetime of waste.

Over the cesspits they lived in in their houses. They didn't bathe.

I am told by some people who.

Have read a lot of Jane Austen that you can read her entire output of books and never come across one mention of anyone ever bathing.

Okay?

Consequently, they had a very high incidence of infectious disease. Consequently, their population was low. Consequently, they were relatively prosperous.

England has a greater, had a greater.

Agricultural capacity during the medieval period than Japan did. And yet there were 15 million Japanese in the year 1500. There were only 4 million Englishmen who were very prosperous.

So if we can summarize this in.

A graph, then if we improve sanitation, health care, food aid in a Malthusian society, we wind up with more people and they are more miserable. Okay? They are poorer. And if we start killing babies, or the functional equivalent of that, if we start engaging in family planning, then we make fewer people and they're more prosperous. Now, this isn't some sort of theoretical construct. There are actually good data to support this. And this comes from the English data that I talked about 15 minutes ago that goes back to the year 1200. And what we're looking at here is a plot of population versus per capita GDP in England for 400 years of the medieval period between 1200 and the year 1600. And we see this nice hyperbolic distribution of data points. The most interesting state set of data.

Points is right here.

These were the years immediately following the plague when half the population died. They were very prosperous. The ones that were left had a bounty of agricultural output available to them. And this was the Start of England's rise to prosperity. As a nation, our first instinct when we see people starving halfway around the world is to feed them, buy bed nets, give them food, give them HIV drugs. Our humanity demands it. We can't not do this, all right? And we wouldn't be human if we didn't do it. But the realization has to be that if that's all we're doing, we're throwing gas on a Malthusian fire. We have to do other things. And unfortunately there's nothing great realization of this problem out of the Malthusian mechanics.

Again, this is something that all development.

Economists know about, but it's something that they really don't want to talk about in public. Just to show you some, some data on world population and particularly the population of Africa, here's the two curves over the past 200 years. Obviously this is a semi log plot and we can, if you look carefully, you can see that the African slope is sloping up faster than the world slope. Semi log plots are wonderful because they hide momentous things in very small spaces and in very small slopes. This is the growth, this is just the first derivative of that curve.

It becomes noisier in recent decades just.

Because the data become better and higher quality data. And we can see that the rate of growth of Africans population was close to 3% in the 1970s and still is well over 2% per year. And it's falling much more slowly than that in the rest of the world. Finally, this is Africa's population as a percent of the world. Population starts out at 5% and now has grown to around 17. All right, well let's go back to England then and reverse back and get some depth to our understanding. What we see is that these little diamonds are the data that I was talking about before. These bigger squares occurred during the 17th century. Something's happening here during the 17th century. We are escaping from this regimen. And then finally we go another century and a half ahead and we get that we put the 18th and 19th centuries in and we see a clear cut escape from the Malthusian trap down here. This is the realm of Malthus. It's shaped a little differently than the slide you saw before because I've compressed the Y axis, the population axis, so it's flattened out into a pancake. And now clearly we've seen an escape out in this direction. This is the realm of, of Malthus. This is the realm of Adam Smith. So how do we accomplish this in the developing nations?

Well, if you've been following along there's.

Really only three choices. You can restrict population with birth control, with family planning. You can improve institutions and cultures. It would really be nice if you could do this and do it rapidly, but you can't because institutions come from culture. The English Common Law grew out of English folk wisdom and you could no sooner transplant that to a traditional society than you could transplant bananas to Alaska.

It's just not going to work.

We found this out, unfortunately, all to our chagrin in Iraq and Afghanistan. There are just certain things, certain cultural, institutional things that you just can't transplant. If you look at what this administration has tried to do, it has tried to do this with a fair amount of hubris. But its right wing religious sentiments, its beholden see to the Republican and the religious right. The Christian right prevents it from doing this. They've gotten it backwards. They've chosen to do one thing that would actually do some good and they've chosen to focus on the one thing which is doomed to work. Now. There's a third possibility which I think is worth talking about, and that's about the role of immigration. There's no better way to provide aid to a developing nation and no better way to improve its institutions than to allow its best and its brightest to emigrate and to send remittances back home. Because money that is sent to individual people and individuals is much better spent than is money than is sent by aid agencies and is spent by governments. So unfortunately, that's really not what we hear in the public debate. For example, what people hear a lot of is from this particular authority on economic development, something must be done, Anything must be done, whether it works or not. Jeffrey Sachs, pretty much the same thing. Unfortunately, what this takes, fails to take into account is that there's a third possibility. It's not just that you make it better or you don't make it better, it's that you very possibly may make it worse. All right. And this is a possibility that really needs to be considered. Finally, the greatest world expert now on economic development has this to say. And this is really the state of public debate on developing world economic aid. I think we need to do better. I think we need to look around, I think we need to see what the problems are. And I think we need to move to a more evidence based, more reality based model of economic aid than what we're doing right now. And with that, I'll open it up to questions.

So you mentioned that immigration was one good possibility. I know there are areas of countries where there is large amounts of emigration and yes, money keeps coming in, but the best and the brightest are all leaving and no new jobs are actually getting created inside that company, inside the country itself. And so it's not really a long term solution.

Well, the problem I would. The problem that I think is not that it's not a long term solution.

It'S just that the cultural institutional changes.

That we're talking about take a very, very long term, long time to happen. I think the sort of immigration that we're talking about here has only been going on for the past 20 or 30 years. How long did it take the Catholic Church to, to reform its institutional outlook? How long did it take the English to reform their institutional outlook from the divine right of kings in the year 1500 or 1600? These were things that took centuries. It took centuries for the Enlightenment to take hold. And what has to happen, I think in a lot of traditional cultures is they need an enlightenment. And enlightenments don't occur over five years or 20 years, they occur over centuries. And that I think is the reality of it.

Dismiss colonialism as one of the factors in prosperity. But if you go back to your list of top 10 fastest growing economies, there are some names like India, China, Singapore, which are now growing, growing only after their independence. I mean, I doubt whether those countries would have featured in that list before 1950s. So what do you think? I mean, do you think independence is maybe, to put it in your words, it's necessary but not sufficient?

That's a really interesting point. And I'm not even sure it's necessary. And I think Hong Kong demonstrates that very nicely. Hong Kong was, well, Singapore exception. Yeah, yeah, but you know, China was an independent. China really never was a colony of the West. Certainly the Western powers had control of a significant part of its economy for a period of perhaps 50 or 100 years. Yeah, but, yeah, but the Chinese, the Chinese started becoming rich when they tossed out these two awful systems. They had feudalism and then communism.

They got rid of those two.

They figured, okay, we got to try something else. And that was really the change. I mean, it's an interesting question, which is something that we really haven't talked about, which is the relationship between authoritarianism and economic development. If you look at the great success stories of the late 20th century, Chile, Spain, Korea, what happened there? You had repressive, brutal, right wing dictators, they'd established rule of law. The nations became prosperous. And the one thing we really haven't talked about is the characteristics of a prosperous electorate, a prosperous society, a prosperous society doesn't tolerate despots, then you have a full belly and then you have a roof over you, your head. You're a lot harder to intimidate. This is one of the keys and one of the secrets of Fidel Castro's success. He's kept people so poor that they're too frightened to do anything about the system they have.

Do any of your data that you've looked at, you had a lot of GDP per capita data. Do you have any insights into does it matter how that wealth is distributed among people in the country and what the gap between the richest and the poor poorest is or anything like that?

I don't really have any data on maldistribution and economic growth. Actually I do. The better data has to do with maldistribution of wealth and well being. People are happier when the Gini ratio is low. And there is now some evidence that economic growth is better in societies with low Gini ratios as well. You look at the high Gini societies, the people, the societies, the nations that have the highest degree of economic inequality, places like Botswana, Bolivia, Chad, Brazil. Those aren't the world's happiest places. You look at the world's happiest places, Denmark, Holland, Scandinavian, the northern European countries, Canada. The degree of well being in those is much higher. Those are places that we'd all probably much rather live in than the high, than the places with great inequality. There's this libertarian myth that you need a great amount of inequality to incentivize people. I don't think that survives the data.

So there's an argument to be made that a lot of the increase in prosperity we've had in recent centuries is due to widespread use of fossil fuels and that when that goes away we'll also lose what we have. What do you think of that?

Well, it's an interesting question. It's an interesting counterfactual is what would have happened if the internal combustion engine had never been invented or if we hadn't discovered the large stores of oil that we have. I tend to think there's two possibilities. I think the less likely possibility is that we would not have grown quite as rapidly. I think that the much more likely possibility is that the human genius for technological innovation would have found a way around it, as we are going to have to do very soon.

You mentioned in your response to the first question about the Enlightenment and the Catholic Church Reformation is taking hundreds of of years. Do you feel that sort of thing is actually still the case given widespread both mass communication and point to point Peer communication and the amount of just knowledge and books and information available in the current system.

Oh, you're an unbridled optimist.

I've been called that for a while.

Yeah. I think the minimum period of time you need to. For real institutional change to occur, people don't change their minds. People are very stubborn. They hold on to their political and their religious opinions for a lifetime. And what needs to happen is for kids and grandkids and great grandkids to grow up and look at their ancestors and look at their parents and their great parents, grandparents and great parents and say, grandpa, what were you thinking? And that minimum time period is 60 years. And that's a, that's a minimum figure. I don't think the Internet changes people's minds any faster.

Not the Internet per se, but just even telephones, telecommunications, television, newspapers.

Yeah. I think that if anything, they can also serve to reinforce people's opinions as well. And we're seeing a lot of that. All the communications modalities you're talking about work both ways when it comes to the support of traditional points of view. You know, you can now go online and find whatever imam you want to who will support your own particular opinion. And that's what a lot of people are doing in the Muslim world.

You listed as the first requirement for a technological innovation incentive, which you identically equated with property rights and in particular with both physical and intellectual property rights. You're talking to a group of software people who have close ties with the open source community, a group of people who do something not at all for property rights. And furthermore, there's a wide variety of property rights, ranging from the king is not allowed to take my house just because he wants to, all the way to hypothetical opposite extreme, where I could say I make a certain amount of money for every time someone does a search on Google because there's some of my code in there. So could you talk a little bit about exactly what type of property rights are required for this technological innovation?

I would have been really disappointed if I came here. Nobody asked that question. So thank you. I would have. Yeah. The answer is, is that when you talk about. We haven't really talked about property law. If I were talking to a group, group of lawyers, I would have spent some more time on that. Obviously, property law is. Recognizes all property law, starting from the. Really all the way back to the first property law in the Florentines 600 years ago. Understood a balance between the public benefit, which is what you're talking about, and people's incentive. All right. When you talk about intellectual property rights in the United States law, they have to be. In American law, they have to be limited in both time and space. It has to be to a particular invention. It can only be for a certain period of time. Now, just how limited it is in those two dimensions I think is a matter for legitimate debate. But obviously you're quite correct. It can't be unlimited in both of those dimensions. It has to be free in some dimension. And I think that one of the things that you people are doing is you're making it perfectly clear what the value of that side of the balance is of narrowing the definition, narrowing the dimension of property rights is, and I'm very sympathetic to that point of view. There are no absolute civil liberties, there's no absolute liberty to say what you want, and there's no absolute right to property. Even in the most libertarian of societies, even in Hong Kong, they can take your apartment by right of eminent domain.

I noticed in the book some references to democracy in societies and their growth. Can you tell anything about that? Expand a little bit. And what's your view on democracy being corrupt by corporations that are too large and control the democratic process by large amounts of money?

Well, I mean, if I'm talking to any group that is expert at subverting that particular problem, it's this group. You know, you have put tools in the hands of individual citizens that I think significantly alters the balance of the power. When you look at the balance of power between the rich and the poor in a society, what you're really talking about is the access to information and the access to the microphone. All right, for example, if you look at the story of the abolition of the corn laws in England, which benefited the rich landholders that came, it's not a coincidence that that law came into effect three years after, five years after the introduction of the penny post, which enabled people to talk to each other. Well, now it's not the penny post, it's the zero price post, which you folks have done an excellent job of doing. Now, as far as the relationship, so you've, you know, the more information that people have, the more you alter the equation in favor of the powerless against the powerful. All right? Now as far as democracy and economic growth goes, I think that the data are very clear, which is that it is not democracy that leads to economic growth. In fact, too much democracy probably hurts economic growth through soak the rich laws and soak the rich policies. The direction of causation is clearly the other way around, which is from wealth to democracy. When people become wealthier, they become more empowered. When people become more empowered, they demand more from their leaders and they are less tolerant of corruption and they are less tolerant of malfeasance in office.

So if you want to make a.

Country democratic, you make it rich. You don't order strikes from aircraft carriers.

Thank you.

Excuse me. I've heard some stories saying that Japanese society is now moving to, like, M society, which means richer get richer, poor get poor. Do you see this as a trend or this is a. Any comments on this?

There is no question that the capitalist.

Mechanisms I've been talking about here today lead towards income disparities. If you let this, the system that I've talked about, run free, you start seeing significant income disparities and the system starts falling apart. Because when I talk about property rights, I'm talking about the ability to go on the street and not be robbed. And if people are poor, if people don't know where their next meal is coming from, they're more likely to rob you than if they've got a roof over their head and their bellies are full. So the state has a role in distributing income. Capitalism has to be saved from the capitalists. There's no question about it.

Through redistributive mechanisms, through a generous safety net.

It's economically inefficient. Yeah, of course it is. But it's also more humane. And in the end, it's actually more economically efficient.

So given your 2% real growth, you know, exponentials build up pretty quickly. Do you have any thoughts where this might all end? You know, how high does it go? I mean, obviously it's speculation.

We're in Terra Nova.

We've only had 200 years of this.

And that's not that many doublings. I actually posed this question at lunch one day to Bill Baumel, who many of you may know is one of the world's foremost development economists and who's thought more deeply about the innovative process and prosperity.

And he just grinned.

And I said, do you think there's a limit? And he just grinned back at me. And he said, no, I don't.

But.

It may not be. You know, the other possibility is it may not be stable. I don't know the answer. It's a very good question.

I'll take another one. So your first graph there, the one that shows the 29 depression, there's a depression before that somewhere in the 1800s. What was that depression all about? And then if you look at the time between Those two. Are we now due for a third one?

Okay, hold on, let me find it. Okay, that's going to be this one right here.

This occurred in the year in the.

Late 1830s, early 1818 40s. And one of the great ironies of.

American history and of the American currency is that it's the fault of this guy.

This was Andrew Jackson. And Andrew Jackson let lapse the charter on the second bank of the United States. So we had a central bank and we went from having no. From a central bank to having no central bank. And that's what happens when you suddenly get rid of, of a central bank. And one of the great ironies. There are two ironies here. One is that he wound up.

On.

The $20 bill and at the top of it it says Federal Reserve note.

And the other great irony is that.

In the year 1837, J.P. morgan was born and he died in the year 1913, which was the year the Federal Reserve, the central bank was re established. And during the years, most of the years that he was alive, he was in fact the American central bank. I'm not a big believer in wave theories. You know, I mean, what I think about when I think about finance and I look at that dip there in 1929, I know that the value of a basket of securities fell by about 90, 90%, which is why I own bonds. Not a lot of bonds, but it's why I own bonds. And so can that happen, Will we seal that sort of economic catastrophe at.

Some point in the future?

Almost certainly, in the words, you know, to sort of combine, you know, to channel Nikki Taleb, Nassim Taleb, through Harry Truman, the only black swans of the history you haven't read.