When the Industrial Revolution hit in the 1800s, certain countries were left behind. With a new industrial revolution just around the corner, Australia may be one of the countries left behind this time. By Warwick Smith.
One way to anticipate the future is to look to the past. British economist Angus Maddison has estimated that in the year 0, the population of Western Europe was 24.7m. A millennium later it was 25.4m, an increase of just 700,000. Total global population increased by only 37.3m in 1,000 years. Had we continued at this pace, in 2015 there would have been 312m people on Earth. Gross domestic product fared even worse. Between the year 0 and 1,000 – GDP per capita was stagnant or fell across all of Maddison’s seven global zones.
Over the next 800 years, the pace quickened a little. World population quadrupled to crack the billion for the first time. By 1819, the Eastern European population of 91.2m generated some $60.9bn worth of stuff (1990 International $) or $665 per person.
Then in 1820 everything changed, sort of. Fuelled by a potent mix of technology, ideas, appropriated resources, and a distressing number of slaves, the Great European powers began to make themselves Great. Certain colonies prospered as well. Countries like the US and Australia increased output markedly, quickly distancing themselves from other colonies.
There are two key explanations for the changing fortunes of different colonies: factor endowments; or institutions (or some combination of the two). In Guns, Germs and Steel, Jared Diamond proposed an entertaining version of the former, where the ability to grow nutritious grains, the presence of draft animals, and immunity-inducing epidemics saw Europe come to dominate the world.
Others have argued that, while factor endowments were important, it was the institutions that they gave rise to that really made the difference. MIT Professor Daron Acemoglu and his colleagues have argued that the presence of disease in certain colonies led to the development of “extractive” economies. Low settlement rates saw small elites seek to concentrate power, appropriating as much wealth as possible and exporting resources back home.
Conversely, places without tropical diseases became “settler colonies”. When Europeans settled these places, their institutional arrangements mimicked those of the home country. Land and livestock were privately owned by new migrants, incentivising productivity increases. Once the Industrial Revolution came, these colonies dramatically increased output.
Without the hope of social mobility or the pressure of competition, extractive economies failed to take advantage of new opportunities and were left standing at the station while the Industrial Revolution brought wealth to the rest of the world.
While the “private property prescription” is a temptingly simple answer, evidence suggests a more crucial factor appears to be whether a country developed institutions with a broad franchise (equality and equal opportunity) or narrow franchise (inequality and low social mobility). Private property has a role, but only as part of a wider suite of institutional arrangements.
Characteristics of success
When we look across those countries that did well, a number of key factors stand out.
Suffrage: Countries that broke from the pack in the 1800s were those where citizens could vote. This makes sense; the more people have a say in government, the more inclusive government policy should be. The rapid growth of the US and Australia coincided with a high proportion of the population able to vote. In the US, 79.2% of adult males voted in the 1844 presidential election. In Australia, economic qualifications for voters were removed in South Australia, Victoria and NSW in the 1850s. Conversely, colonies that were left behind often saw a vast proportion of the population excluded from elections. It was not until the very late 1800s that a number of Latin American countries saw more than 1% or 2% of people voting
Education: Educated people are more productive, flexible and able to take advantage of technological change. Australia’s egalitarian society saw educational opportunities extended to a broad spectrum of the populace. By 1844, approximately half its non-Indigenous children were receiving a formal education. By 1901, literacy rates were around 80%. This occurred in stark contrast to other colonies (including British colonies such as in the Caribbean). Despite immense wealth being generated, basic schooling infrastructure was not established on a broad scale – elites sent their children to private schools while other children went without. Up to 1900, literacy rates remained at or below 30% in Bolivia, Brazil, Guatemala, Honduras, Mexico and Paraguay, and was likely below 30% in Columbia, Peru, Puerto Rico and Venezuela.
Land policy: Epitomised by the encomienda system popularised by the Spanish Crown (whereby conquerors were rewarded with the labour of certain groups of people), land policy in countries that were left behind attempted to shut people out of the property market. Land was selectively offered in large chunks at prices only the wealthiest could afford. In Australia, land policy was designed to encourage new migrants and sought to break down the class privilege that calcified Mother England. Country lands were sold for as little as £1 per acre, payable over time, and acreages were limited to prevent large holdings.
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Future consequences?
Australia is becoming a more unequal country. Institutions that had previously fostered greater equality now do the opposite. This is a problem because it was Australia’s relatively low levels of inequality that put us in an advantageous position during the last industrial revolution. Rapid advances in robotics, automation and AI suggest a new industrial revolution is just around the corner, but Australia’s key institutions have been so badly eroded we may be disadvantaged when the full force of this technological change hits.
Home ownership rates are falling and many are shut out of the market. There are substantial funding gaps between private and public schools, and we are slipping in global education rankings. Australia still has universal suffrage, though only 43% of us believe it makes any difference whether the Liberal-National Coalition or Labor are in the top spot.
Societies with these characteristics performed particularly badly during the last period of rapid technological change. Many have never recovered. We should be concerned that the institutions that once allowed us to pull ahead may soon be the reason we fall behind.
Warwick Smith is a research economist at the University of Melbourne and a Research Fellow at progressive think tank Per Capita. This article was originally published by The Conversation.