Professor Douglas W. Rae: Okay, everybody has the handout? Let's begin organizing the day's work. I will begin by taking the snapshot you have in front you and than using the data animation on the board to give you a sense of the dynamic process, which is hidden in the static diagram before you. Our real interest is in the dynamic process and the statics are just like, for example, a quote on the Dow Jones for 2:32 in the afternoon. It's a moving target and the motion is what's interesting. That's the first thing we're going to do. The second thing is to look at the "dismal science" of economics as conceived by Thomas Malthus, whose principle work appeared in 1798 and 1800, and which put forward a theory to the effect that nearly universal poverty was an essential and inevitable fact of human existence. Thank God he was wrong.
Third, we'll look at Gregory Clarke's exploration of Malthus' world. Clarke is the author of Farewell To Alms, which I hope all of you have begun to find your way through. It's available at Labyrinth. Clarke is something of a curmudgeon, and he offers interpretations, which should provoke argument. For example, he interprets the demography of England in the Malthusian period, before the great surge in the economy, in essentially Darwinian terms, Darwinian both with respect to culture, so social Darwinism, but also with respect to biology. He flirts with the idea that the children of the wealthy were genetically superior to other children being born in early modern England and that that fact has something to do with why the great economic surge took place first in England; actually more broadly the United Kingdom. Finally, and this is a long agenda, finally I'm going to look at economic biology. In particular, at what is called the world demographic transition. The world demographic transition takes--it is as nearly regular as clockwork and it takes societies from poverty, short life spans, high birthrates, high death rates to relative affluence combined with capital, relative affluence with long lives, low birthrates, low death rates and lurking behind the diagram before you is the confluence of the great economic surge and the world demographic transition. So forty-five minutes from now we should be at that point.
The diagram on the board is the work of Swedish economist Hans Rosling, and it is a data animation, it's set up as follows: income per capita is on the horizontal dimension, and that income per capita is scaled logarithmically. I'll switch that out in a minute but we'll start with the logarithmic scale and on the vertical dimension is a linear scale for life expectancy at birth. The bubbles represent countries, the larger the bubble the greater the population of the country, the bubbles are color coded to the map upper right, so all of the western hemisphere is shown in yellow; Europe and North Asia in orange and so forth, and notably Sub-Saharan Africa in blue. You'll also find special interest in the green bubbles representing the states of the Middle East. Now let's just play this, it is a time series, it's 200 years of time series. The bubbles start here in the year 1806 and begin moving. Yes, you're going to need a microphone, let's hand it to you.
Student: Do the diagonal lines indicate [inaudible].
Professor Douglas W. Rae: Say again.
Student: Sorry, do the diagonal lines--
Professor Douglas W. Rae: Yeah they cast doubt on the data. While you're on stage here what did you just say?
Student: We just watched 200 years of development for a whole series of countries. What I thought some of the more interesting ones were the countries that either--they just showed a clear trend the entire time but there were a few yellow balls sort of start overtaking all the other countries around them as you're passing them, and also there were a few that sort of went up and down, and it went to the exact same income per person for a long period of time.
Professor Douglas W. Rae: Some of them seem stuck. And was it mainly yellow balls or were there some orange balls out there?
Student: No, no in fact the ones going up and down the most and then one comes first--
Professor Douglas W. Rae: No, no in the ones that were in the lead.
Student: Oh, it was a bunch of orange, there were just a couple yellow, and it was generally orange.
Professor Douglas W. Rae: Okay. Now hand the microphone to somebody else, we're just going to pass it around here and get people talking. No, no don't hand it on. If you were going to describe to someone who wasn't here what the main pattern was taking into account the two variables, what would it be?
Student: Generally movement toward the upper right hand corner.
Professor Douglas W. Rae: Okay lower left, upper right and lower left, upper right and since they're not here they don't know what that means.
Student: Toward greater income per person as well as greater life expectancy at birth.
Professor Douglas W. Rae: Okay, so there is something by and large good happening in the data. Now there are--let's pass it onto Yale Egyptology here. Does the--is the progress with respect to biology and wealth evenly distributed or not so evenly distributed?
Student: No, it's not evenly distributed because they all--all the balls start down in the lower left hand corner at the beginning very tightly packed, while they all eventually move up and over to the right. Some are still quite far to the left and some are all the way to the right.
Professor Douglas W. Rae: Would he actually go backward?
Student: Some might.
Professor Douglas W. Rae: Okay it's hard to ask you to remember all that with a rather complex basketball game on the screen there. Could we hand it on? Would you--if you were a god, or God's accountant, and you were a God friendly to humankind, would you say, by and large, what you're seeing there looks like the world getting better?
Student: I would say so because there was a general improvement, but at the same time, you see some of the other countries, we'll say the purple ones, which are located in Africa--
Professor Douglas W. Rae: I think they're blue. Yes--
Student: [inaudible] but compared to the other countries even though overall adjusted shift toward the upper right hand corner, but it wasn't evenly distributed.
Professor Douglas W. Rae: Okay, terrific. Pass the mic straight back, please. Do the dots, or the bubbles, show all the inequality involved with all the people in the world or do they mask something? Let's take, for example, the enormous--look at the very large light blue bubble center stage. It represents India. As far as we can tell from this graph, everybody has the same income and probably works for Wipro in Bangalore. In actual fact--I don't know do you know anything about India?
Student: [inaudible]
Professor Douglas W. Rae: Okay, good. Now we could infer from that that the vertical side, the vertical dimension of the world economy can be thought of in two phases. One is the difference between countries measured here by mean GDP per capita, and the differences within countries, which would be represented by an income curve or a wealth curve within each of the countries. It turns out that there's quite a lot of inequality inside the bubbles and that that inequality is most pronounced in the countries which are in the early stages of getting rich. The general pattern, India is a good example, and the fiction work assigned for the course, White Tiger, is about that vertical dimension and how exhilarating it is on the one hand, and the crushing disadvantage it imposes on people who aren't part of the capitalist development story.
Okay, now I want to change the diagram to get a little more finesse here, and now I have made the income curve linear. So it no longer exaggerates movement at the low end of the scale, and what I'd like you to do is watch this process and tell me what you think you're seeing. These are the same data just projected differently. Now watch for some shooters. Now let me do the last half of that projection once more and then we'll try to talk about it. Could we get a mic up and going in that section please? We're going to play from--let's go around 1900 here. Okay, so over here, who's got the mic? Can you describe the path that the vast majority of the countries followed?
Student: The majority of the countries within the graph gain [inaudible].
Professor Douglas W. Rae: Okay, so what's just been said is that the majority of the countries show modest gains in income per capita and substantial gains in longevity, so they move vertically, more or less vertically, and then they pass second base, so to speak, and turn right across the income field. Let's run it once more. Pass the mic please; I'm going to ask the next person to take a shot at which countries are the shooters, which defy what I just said. Who's got the mic? Who do you think those shooters are?
Student: The shooters seem to be Europe, and the Middle East, and North Africa.
Professor Douglas W. Rae: Is there--what are the--how would you go about getting huge gains in income per capita without going through the prior step of having people live quite awhile? How would you get--what might make that feasible?
Student: Especially for the green countries it seems that GDP per capita really spiked in a few decades.
Professor Douglas W. Rae: Okay what--don't hold us in suspense, the green countries might have a lot of?
Student: Oil.
Professor Douglas W. Rae: Oil, okay so the oil states, if you bracket the oil states you've got a very general worldwide pattern of modest gains in income combined with substantial gains in public health, followed by continued gains in public health, though at a decreasing rate combined with large gains in income per capita. Now notice that the point made five minutes ago still holds. When I say that the GDP per capita of a country doubled in a period, does it mean that the GDP of most people in that country doubled? The answer to that--can we get the mic to center--I'm sorry where's the mic here? There we go--yep go ahead.
Student: Not necessarily, because the chart doesn't take into account income and inequality within the country itself.
Professor Douglas W. Rae: Okay, and let's think of the oil states for a minute. What generally happens to the vast share of--large shares of revenue from oil extraction in the middle decades of the twentieth century, which is what we're talking about?
Student: It remains concentrated in the hands of a few, like, politically connected individuals probably ruling the country.
Professor Douglas W. Rae: Okay, they either remain in the hands of a local elite, for the most part, or they are siphoned off by a large international energy company, but the vast majority of people in such a society often don't benefit very much from that, and that becomes a huge issue in world politics and in attitudes toward capitalism. Okay the URL of this data, and I've explored here less than 1% of its potential, is www.gapminder.org.com and it is a resource I would like you to use in the background for this course. Just out of curiosity how many of you had used it before? Okay the rest of you should join in. This is the most useful technique for staying awake while thinking about numbers late at night that I have ever seen. I showed it to grandchildren ranging down to four and they all love it.
Alright now this is the diagram that Clarke presents at the beginning of his book. It's taken from Angus Maddison, who is the lead researcher on everything before 1800 in economic history these days, and literally every--there are perhaps fifty books that touch on this material and every one of them is Maddison reformulated and resliced. These are the four things I told you we were going to do, we've done one of them. Malthus and Clarke refer to the left side before the great surge and the biology part about the world demographic transition concerns the movement across from left to right, which stands behind these changes.
Now Malthus and the logic of perpetual poverty; Thomas Malthus was a Cambridge wrangler, meaning he was at the very top of the student body at Cambridge. He was a fellow of Jesus College, he was a devout Christian, and he was a follower of David Ricardo and David Hume. He was an empiricist. He looked at the world around him and devised a simple model, and Clarke makes it a good bit more complicated than Malthus does. The reason for that is that Clarke wants to make it look like contemporary economics, and the actual equilibrium story is very different from the equilibrium story in Microeconomics 101. The influence of David Ricardo, there were three great classical economists Adam Smith who we're going to study on Wednesday, David Ricardo whom we're not going to study, and Karl Marx who we're going to study in a week. The contribution of Ricardo to Malthus was that Ricardo had devised what he called "the iron law of real wages." The gist of that was that no matter what the technology, no matter what the demographics, the inflation adjusted wages paid to unskilled labor would always tend toward the bottom of the scale we've been looking at, would always tend toward the level of mere survival, or subsistence as they say. In the back of Malthus' thinking is both Ricardo's iron law and the empirics of 200 years of stagnate wages, which the English working class had experienced.
Ricardo's main intuition had to do with two forms of arithmetic progression. On the left, counting by hundreds, from 100 to 1,000 in the production of goods. In the center counting by doubling at each cycle, the population of the same society, and on the right hand side, product per capita derived obviously enough by dividing the one by the other. Let's say the subsistence point is half a bucket per person. You then--this was Malthus' big point--that everything progresses until you get to the point where people begin to fall below subsistence level and with a very unequal distribution of income, which was inevitable in this period, as it is inevitable in the present period, or nearly so. You would find a solution--well what would be the solutions? There are two main kinds of solutions, one let's generate a lot more production. Let's get the scale of production to not be a linear flat line but get it do this. Get production to go north in the same way population does and Malthus asserted that that couldn't be done. Now we'll see, and we know in our own experience, that he was mistaken. Production has done exactly that through the introduction of capital intensive production.
The pessimism in this scenario can be linked to a correct intuition about England or any other agricultural society in the period from let's say 1200 to 1800, that's the period Clarke chooses. The first thing that is--that strikes you about this is they're not making land anymore. Only the Dutch make new land. So you're going to deal with a fixed total of arable land. You have, and let's assume, that you have a growing population. The land mass is static, the population is growing, let's just assume that for the moment, and assume it's growing in a Malthusian way. Let's imagine this is actually a photograph of berry pickers in Poland in the year 1909, all the visual images here--or virtually all the visual images here comes from Wikipedia Common, and since we're being filmed that's important so that we don't violate anyone's copyright, because everything on Wikipedia Common is public domain.
We get--that 70 is a little hard to isn't it? We get land acre, we've got 100 units of land for this berry farm and production increases as we increase the number of workers from one to 12, it starts at 50 with one worker and ends up at 174 bushels or buckets with 12. Since the land is fixed the marginal impact of each new worker is a little less than the marginal impact of the worker before. The blue series boils it down to bushels per worker, and we have cut 50 bushels to 15 bushels, by going from one worker to 12 workers. This is all just made up stuff, but it captures the intuition about diminishing returns to intensification of labor.
The constants in this story are land and capital. We're not adding new land, we're not adding new capital. We're just adding new workers to an existing quantity of land. The intuition that guided Malthus was that as you intensified labor you got diminishing total returns, the red arc, which implied, by perfectly simple logic, a diminishing rate of production for each worker. That intuition is really, that along with the iron law of wages, is at the middle of Malthus' thinking. On the cultural--who here went to a high school where you learned Latin? Ready for this one? Have we got a mic, where's the microphone for him?
Student: If one doesn't lose, another doesn't acquire.
Professor Douglas W. Rae: Okay, if none loses no other acquires.
Student: No one loses, and no one gains.
Professor Douglas W. Rae: Yeah. This was St. Thomas, and St. Thomas was expressing the core conviction of classical Greece, though not Rome, classical Greece and Christianity in the middle Ages and early modern times. All the scruples, all the rules about usury being not okay, that is lending at interest being a biblical violation, all those ideas come from this; that the total wealth produced by and for mankind, humankind, by and for humankind, is essentially a fixed quantity, so that as I get rich the act of getting rich imposes relative poverty on others. In schematic form we have a two person society and going away from the origin means getting richer, the budget plane is a 45 degree angle, where X + Y = a constant sum so that movements of getting rich, in either direction along that budget plane, imply making others poor. This was a deeply held assumption that the best educated and least educated alike shared, and it accounts partly for the underlying trope in Malthus, and it tells us something about the brilliant originality of Adam Smith and his contemporaries in the Scottish enlightenment when they said, "not so."
If you represent the same thing with three--my artwork is a little limited. You have to imagine that these are three dimensions like the two for me, you and he, and that we've drawn--that the budget constraint as a plane here, and then you have to imagine that the green dot is on that plane. It takes a little imagining, I've stared at it a while. The point is this: that as you move the dot it's impossible to make any movement which doesn't disadvantage one of the three people or more. The general assumption, more or less analogous to zero sumness in game theory--how many of you have done Ben Polak's course? More or less analogous to the zero sum theory, or to the way small children think about sharing Lego's. If I put more in my contraption there are fewer for you to use in your contraption. That is a fundamental assumption in this whole way of looking at the world, and it corresponds to reality most of the time.
Most of the time in a low capital, principally agricultural economy, the world acts like this; new gold doesn't emerge, new ways of producing at much higher rates are invisible, and when we get to Marx we'll see that he puts this rabbit in the hat by the way he defines the value, the exchange value and the use value of goods, he puts this zero sum condition in by the way he measures labor and uses labor to define the value of everything, so that only by imposing surplus hours of work on the working class can we get richer. Horse feathers! Just not true. but that's for another day. Now Clarke's explorations--who's had an hour or more with Clarke? That's a little worrying. We got a mic here? Is it on? Do you like Clarke or not like him?
Student: He's very interesting. I think he writes very well, it's convincing, and very clear.
Professor Douglas W. Rae: He's convincing, he's clear, he is empirical. There's some kind of a chart of table for everything, and he is opinionated. It's not the kind of cool dispassion that let's say Rick Levin might value in an economist. It's a much more heated style of argument. I actually think he's sometimes a little off, but he's making the argument in a really interesting way. One of the things he does is shown in this chart, which is taken from I believe Page 31 in his book, and this is total population on the vertical dimension, income per capita on the horizontal dimension. The red dots represent estimates taken once every ten years between 1200 and 1600, and they form an interesting pattern. He combines this with something else so it's hard to define, but if you decombine it, it's almost as if there were a budget plane here, and you can move up and down the budget plane but not through it so that the total--it's these dots moving away that could be explained Malthus-wise or St. Augustine-wise by assuming that there is a fixed total, and you can use it to feed more people worse, or fewer people better. Indeed, if you pull out the data for the time of the great plague, population goes down and per capita income goes up.
Now how exact do you think our records of incomes in England in 1380 are? It's a stretch to try and make this highly quantitative, but it's probably not far off. He then--if you then add 1600 to 1800 you get something different and you begin to get a surge in population that does not correspond to a huge loss in per capita income. Implicit in that is the idea that we are breaking through budget planes. Not in big ways, not in elegant ways, but there is something happening which takes us further and further from the central tenants of the Malthusian model. This is Clarke on real wages from 1200 on the left to 1800 on the right and the spike in the middle is at least partly attributable to the influence of population decline in the century before it. I've drawn it so it looks like a much bigger mountain than it is, it's actually a very gentle swell and you can find a version of it no doubt more accurate than mine in Clarke.
The consumption patterns of ordinary workers in this period were very modest. Food and drink accounted for three quarters of spending and I think this is pretty good empirics. Clothing and bedding 10%, housing and heating, light and soap, not much. Life was pretty dark, pretty limited. The level of discretionary spending was very slight. There's a general rule called Engel's Law, and this is not the Engel's who worked with Marx, this is Ernst Engels, lived in the 1800s, that as real incomes go up the fraction spent on food goes down, and while that's not exactly a blinding insight it nonetheless has the advantage of being a true statement. Within food the proteins, principally meat, to a lesser degree fish, systematically displaced starches until you get to our stage of gluttony.
The most interesting piece in Clarke is his handling of wealth and reproduction and I will ask you to read it for yourselves, but the gist is this, that the number of surviving children produced in each generation was greater among wealthy families than among poor ones. It's pretty easy to think of reasons that might be true. For example, money for heating your house and feeding the babies. The point that Clarke makes of that is more controversial. Clarke wants to say that a cascade of children born at the top of the pyramid, a cascade of those children were forced to be downwardly mobile for a long period of time populating each level of British society with adults who had begun life with the advantages of being on top.
It's easy to make up a story, which Clarke does, to the effect that the energetic effort you might expect from those people who had been pushed down might increase the intensity of effort and competition in the economy. He then makes a series of gestures towards biological Darwinism. To the effect that Britain led the industrial revolution because it had a disproportionate number of very able people, and the assumption here is that the rich were more able than the poor. It had a disproportionate number of very able people in all the levels of the pyramid. Now the empirics on that one are really thin. There's an awful lot of vapor in the intellectual process there. This is characteristic of Clarke, he's really interesting in throwing out thoughts that should provoke an argument and I should think you should be able to generate arguments among yourselves on that topic.
Now biology gone good; I'm going to tell this one in words and then give you the diagram. In every society, in the Malthusian phase, life is short and babies are plentiful so that a typical household might have eight or ten children, of whom perhaps three or four might survive into adulthood, and having survived into adulthood many would die at your age or something like it. The throughput of human beings was extremely fast, that's a way to think of it in relation to total population. Then the death rate falls, and when the death rate falls the birthrate does not respond right away. In fact, it takes several generations typically for birthrates to adjust to falling death rates. The consequence of that, there were several, but the most fundamental for us is that the population of the world went north very rapidly. They're having lots of babies and people are living long lives. Then ultimately the birthrate does fall and when it falls we have both the birthrate and the death rate at low levels. People live long lives and the population of their societies becomes more or less static again. It is then possible to go one step beyond that, and the one step beyond that is that the birthrate overtakes the death rate on the low side, and the society begins to do two things at once. It becomes smaller and to have a higher and higher fraction of very old people. Can anyone name a society that is in that stage? Yes.
Student: Japan.
Professor Douglas W. Rae: Japan. Fine. Japan is there, Russia is pretty much there, much of Italy is right on the edge of that, much of Eastern Europe is there. Now the picture; this is the population surge in every continent, I'll post the slides and I'll post them in a way that you can read them next time, I promise. All the continents turn north beginning sometime after 1800 and that reflects the fact that they are in the progress of the demographic transition. Now this is a conventional representation of the transition in four phases. In the first phase we have death and birthrates somewhat unstable but steadily high. Then the death rate falls. The major cause is clean water, household hygiene, a little bit higher calorie diet, and at the later stages some aspects of modern medicine. The birthrate doesn't adjust, and Phase II consists of the period when the death rate is falling fast and the birthrate remains more or less constant at a high level. Then Phase III, the birthrate is now stable at a relatively low level and the birthrate is falling to meet the death rate. Then in Phase IV you've got both of them at relatively low levels.
Now we come back, at this point, to the picture we began with. Much of what you see in this diagram, and much of what you saw in the dynamic animation at the beginning of the hour, consists of passage through the demographic transition. Most of what you see on the left third is societies that are in Stage II or early in Stage III, most of the middle is Phase III where the birthrate is falling but you're still building population, and the prediction is that we're going to build the world population from a little under seven million [correction: billion] to about eight and a half million [correction: billion] before you guys are my age, and mostly Stage IV out on the right.
Now the pertinent fact that you need to carry forward from that last little piece is this: the world demographic transition has happened in a sequential fashion so there are temporal offsets. Societies that are in Phase IV, low birthrate, low death rate tend to have a lot of capital and tend to be short on cheap labor. Societies that are in Phase II or Phase III tend to be long on cheap labor and short on capital, and the dynamic of world trade which is such an important part of capitalism is a way of arbitraging between early and late phases in the world demographic transition so that cheap labor maximizes its value by being combined with capital from Phase IV societies. On Wednesday we'll come back to the eighteenth century with Adam Smith, who is in my view, the greatest of all writers on economy and society.
