By and large, the history of
the world’s economy is defined by increased openness: more trade with other
countries and more acceptance of innovation has raised dramatically living
standards throughout the world over the past two hundred years. Despite this
record of success, there are many people who argue that we should reverse that
openness — we should throw up trade barriers, particularly against China; we
should slow down innovation to avoid disrupting people’s lives; perhaps we
should even slow down economic growth to protect the environment. Do these
people have a point, or are they failing to understand how the world’s
increasingly open economy has made humanity much better off? I’ll be discussing
this question today with Phil Coggan.
Phillip Coggan is a business journalist, news correspondent, and author who was written for The Economist since 2006, where he writes the Bartleby column covering management and work. Before that, he worked for The Financial Times for 20 years. His latest book, More: A History of the World Economy from the Iron Age to the Information Age, was released in March of this year.
What follows is a lightly edited transcript of our conversation, including brief portions that were cut from the original podcast. You can download the episode here, and don’t forget to subscribe to my podcast on Apple Podcasts or Stitcher. Tell your friends, leave a review.
Pethokoukis: You say this book is a warts-and-all look at the history of the world economy. But lately, it seems that people assume the history of capitalism is all warts. People think our modern economy is built on this foundation of imperialism… and slavery… and exploitation. And, yeah, we should address those warts, but isn’t it fair to recognize that the rise of the world economy has also been a beautiful story of human progress?
Coggan: Definitely. Of course, there have been warts: Imperialism, slavery, and worker exploitation all occurred in the last few centuries. But if you take the big picture, would you swap being a human in 1400 for a human in the early 21st century? If you go back six centuries, you would have had very limited choices of employment. You would have had no books, no entertainment, no antibiotics, and no medicine. And woe betide you if you got attacked, because there would be no police force or fire service to help you. Your life expectancy would be very short. Your diet would be very restricted. Your height would be very restricted, too. If you were a woman, you would be confined to a very small number of tasks. As for men, the chances are you’d be a peasant or a servant for some feudal lord.
Leap forward 600 years, and, for mankind as a whole, it’s been a fantastic bargain. There are many more of us. For a start, there are more than 7 billion — approaching 8 billion — of us. On average, we live longer, we are taller, and maternal deaths in childbirth have fallen dramatically. Deaths in the first few years of life have fallen dramatically. So people are healthier, stronger, have many more choices, and are literate. It’s a great bargain relative to life in 1400.
A lot has been said about this transformation from widespread poverty to the unprecedented wealth we have today. What’s your take on it? What do you see as the key mechanism of that transformation?
Well, I think the underlying mechanism is connections between people. In the world of 1400, before we really saw any great signs of the economic growth that subsequently emerged, there was some long-distance trade, but it was confined to luxuries like silk and jewels. Much of the world barely knew the other parts of the world existed. Diets were restricted before the Columbian Exchange, which occurred after 1500 and brought a wide variety of plants and livestock to different parts of the world and enriched cuisines.
Once we started to make those connections, there was a bad side of that, of course, in the form of slavery and the slave trade across the Atlantic. But China started to trade with the rest of the world in a much more serious form, bringing in the silver that we were getting from Latin Americans and then exchanging that for goods. The Americas initially started with the exploitation of the silver mines but eventually grew to the vast economy we see today.
Because of those connections, we were also able to exploit technological innovations. There had been technological innovations all through the previous millennia, but they were very slow to catch on in other places. Thanks to printing, which was a great technological innovation, it was possible to spread the knowledge of other innovations much faster. And then, of course, thanks to transport — sailing ships and later steamships and trains — these innovations were spread all over the world.
Innovation and connections go together because the more people you have involved in a network, the more the chances that one of them will have a bright idea and spot something that the others haven’t seen. Then the others can be made aware of that idea and exploit it themselves. It’s the ability to make connections with the other billions of people around the planet that has made us more prosperous.
I love the theme of connections for a couple of reasons. One of my favorite guests was a computational physicist, Cesar Hidalgo, who wrote a great book called, Why Information Grows. He looked at economies as a giant collective computer formed of myriad human networks — such as schools, universities, and companies — and networks between countries.
That idea of connection really caught on to me. One metaphor that I’ve been using in my writing, which I’ve stolen from The Economist, is the idea that you can have a drawbridge-up country and economy or a drawbridge-down country and economy. And what you’re saying in the book is that we owe a lot of where we are today, including our living standards, to the fact that countries and economies became drawbridge-down and connected with each other, and there was a flow of trade, talent, and capital globally. I guess my conclusion is we should be very careful about dismissing the value of those connections.
I agree absolutely. And of course, other people have pointed out the contrast between, say, North Korea and South Korea — or Korea and Taiwan versus other parts of Asia in the first three or four decades after the Second World War. There doesn’t necessarily need to be a completely free market focus or, indeed, a democratic focus. But the countries that concentrated on becoming export machines and opening up to the rest of the world prospered more quickly.
Look at what happened to China, which cut itself off from
the rest of the world up until the death of Mao, a brutal dictator who had
madcap schemes for improving the economy — one of which led to a great famine. Once
Mao was gone and Deng Xiaoping reformed the economy, it started to look outside
as an export machine. The prosperity’s just taken off in the last four decades
and taken many people out of extreme poverty. I mean, a billion people have
come out of extreme poverty in the last 20 years around the world, which is a
remarkable and often unsung achievement. And that’s because China, as you say,
put the drawbridge down to the rest of the world.
Now, that does have knock-on effects on the rest of the world, of course. But look at it from the point of view of a martian looking down at earth: Has earth become better off because China put the drawbridge down? Definitely, it has.
The idea of these connections is not just the trading aspect — it’s not just goods going back and forth, which is fantastic — but also people connecting with other people and their ideas, leading to more innovation. And I think the history of a world economy is a really exciting story because of this innovation.
I’ve talked about my favorite chart of all time many times in this podcast showing per capita growth, which was stagnant for so long before swooshing straight up.
Yeah, the hockey stick.
If all you knew about that world economy was that chart, you’d think the aliens landed and gave us technology or something. But it actually came from us. We did that.
Yes, it required a number of things. And it’s an interesting question as to what made things take off in the 18th century and then the 19th century. And I think it was the concatenation of a number of factors. So the fact that the New World has been opened up and connected to the Old World was a way for Europe to move surplus population off the farms and into the Americas, which had lots of land and few people. And technology moved, partly by industrial espionage, in the early 19th century. Textile machinery moved to the US, for example.
Of course, then the great advances in transport allowed people to move across the Atlantic in huge numbers. And all of that created this first great era of globalization in the late 19th century when America emerged and Germany became a European economic power to rival Britain. Lots of other parts of Europe started to industrialize. Japan built up its own textile industry as well, showing it wasn’t simply a European thing. And that was an era of great freedom for goods, people, and capital to flow around the world. And we may be getting onto this later, but then there was this sudden shift post-1914 where things started to go backwards. I think if we’re looking for warning signs for today, it is that post-1914 phase which we need to worry about.
A lot of people think that we should embrace going backward as we did back then. They think that the United States went off track when we opened up to more trade and immigration. They think our openness has been a bad thing, and so there’s a political element that would embrace a kind of reversal.
Yes. Look at the difference between American attitudes post-1918 and post-1945. Post-1918, America moved into isolationism and withdrew from the League of Nations. And once things started to go wrong in 1930, there’s the Smoot-Hawley tariff, and we had the Great Depression in the 1930s.
Post-1945, American bestrode the economic world like a colossus. But it made the very far-seeing decision to offer Marshall Plan aid to Europe, realizing that if it helped Europe recover, it would create this enormous market of customers for American goods. And the result was 25 to 30 years of fantastic economic growth around the world. And America took part and safeguarded Europe from the threat of communism and the Soviet Union. And so it was an incredibly wise piece of altruism.
However, the risk comes when you get another power that emerges, which challenges you in your economic backyard. The Soviet Union was a military threat to America, but it wasn’t really an economic threat. China is both. And the same thing happened if you go back to the early 20th century with Germany emerging as both a military and economic threat to Britain. Thus, it’s less easy to be altruistic, to keep the drawbridge down when you’re facing that kind of challenge. And that’s the worry going forward over the next 10 to 20 years.
Was it a mistake for the West to usher China into the world economy?
I don’t think it was a mistake. Could it have been done differently? Could it have been done in a way that tied China more into having to obey the rules of trade and not do the very real restrictive practices in terms of intellectual property and keeping out foreign firms that China does use? People who complain about China have the right to complain about China for these reasons. But as I mentioned earlier, a billion people came out of poverty in the last 20 years as a result of China opening up. So it’s hard to see a decision like that as a mistake.
It’s also worth thinking about what has happened in the last 20 or 30 years. China has sold America a lot of cheap goods. America has paid back China in debt (in dollars), which currently yields less than 1 percent for 10-year treasury bills in a currency that America controls and China doesn’t control. So you might argue: Who’s actually getting the worst of that bargain? Should we have thought more about how to compensate the losers from China’s trade growth? Yes. Should we have insisted on firmer checks that would make sure that China obeys the rules? Yes. But I don’t think it was a mistake in historical terms. It was the right thing to do broadly.
Do you think China has figured out either a new and better way to do capitalism or a different way to produce economic growth and prosperity than the bottom-up, pro-market way that at least we like to think that we do in the West? Is authoritarian capitalism the future?
Unfortunately, it is a model that appeals to some countries, but I don’t think it is a new and better way.
Great gains in growth are made when economies are
developing, because you’re essentially moving workers from low productivity
areas like agriculture into high productivity areas like manufacturing. One of
the reasons that the European economies developed so quickly after World War II
is they did that too — about half of Italians were working in agriculture in
1945, and by the 1970s, Italy was a very heavily industrialized economy (and
they’ve had their problems since then).
So you get these huge gains when you start developing. Then eventually, you reach the stage of you’ve exhausted all the gains from moving people from agriculture into industry, and you’ve probably over-invested in some sectors and become inefficient. And that’s when growth starts to struggle.
Of course, we worried in the late 1980s that Japan had cracked a model that the rest of us hadn’t understood. They had these companies that weren’t too worried about profits and were only worried about market share, and we thought they had it figured out. And then Japan suddenly hit a wall. So at some point, China will run into its own problems too. And of course, it has a demographic problem in that it’s aging quite quickly, unlike plenty of other countries in the developing world. So their workforce will start to decline, and it’s much harder to grow your economy — as Japan has found — when that starts to happen.
I think it’s important for us to get faster economic growth, and I’m still surprised by those who think that is not a good goal. Some of those people are worried about the environment, and others are worried about technology causing too much disruption. What do you think has caused this backlash against economic growth?
Well, I think the cause is twofold. One is, as you say, the environmental concerns. On that point, per capita use of energy in the US peaked in the 1970s, and it has been possible to reduce the environmental cost per unit over recent decades. I’m sure, with the right technology, it could be possible to do that a lot further. We’ve eliminated other problems like the hole in the ozone layer with our technological expertise. Various governments are trying out subsidizing renewable energy, which may or may not be popular at AEI, but if you can get the cost down to a certain level where the usership goes up, then you get those sorts of economies of scale. This has happened with other technologies.
The second reason is a problem we’ve had the sense in the last 30 years in the West: The benefits of economic growth have gone largely to a very small elite. There’s lots of dispute about how exactly to record the figures, but it’s pretty clear that productivity and real wage growth have not gone hand-in-hand in the last 30 years in the same way that they did in the 30 years after the Second World War. And there are plenty of explanations as to why that may have happened, but it’s something that really governments need to tackle going forward over the next 20 years. And I think it explains why we have the growth of populist politicians in various countries around the world who were saying, “It’s all a trick by the elite, and you need to shut out other countries from your trade because they’re cheating you.” That argument is given force by the fact that people really don’t feel that their living standards have improved as they did in the past.
When economic growth took off, the world was not filled with liberal democracies — certainly not liberal democracies as we know them today. So, having written this book, what do you think is the relationship between economic growth, economic freedom, and political freedom?
Yes, it’s very interesting, isn’t it? You’re right that it didn’t take off with full democracy. But if you look at the places where it first took off — Britain and the Netherlands — those were countries where absolute monarchy had its power curved and you had governments effectively backed by the merchant classes. Both in Britain and the Netherlands in the 18th century, they were able to hold off France. They were much more powerful, potentially because they had the ability to finance wars by borrowing money from their own credit classes. In contrast, France was stumbling from one debt crisis to the next.
So if you have an economy where the government is not forever at risk of seizing your property, seizing the fruits of your labors, then that’s a good thing. And as democracy develops, of course, the governments are constrained because the property owners don’t want their property seized. That’s one reason why the two things go in hand.
The big question I suppose going forward for the next 30 years is: What will drive those productivity gains which we desperately need? My answer is creativity and the ability to think outside the box. And I don’t think creativity and the ability to think outside the box are possible in an authoritarian state. China, again, has almost done what the Soviet Union did in the mid-20th century, where it’s just used rapid industrialization to power up its economy. And that’s enormously successful in the opening stages, but for that final stage, you need the ability to be innovative and feel that you will get the fruits of your innovation. America still is able to do that in a much more successful way than most other countries.
And the fact that we’ve already mentioned Silicon Valley as the fact that that is where more new business models are emerging than anywhere else is really striking. And I was just looking at some figures in this week’s edition of The Economist, and new business startups have soared since the start of the pandemic, interestingly enough. People are trying out new business models. And so, we may yet see another wave of innovation. You couldn’t do that in the Soviet Union, and I don’t think there’s the scope to do it so much in China.
You mentioned the pandemic. I’m actually concerned that we’ll come out of this pandemic as a more risk-averse society, where we won’t be trying out as many new business models or innovating. But you seem to be suggesting that this pandemic may make us less risk-averse and that we’ll see the importance of being a rich, technologically advanced society.
So at this point, what do you think is more likely? That we’ll become more risk-averse and inward-looking? Or that we’ll realize it’s really important to be a rich, technologically advanced society in order to deal with future unknown risks? Which way do you think it’s going to go?
It’s a very good question. Obviously, different people react in different ways, and different societies will react in different ways. I would say that what tends to happen with a crisis is it accelerates changes that were already trending. We’ve seen that already with online retailing — which has been growing for the last 20 years — and has had a huge lift out of this crisis. The cashless society has had a big lift out of this crisis.
Innovation also occurs in the way that people discovered they could work from home, and they can be equally productive, if not more productive, at home. That will create another whole kind of change in the economy as business moves to supplying people in their local area, rather than relying on them to commute into cities every day, as they have done up to now. So I’m more hopeful, though far from certain.
It does depend on the political reaction. If the political reaction is to say, “Everything that comes from abroad is terrible, since we imported this virus,” then that will be really bad. But populism doesn’t necessarily grow exponentially. And look at populist governments around the world. Brazil, for example, has not handled the pandemic very well. So if you have a sign that populism isn’t always efficient, then people might return to understanding that a good government involves cooperating with other countries. All the problems that the world faces at the moment require international cooperation, whether it is climate change, international crime and terrorism, or tax evasion.
Are we in a period of late capitalism, where massive inequality will lead to the start of something else? Or are we entering a period of transformation into something that will still be very recognizable to people who’ve been alive for the last half-century?
I think it’s the latter. I take that more optimistic view. I grew up in the seventies when we also seemed to face a crisis with stagflation, strikes, terrorism, and two oil crises. America had Jimmy Carter and the Malaise Speech. Britain was described as ungovernable. That seemed a moment of enormous crisis, and yet, that was followed by the 1980s and some kind of renewal. And then, we had the sudden surge in productivity in the late 1990s, which showed that we could generate more productivity despite people talking, even then, about late capitalism. So renewal can be done again.
As we’ve been saying throughout this conversation, the risk is that we turn inwards politically and stop that from happening — doing exactly the same as people did after 1914 when nationalism surged and they restricted immigration and trade.
One can’t predict how these things will work out. However, if people only understand that trade is not a zero-sum game, that immigration has brought enormous benefits — the United States economy was built on mass immigration in the late 19th century, and that’s why it became an economic superpower — then I think this book will have served some purpose in changing the debate about why we were successful in the past and why we shouldn’t give up those successful traits when we look forward to the future.
My guest today has been Philip Coggan. Philip, thanks for coming on the podcast.
Thanks very much, Jim.