Gregory Clark: “A Farewell to Alms”

Why did the Industrial Revolution happen when it did, and in England? Gregory Clark attempts to answer this question.

Clark starts by discussing Malthusian economies. Modern, growing economies with rising living standards are historically unusual. For five to seven thousand years, median wages did not change much. The wage of an unskilled labourer was actually lower in 1700AD than it was in 500BC! And agricultural societies had lower standards of living per hour worked than hunter-gatherer societies, in which people could get by with very little work. Yet, over the thousands of years before the industrial revolution, technology did improve. Why didn’t improvements in technology lead to improvements in living standards, as they do now? One thing that comes across from Clark’s book is that modern growth rates not normal. We are used to growth rates of 3% per year (but falling), but the middle ages could see growth rates of 3% per century or less!

The problem was that the gains from technological improvements all went into sustaining larger populations. This is to be expected from standard Darwinian theory: animals will evolve to have as many children as they can support (and no more because this would be a waste of their resources). If technology makes it easier for someone to support more children, they will have more children. The limiting factor was natural resources (before the industrial revolution, this meant farmland). Technology enabled the more efficient use of natural resources, which increased total income, but this enabled population increases which pushed down average wages until natural resources became the limiting factor once again. The Black Death, which killed a third of the population of Europe, caused a big increase in living standards which lasted for a century, until the population increased to previous levels.

People are a negative externality

Clark quashes some naïve libertarian ideas, such as ignoring natural resource constraints, and the belief that more people are always an advantage. Resources are limited, both in the short and long term, and even if there are reserves it may not make economic sense to extract them more rapidly (the Hotelling principle). Land is limited, and more people reduces the amount of per person and increases the price, which can lead to a net reduction in living standards (but an increase in income for rentiers such as landlords and the state). People are a negative externality, since they use up natural resources which could otherwise be used by you, and they must be productive in order to offset this. More people enables specialisation and network effects, up to a point, but beyond that they reduce living standards. (Sophisticated libertarians such as Mises and Hoppe do recognise this. Mises: “The world, or an isolated country from which emigration is impossible, is to be regarded as overpopulated in the absolute sense when the optimum of population – that point beyond which an increase in the number of people would mean not an increase but a decrease in welfare – is exceeded.” (Mises: “Nation, State, and Economy” . New York University Press, 1983. Pg 58.) Hoppe: “An influx of migrants into a given-sized high-wage area will lower nominal wage rates. However, it will not lower real wage rates if the population is below its optimum size.” (Hoppe: “Democracy: The God That Failed”. Transaction Publishers, 2007. Pg 137.) That is, the “optimum” size of a population is that beyond which real income per capita will decrease.)

Another mistaken libertarian idea is an overestimation of the power of good institutions, which Clark refers to as the (Adam) “Smithian” view. In fact, good institutions are necessary but not sufficient for high living standards. Clark points out that England had good institutions for centuries, and can even be argued to have better institutions then than it does now. For example, property rights were more absolute in medieval England than they are now. Yet we are more prosperous now. Protections for innovation such as patents and guilds existed for a long time, yet innovation did not take off.

More is needed than free market institutions to improve living standards. Clark’s thesis is that centuries of good institutions enabled the evolution of a better population, and it was only once the population was intelligent enough that the industrial revolution took off.

Genetics

So what changed? Why did improvements in technology start leading to improvements in living standards, instead of larger populations? Clark doesn’t answer this adequately, but he provides a wealth of data suggesting the answer was improvements in the stock of population, caused by differential fertility between rich and poor. Clark demonstrates that in medieval England for centuries until the industrial revolution, the rich had more children than the poor. The richer you were, the more surviving children you had (the violent aristocracy excluded, who tended to kill each other off), and the poor did not even have enough children to reproduce themselves. As a result, English society demonstrated downwards social mobility, as the children of the rich had to move down the social scale to take up occupations vacated by the sub-replacement-fertility poor. The surprising result is that downwards social mobility can be a healthy thing for society. The rich bourgeoisie reproduced, spreading their bourgeois values of hard work and thrift.

The population thus improved. Clark points out that returns to saving and acquiring skills were much higher in the past than they are now, yet people did not do so, despite the higher incentives. One explanation is that people were poorer, so they would have less resources spare to invest, despite the attractive returns. The other explanation is the people had a higher rate of time preference. Time preference is partly genetic, and “interest rates fell from astonishingly high rates in the earliest societies to close to low modern levels by 1800.”

Economic growth

Economic growth came partly from saving/capital accumulation but the vast majority came from efficiency improvements.

Why don’t we see any growth per person before the industrial revolution? Why were efficiency improvements absorbed by increased population, so that the limiting factor was always natural resources? The industrial revolution did enable a population explosion in England, as well as an income explosion, but the economy grew faster than the population. Why? There are two possible explanations, and evidence that both played a part. One is that technological advancement was so fast that population growth could not keep up. The other is that the British population somehow limited its growth, without being out-evolved by people who didn’t. Social pressure and/or religion are likely candidates for this. In the same way that Catholicism virtually eliminated cousin marriage, thus increasing the IQ of Europeans, social pressure/religion strongly discouraged having children out of wedlock. This reduced the number of children born to poor people.

Changes to the quality of population seem to be of paramount importance. Today, in poor countries with access to Western technology, such as most of Africa, all efficiency improvements have gone into increased populations; evidence against population growth not being able to keep up with technological improvements. In countries such as Malawi, the birth rate is higher than ever in history, and the people remain as poor as ever. This demonstrates that technological improvements are insufficient to increase living standards. There must be a way to restrict the evolutionary imperative to have as many children as possible. In countries where this does not happen, the people remain poor. Bruce Charlton calls this “selecting for pure fertility”. In a world of technology, where survival is easier than ever before, i.e. the land can support more people, selection pressures for anything other than fertility are weak.

Clark demonstrates another way in which population quality is of paramount importance. He shows that the returns to capital were similar all around the world, at the time of the well-integrated world capital markets of 1870–1914. Therefore, countries such as India were not poor because they did not employ as much capital as rich countries. On the contrary, they did not employ as much capital because they were poor. Entrepreneurs did not deploy marginal capital to India, because it wouldn’t be used as efficiently as in England. “The poorest countries specified slightly faster operating speeds, but this was an insignificant difference compared to the extra labor they employed.” “Poor countries used the same technology as rich ones. They achieved the same levels of output per unit of capital. But in doing so they employed so much more labor per machine that they lost most of the labor cost advantages with which they began.”

Low wage rates were due to poor quality labour and labour habits, not poor quality management. Different capital levels around the world correlated with productivity and income, but capital returns were the same, showing that poor countries had low capital levels because they were unproductive, not that they were unproductive because they had low capital. And they were unproductive because they were inefficient. It was efficiency growth that drove capital accumulation, not the other way round. It had to be that way round,: increasing the amount of capital does not automatically make you use it efficiently.

An aside: Land

Clark makes some errors about land rents. He correctly observes that growth came from efficiency improvements, and the economy grew faster than the population, so resources were not the limiting factor. Therefore, the amount of land per person is now “largely irrelevant, except for a few resource-abundant economies.” Countries like Singapore and Hong Kong are extremely wealthy despite not having much land.

However, Clark errs when he says “land, in the long run, received none of the gains from the Industrial Revolution.” In fact, land prices in productive places like Singapore and Hong Kong are among the highest in the world.

Clark says “the failure of real rents per acre to increase significantly has meant that, as economic output marched upward, the share of land rents in national income has correspondingly declined to insignificance”.

Clark: “One reason why taxes were so light in preindustrial agrarian societies was that the ruling class had a rich source of income without resorting to taxation: land ownership. As figure 7.4 showed for England land rents accounted for about 20 percent of income.”

He acknowledges that “as farmland rents declined, urban rents increased. Indeed in 2000 in England, while an acre of farmland sold for an average of £2,900, an acre of potential building land cost £263,000, and an acre of building land for which permission to build had already been secured was worth £613,000. But as figure 10.3 shows, even in densely populated England, where rents for urban sites may be two or three times the level in most countries at this income level, they are still only about 4 percent of national income.”

I think this paints a very misleading picture. It would be more accurate to say that income taxes were so light because the ruling class received its income from land tax (rent).

It is simply not true that land rents only represent 4% of national income. Most UK householders are owner occupiers. They do not pay rent to anyone else, so their land rents do not show up in GDP figures, but they enjoy the land rent nonetheless. Secondly, the government now spends about half of national income, and receives little of its revenue from land rents. If income taxes were abolished, land rents would capture much of this income.

The point is that land does not actually take part in the production process, like labour or capital, but captures value from it. Land income is a rent, unlike labour or capital income. While you need to occupy some land in order to produce anything, most of the value of land comes from its location value. The non-location element of land value is virtually nothing, as demonstrated by the Earth’s vast low-value locations, such as Siberia.

While farmland rents have plummeted, city rents have risen. Land rents are only depressed at the moment because of other taxes. The total value of all rents (including land rents and income taxes) tracks the size of the economy. Land rents currently represent a small part of total rents, but if artificial rents like income tax were abolished, land rents would rise, total rents remaining a similar size.

Implications

This book provides further evidence that dysgenics is a real problem, and should make people think of ways to combat it. Population matters. Humans are not fungible. A high-quality population is better than a low-quality population. This has implications for immigration policy and reproductive policy.

More people means lower living standards unless the extra person is intelligent enough to offset the negative externality of their existence. Therefore, immigration of stupid people should not be allowed. An IQ test for immigrants is a good idea. We should be exporting intelligent people and spreading them over the globe, not importing stupid people to replace our shrinking populations.

The book also gives cause for existential worry. Economic growth per person is extremely unusual, because both rapid technological progress and slower population growth are unusual. Evolutionary imperatives are usually irresistible, so defeating the evolutionary imperative to have more children over the long term is going to be difficult, yet we are currently not doing anything about it.

These aims might seem contradictory, but they are not. A shrinking population might be ceteris paribus a good thing. But increasing the intelligence of the national and worldwide populations is a good thing.

Smart fraction theory is the idea that economic growth is more closely correlated with the IQ of the top portion of the population, i.e. for two countries with the same average IQ, the one with the flatter bell curve will do better, because it will have more geniuses. Invention and innovation depends on creative geniuses, not average people. A small increase in average IQ will cause a bigger increase in the number of geniuses.

The state should pursue a eugenic welfare and tax policy. Taxation should be severely reduced: in practice this means the elimination of income tax and its replacement with land tax.

Welfare could be eliminated or severely reduced, but welfare itself is not directly the problem. If some way could be found to have welfare without increasing the fertility of the poor, such as making sterilisation a condition of receiving welfare, this would be a good thing. It would be humane to provide welfare to already existing humans, but without creating more humans requiring of welfare.

The reason we have such high economic growth rates is genetic. The reason complicated societies are possible is genetic. If states continue to pursue the misguided policies of income tax and welfare, it would be perfectly possible for us to return to growth rates of less than 3% per century, or even for average income to decline substantially. This would be a disaster. Growth rates are already declining in the West, and while some things (e.g. communication) are getting cheaper, other things (cars, food) are getting more expensive for median wage earners. (This suggests to me that the “natural resources as a limiting factor” model lacks descriptive power. A more accurate model would not treat “income” as a homogenous thing. Rather, some sources of income (food) are limited by natural resource constraints, but others (communication) are not, so income in one can increase while income in another decreases.) “Great stagnation” theory holds that invention & innovation rates are declining, and that we in the West may no longer be able to do things that our ancestors were able to do. We no longer build as tall buildings or put people on the moon; perhaps we cannot do so. Researchers such as Charlton and Woodley have some evidence that we are less intelligent than our Victorian/early 20th century forebears, as would be predicted from our dysgenic society. Food for thought…

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