Oded Galor, Herbert Goldberger Professor of Economics at Brown University, joined Elias Papaioannou, Co-Academic Director of the Wheeler Institute and Professor of Economics at London Business School for the fifth event in the Wheeler Institute’s Rethinking Capitalism series.
Professor Galor’s latest book ‘The Journey of Humanity’ explores the evolution of human societies since the emergence of anatomically modern humans in Africa nearly 300,000 years ago. The book aims to solve two of the most fundamental mysteries surrounding the human growth process. The first mystery is defined as the mystery of growth, namely, what are the roots of this dramatic transformation in human living standards that has occurred in the past two centuries after literally hundreds of thousands of years of stagnation? The second mystery is the mystery of inequality, namely, what is the origin of this vast inequality in the wealth of nations?
This article is a long read and describes the key themes covered in Prof Galor’s latest book ‘The Journey of Humanity’, including (i) The Mysteries of Human Economic Growth & Inequality; (ii) The Three Stages of Human Economic Development; (iii) The Wheels of Change; (iv) The Tipping Point; (v) The Roots of Global Inequality; and (vi) The Role of Geography.
The Mysteries of Human Economic Growth & Inequality
Throughout the course of human existence, life was to a large extent “nasty, brutish, and short”. In fact, human life was remarkably similar to that of other species on the planet. Humans were preoccupied by survival and reproduction and living standards were very close to the subsistence level. For example, only a few centuries ago, 1/4th of infants did not reach their first birthday and half of them did not reach their reproductive age. It was a world in which about one-tenth of women perished during childbirth and life expectancy fluctuated in a very narrow range of 25 to 40. Perhaps most remarkably, it was a world in which an economic crisis did not lead to ‘belt-tightening’, but rather to mass starvation and ultimately extinction. Moreover, broadly speaking, living conditions did not differ greatly across time and space.
But then, in the past two centuries, there has been an incredible metamorphosis in living standards across the globe. World income per capita has increased by a factor of 14. Life expectancy has more than doubled and a great divergence in human prosperity has occurred across time and space.
In contrast to conventional wisdom, it is important to note that living standards did not evolve gradually over the course of human history. Technology, on the other hand, evolved gradually but it resulted in more people rather than more prosperous people. As a result of this, the transformation that has occurred over the past 200 years, Prof Galor defines as a ‘phase transition’, namely a change in the structure of the system once a tipping point has been reached. Therefore, understanding the mysteries of growth and inequality requires: (i) a better identification of the forces that permitted the transition from stagnation to growth; and (ii) the identification of the forces that generated this differential timing of transition across the globe – why some societies took off in the beginning of the 19th century and others towards end of the 20th century. In addition, it requires a better identification of the role of historical and even pre-historical forces in generating this differential timing of transitions across the globe. Resolution of these mysteries will provide important insights into the design of policies that can mitigate inequality across the globe.
The Three Stages of Human Economic Development
Firstly, it is important to understand the process of development that has resulted in the inequality that we see today. The process of development can be divided into three fundamental phases, namely:
- The Malthusian Epoch – originates with the emergence of homo sapiens in Africa nearly 300,000 years ago and spans 99.9% of human existence, ending with the eve of industrialization (17th-18th century BC). It is an epoch of stagnation in income per capita. But at the same time, this is an epoch of dynamism in terms of technology, population, and human adaptation. It is this dynamism that brought about the take-off initially into the Post-Malthusian regime, and ultimately in the aftermath of the demographic transition, into the so-called Modern Growth Regime.
- The Post-Malthusian Regime – spans from 17th-18th century BC to the 1870s.
- The Modern Growth Regime – spans from the 1870s to the present.
The forces that operated during the Malthusian Epoch ultimately led to the differential timing of the transition from stagnation to growth and much of the inequality that we see today.
The Malthusian Epoch was characterized by an important dualism – stagnation along with dynamism. Stagnation occurred in living standards, with income per capita fluctuating around a subsistence level of consumption. Life expectancy fluctuated in a very narrow range of 25 to 40, with humans living past 40 only in rare circumstances. At the same time, this was a period of dynamism – dynamism in technology, population, and human adaptation to the technological environment and geographical environment.
The Wheels of Change
In general, dynamism in technology occurs via small, incremental technological advances at a very slow pace. During the course of history, humans moved from one stone tool technology to another, reaching the steam engine at the eve of industrialization. The world’s population grew from about 2.5 million at the eve of the Agricultural Revolution 12,000 years ago to about 1 billion people in the midst of industrialization, a four-hundred-fold increase despite Malthusian stagnation. At the same time, the Malthusian Epoch witnessed greater adaptation of the human population. These three forces – technological progress, population growth, and human adaptation – are collectively referred to as the ‘Wheels of Change’. They are the forces that triggered and governed the pace of the transition from stagnation to growth.
During this Malthusian dynamism technological progress increased income per capita, but only temporarily. This is because the increase in income per capita permitted more children to survive, more of them to be born, and as a result, population growth that counterbalanced the growth of technology. Inevitably, income per capita reverted to the previous equilibrium level. Consequently, during this period, unlike today’s world, technologically advanced societies were not richer – they had higher population density. This is one critical element for understanding the roots of inequality today.
The second one has to do with the impact of technology on human adaptation. The Malthusian pressure affected the size of the human population – better technology permitted larger population to be supported. But in fact, it affected the composition of the human population as well. Namely, it generated certain adaptations of humans to the technological environment and to the geographical environment. It encouraged traits that were complementary to the growth process. Higher income resulted in higher reproductive success, which became more and more prevalent in the population. Moreover, during the Malthusian process, adaptation raised the prevalence of complementary traits to the growth process and ultimately reinforced the process, thereby permitting an earlier transition from stagnation to growth.
The third element relates to the origins of technological progress. Technological progress was affected by the size of the population, the potential number of innovators, the demand for innovators, the composition of the population (how adapted people were to the technological environment), the division of labour, and the extent of trade. At the same time, technological progress permitted a larger population to be sustained and thus, greater adaptation of the human population to the technological environment. Therefore, this results in a reinforcing mechanism between technology and the size and the composition of the population.
The Tipping Point
Eventually, over time, this resulted in technological progress becoming more and more rapid, ultimately reaching a critical point, the Tipping Point. When this critical point was reached, the environment was changing so rapidly that to cope, people started investing in themselves (i.e their education). This investment in education came at a cost. These individuals lived very close to the subsistence level, and so, they could not compromise on their own consumption. The only other item that they could economize on was the number of children. So, the rise in human capital formation, which was triggered by the acceleration in technological progress, generated human capital formation and a reduction in fertility. This implies that the Malthusian forces suddenly vanished, in the sense that it was no longer the case that technological progress was being counterbalanced by population growth because in fact, population growth started to decline.
Thus, the growth process for the first time in human history was freed from the counter balancing effect of population and investment in human capital triggered a demographic transition and a decline in fertility. In other words, the holy triangle – technological progress, human capital formation, and the decline in population growth – permitted the world to sail into the sustained growth regime.
To a large extent, this is defined in science as a ‘phase transition’, like the conversion of water into water vapour. More importantly, as is the case with the evaporation of water that not all water molecules convert from liquid to gas at the same time, some societies transitioned earlier than others, resulting in an enormous divergence. Therefore, the roots of global inequality have to do with this differential transition from stagnation to growth that has occurred in the past two centuries.
The Roots of Global Inequality
With regards to global inequality today, it is tempting to think that it is related to cross-country differences in education, physical capital formation, and technological levels. However, this does not explain why some societies fail to efficiently invest in education & machines and adopt advanced technologies. Which brings us to one of the most fundamental questions – what are the historical and prehistorical barriers in the process of development, or in other words, what are the deep-rooted factors behind the inequality that we see today?
These factors can be categorized into: (i) institutional factors; and (ii) cultural factors (although institutions and culture themselves are endogenously determined). Diving deeper, we see that institutional and cultural factors are determined by geographical and societal characteristics.
Starting with institutions, we know that different societies have adopted different forms of institutions. We see the emergence of growth enhancing, inclusive institutions (such as democracy) in some regions of the world, and we see the emergence of growth retarding, extractive institutions in other regions of the world. Indeed, a significant portion of the inequality that we see across the globe can be traced to this divergence in institutional characteristics. However, there are only a few instances in human history in which institutions have emerged rather randomly. Typically, institutions react to the economic environment and evolve in a way so as to smoothen the rotation of the Wheels of Change, especially during random critical junctures in the course of human history. For example, the Black Death can be viewed to a large extent as a random black swan event that had a tremendous impact on the scarcity of labour and the decline of feudalism in the United Kingdom. This decline in feudalism is associated with the emergence of property rights and perhaps later, industrialization. Second, we can think about the Glorious Revolution and its impact on constitutional monarchy. The Glorious Revolution again, can be viewed as a random event. It is quite possible that James II would have defeated William of Orange in the battlefield in which case absolute monarchy would have persisted, causing industrialization to occur somewhere else in Europe.
Nevertheless, institutions typically in the course of human history evolved gradually and responded to the economic incentives. In particular, the Agricultural Revolution that occurred 12,000 years ago was associated with tremendous increase in population density. This increase in population density generated a demand for institutions that could create cohesiveness in human society such as banks and governments. Geography played its role too. The suitability of the land for the cultivation of crops that require large plantations led to the emergence of large, land-owning aristocracies that had great influence on the political system and ultimately led to the emergence of extractive institutions and even slavery. Similarly, the disease environment in sub-Saharan Africa impacted the delayed adoption of centralized institutions in the region.
The emergence of growth enhancing traits, such as social capital, in some regions of the world and the emergence of growth retarding traits, such as family ties, in other regions has been well documented. This, for example, explains the divide between northern and southern Italy, a country with naturally similar institutions. However, there are instances in which we see random, growth enhancing cultural mutations as well. For example, in the first century BC, certain sages demanded that Jewish boys must know how to recite the Bible in front of the community by the age of 13. This had no economic justification whatsoever – it was entirely capricious at the time. But nevertheless, this cultural mutation persisted over time because ultimately such skills became highly rewarded in occupations that emerged later, particularly in the urban sector. Overall, cultural traits emerge because of changes in economic incentives and changes in the technological and geographical environment in which people operate. Perhaps the most important trait for the growth process was the inculcation of a future-oriented mindset in people.
The Role of Geography
Geographical characteristics such as soil quality, climate, disease environment, and even geographical isolation, had an indirect effect on the evolution of cultural and institutional characteristics. These elements ultimately persisted and generated some of the inequality that we see across the globe today.
Going back to the Agricultural Revolution (or the Neolithic Revolution) 12,000 years ago in which human societies transitioned from hunter-gatherer tribes to agricultural communities, this transition is associated with the emergence of a non-food producing class. This non-food producing class engaged in knowledge creation, in the form of science, technology, and written languages. This knowledge creation generated a technological headstart that persisted over time. As per Jared Diamond’s thesis, the variation in the timing of the Neolithic Revolution across the globe explains much of the variation in global inequality today, namely, the fact that some societies transitioned into the Neolithic earlier than others and thus, those societies are more prosperous today because of this technological headstart that persisted over time.
However, real-life evidence is not very complimentary to this thesis. The Diamond hypothesis is very relevant for understanding the comparative development till the year 1500. This is because there were very limited spillovers from agricultural technological advantages in the globalized world that emerged post 1500.
So, to understand global inequality today, we will have to march back all the way to Africa, from where humans have originated. During the migration of anatomically modern humans from Africa, sixty to ninety thousand years ago, the migration was such that the composition of population diversity across the globe was affected in a persistent way that created the inequality that we see today. This is because during the exodus, the departing populations carried with them only a subset of the degree of diversity that existed in the parental population. This diversity came in the form of cultural, phenotypic, behavioural, or linguistic factors. Moreover, migration at the time was sequential and as a result of it, the data shows that that there is low level of diversity at greater migratory distance from Africa, also known as the ‘Serial Founder Effect’.
This is important because diversity has conflicting effects on productivity. On one hand, diversity has beneficial effects on creativity and innovation as it generates cross-fertilization of ideas and complementarities in the production process that are beneficial for innovation. On the other hand, diversity is associated with social non-cohesiveness as it generates mistrust, disagreement about desirable public goods, such as investment in education and health, and political division. Consequently, it is associated with conflicts. This implies that, if in fact, there are positive and diminishing effects of diversity on innovation and social cohesiveness, a hump-shaped relationship should be expected between migratory distance from Africa or diversity and economic productivity. This is precisely what the data shows.
Thus, in the year 1500, the optimally diverse societies were those in Korea, Japan, and China. This was a time period in which technological progress was not very rapid and as a result, the benefits of homogeneity in terms of social cohesiveness were much more important than the potential adverse effect on innovation. However, in today’s world, the optimal level of diversity is associated with a society like that of the USA. This can be inferred to mean that as we move into a more challenging technological environment, cultural fluidity is very important in permitting individuals to navigate the stormy technological environment and consequently the optimal level of diversity is increasing over time. If we project into the future, this implies that since we are moving into a more and more demanding technological environment, societies that are increasingly more diverse will have the upper hand in terms of productivity.
What drives the growth process are the Wheels of Change, namely, population size, population composition, and technological progress. But these wheels are not rotating in a vacuum. They are operating in a particular environment that is affected by institutional and cultural factors. If institutions protecting property rights are emerging, then technological progress will be faster. Similarly, if cultural traits are fostering investment in human capital, the composition of the human population will change. If a society is adopting inclusive, growth enhancing institutions, the Wheels of Change operate faster and as a result of it, that society reaches the Tipping Point earlier than others. But at the same time, the initial conditions are very important. Geography affects institutions and culture, and through them the rotation of the Wheels of Change. Migratory distance from Africa affects human diversity, and as a result impacts technological progress directly and institutions and cultural traits indirectly.
Overall, an important fraction of inequality that we see today is associated with forces that operated in the distant past. In fact, data suggests that nearly 90% of the variations in income per capita across the globe today can be attributed to deep-rooted historical factors.
Does it imply that history is fate or that we are captives of our histories? Not at all. In fact, Prof Galor suggested that by considering our history, we should be able to design our future in a more effective way. We need to design growth enhancing policies that are specific to each country and consider its history and geography. A one-policy-fits-all solution will not solve global inequality.
Elias Papaioannou’s conversation with Oded Galor is part of the Wheeler Institute’s Rethinking Capitalism series.
Oded Galor is the Herbert Goldberger Professor of Economics at Brown University. His research on unified growth theory studies the process of development over the entire course of human history, often taking an evolutionary inter-disciplinary approach that blends mathematical modelling and econometrics with geography, cultural anthropology, and biology. His works stresses the role of deep-rooted factors in the transition from stagnation to growth and in the emergence of the vast inequalities across the globe. Professor Galor’s work has redirected research in the field of economic growth to the exploration of the long shadow of history and to the role of biogeographical forces in comparative economic development.
Elias Papaioannou is a Professor of Economics at LBS, where he also serves as an Academic Co-Director of the Wheeler Institute for Business and Development. His research focuses on international finance, political economy, growth, development, and economic history. Elias has held Visiting Professorships at Harvard and MIT’s Department of Economics.
Sagun Tripathi (MBA 2023) worked for more than eight years in the energy sector, across different geographies – the US, Germany, and India – and functions – R&D, consulting, strategy, and operations – before coming to LBS. He is passionate about climate action and how sustainable energy holds the power to transform lives in the developing world.