The Rational Optimist: How Prosperity Evolves

Had I only known it, experiments in laboratories by the economist Vernon Smith and his colleagues have long confirmed that markets in goods and services for immediate consumption – haircuts and hamburgers – work so well that it is hard to design them so they fail to deliver efficiency and innovation; while markets in assets are so automatically prone to bubbles and crashes that it is hard to design them so they work at all.

Rich people are happier than poor people; rich countries have happier people than poor countries; and people get happier as they get richer. The earlier study simply had samples too small to find significant differences.

Bizarre as this may sound, in evolutionary terms it is quite normal. Most species do not change their habits during their few million years on earth or alter their lifestyle much in different parts of their range.

Fire and cooking in turn then released the brain to grow bigger still by making food more digestible with an even smaller gut – once cooked, starch gelatinises and protein denatures, releasing far more calories for less input of energy.

am saying that barter – the simultaneous exchange of different objects – was itself a human breakthrough, perhaps even the chief thing that led to the ecological dominance and burgeoning material prosperity of the species. Fundamentally, other animals do not do barter.

In other words, cooking encourages specialisation by sex. The first and deepest division of labour is the sexual one. It is an iron rule documented in virtually all foraging people that ‘men hunt, women and children gather’. The two sexes move ‘through the same habitat, making strikingly different decisions about how to obtain resources within that habitat, and often returning to a central location with the results of their labour.’

As one anthropologist put it after living with the Khoisan, ‘Women demand meat as their social right, and they get it – otherwise they leave their husbands, marry elsewhere or make love to other men.’

An evolutionary bargain seems to have been struck: in exchange for sexual exclusivity, the man brings meat and protects the fire from thieves and bullies; in exchange for help rearing the children, the woman brings veg and does much of the cooking.

They have found that even when hunter-gatherer women do not face a hard choice between child care and hunting, they still seek out different kinds of food from their menfolk.

African-origin Homo sapiens had a sexual division of labour and Neanderthals did not, and that this was the former’s crucial ecological advantage over the latter when they came head-to-head in Eurasia 40,000 years ago.

Either the Neanderthal women sat around doing nothing, or, since they were as butch as most modern men, they went out hunting with the men. That seems more likely.

Without trade, innovation just does not happen. Exchange is to technology as sex is to evolution. It stimulates novelty.

human beings learn skills from each other by copying prestigious individuals, and they innovate by making mistakes that are very occasionally improvements

There was nothing wrong with individual Tasmanian brains; there was something wrong with their collective brains. Isolation – self-sufficiency – caused the shrivelling of their technology.

The argument is not that exchange teaches people to be kind; it is that exchange teaches people to recognise their enlightened self-interest lies in seeking cooperation.

how inconceivable it would be for an orderly queue of stranger chimpanzees to board an aeroplane, or sit down in a restaurant, without turning violently on each other.

And generally speaking the more cooperative a species is within groups, the more hostility there is between groups. As a highly ‘groupish’ species ourselves, still given to mutual aid within groups and mutual violence between groups, it is an extraordinary thing that people can overcome their instincts enough to have social commerce with strangers.

So – as animal experiments have suggested – oxytocin does not affect reciprocity, just the tendency to take a social risk, to go out on a limb.

As a broad generalisation, the more people trust each other in a society, the more prosperous that society is, and trust growth seems to precede income growth.

Random violence makes the news precisely because it is so rare; routine kindness does not make the news precisely because it is so commonplace. Charitable giving has been growing faster than the economy as a whole in recent decades. The internet reverberates with people sharing tips for free.

Those of libertarian bent often prove more generous than those of a socialist persuasion: where the socialist feels that it is government’s job to look after the poor using taxes, libertarians think it is their duty.

The sexual and political liberation of women in the 1960s followed directly their domestic liberation from the kitchen by labour-saving electrical machinery.

the average American company is down from twenty-five employees to ten in just twenty-five years.

merchants make it up as they go along, turning their innovations into customs, ostracising those who break the informal rules and only later do monarchs subsume the rules within the laws of the

The probable cause of this hiatus was a cold snap, over a thousand years long, known as the ‘Younger Dryas’. The probable cause of the cold snap was the North Atlantic suddenly cooling either from the bursting of a series of vast ice dams on the North American continent, or from the sudden outflow of water from the Arctic ocean. Once

Then, around 11,500 years ago the temperature of the Greenland ice cap shot up by ten degrees (centigrade) in half a century; throughout the world conditions became dramatically warmer, wetter and more predictable.

The characteristic signature of prosperity is increasing specialisation. The characteristic signature of poverty is a return to self-sufficiency. Go to a poor village in Malawi or Mozambique today and you will find few specialists and people consuming a high proportion of what they produce. They are ‘not in the market’, as an economist might say. And quite possibly they are less ‘in the market’ than ancient agrarian folk like Oetzi were. Indulge me in a little sermon. The tradition

This is just one example of how the organic movement’s insistence on freezing agricultural technology at a midtwentieth-century moment means it misses out on environmental benefits brought by later inventions.

You people in the developed world are certainly free to debate the merits of genetically modified foods, but can we eat first?

Instead, genetic modification provides an obvious solution: to insert healthy nutritional traits into high-yielding varieties: tryptophan into maize to fight depression,

Merchants and craftsmen make prosperity; chiefs, priests and thieves fritter it away.

The urban revolution was an extension of the division of labour.

The Phoenician diaspora teaches another important lesson, first advanced by David Hume: political fragmentation is often the friend, not the enemy, of economic advance, because of the stop which it gives ‘both to power and authority’.

The chief reason is surely that strong governments are, by definition, monopolies and monopolies always grow complacent, stagnant and self-serving.

Thanks to a newly perfected technology, the camel, the people of the Arabian Peninsula found themselves well placed to profit from trade between East and West. The camel caravans of Arabia were the source of the wealth that carried Muhammad and his followers to power.

China went from a state of economic and technological exuberance in around AD 1000 to one of dense population, agrarian backwardness and desperate poverty in 1950. According to Angus Maddison’s estimates, it was the only region in the world with a lower GDP per capita in 1950 than in 1000.

Pause, first, to admire the exuberance. China’s best moments came when it was fragmented, not united.

Because it is a monopoly, government brings inefficiency and stagnation to most things it runs; government agencies pursue the inflation of their budgets rather than the service of their customers; pressure groups form an unholy alliance with agencies to extract more money from taxpayers for their members. Yet despite all this, most clever people still call for government to run more things and assume that if it did so, it would somehow be more perfect, more selfless, next time.

His son Yong-Le added some more items to the list: move the capital at vast expense; maintain a gigantic army; invade Vietnam unsuccessfully; put your favourite eunuch in charge of a nationalised fleet of monstrous ships with 27,000 passengers, five astrologers and a giraffe aboard, then in a fit of pique at the failure of this mission to make a profit, ban everybody else from building ships or trading abroad.

Still they tried: North Korea under Kim Il Sung, Albania under Enver Hoxha, China under Mao Zedong, Cuba under Fidel Castro – every country that tried protectionism suffered.

Given the chance they eloquently express their preference for the relative freedom and opportunity of the city, however poor the living conditions.

Rural self-sufficiency is a romantic mirage. Urban opportunity is what people want.

As far as the planet is concerned, this is good news because city dwellers take up less space, use less energy and have less impact on natural ecosystems than country dwellers.

This suggests that good old-fashioned Malthusian population limitation does not really apply to human beings, because of their habit of exchange and specialisation. That is to say, instead of dying from famine and pestilence when too numerous for their food supply, people can increase their specialisation, which allows more to subsist on the available resources.

The Malthusian crisis comes not as a result of population growth directly, but because of decreasing specialisation.

control laws, even including laws requiring compulsory abortion, could be sustained under the existing Constitution if the population crisis became sufficiently severe to endanger the society.’

coerced sterilisation became a pattern in many parts of Asia in the 1970s.

Yet they are not alone. Throughout the world, birth rates are falling. There is no country in the world that has a higher birth rate than it had in 1960, and in the less developed world as a whole the birth rate has approximately halved.

Do these statistics surprise you? Everybody knows the population of the world is growing. But remarkably few people seem to know that the rate of increase in world population has been falling since the early 1960s and that the raw number of new people added each year has been falling since the late 1980s.

If we save children from dying, people will have smaller families.

They are right to be concerned, though they would be wrong to be apocalyptic, after all, today’s 40-year-olds will surely be happier to continue operating computers in their seventies than today’s 70-year-olds are to continue operating machine tools.

It was fossil fuels that eventually made slavery – along with animal power, and wood, wind and water – uneconomic.

Every economic boom in history, from Uruk onwards, had ended in bust because renewable sources of energy ran out: timber, crop land, pasture, labour, water, peat. All self-replenishing, but far too slowly, and easily exhausted by a swelling populace. Coal not only did not run out, no matter how much was used: it actually became cheaper and more abundant as time went by, in marked contrast to charcoal, which always grew more expensive once its use expanded beyond a certain point, for the simple reason that people had to go further in search of timber.

By 1870, the burning of coal in Britain was generating as many calories as would have been expended by 850 million labourers. It was as if each worker had twenty servants at his beck and call.

Heck, it even affects the birth rate as television replaces procreation as an evening activity.

Today, the average person on the planet consumes power at the rate of about 2,500 watts, or to put it a different way, uses 600 calories per second.

The truth is, it was western Europe’s incredible good fortune that just when humankind began to bear down on its landscapes and habitats most heavily, instead of ecological disaster as happened in Babylon, there appeared from underground a near-magical substance so that the landscape could be partly spared.

Not even Jonathan Swift would dare to write a satire in which politicians argued that – in a world where species are vanishing and more than a billion people are barely able to afford to eat – it would somehow be good for the planet to clear rainforests to grow palm oil, or give up food-crop land to grow biofuels, solely so that people could burn fuel derived from carbohydrate rather than hydrocarbons in their cars, thus driving up the price of food for the poor.

But since Americans are in effect being taxed thrice over to pay for the ethanol industry – they subsidise the growing of maize, they subsidise the manufacture of ethanol and they pay more for their food – the ability of American consumers to contribute to demand for manufactured goods is actually hurt by ethanol, not helped.

Meanwhile, the environmental benefits of biofuels are not just illusory; they are negative.

So the question is: how much fuel does it take to grow fuel? Answer: about the same amount.

Drilling for and refining oil, by contrast, gets you a 600 per cent energy return or more on your energy used. Which sounds the better investment?

‘It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth. As a rule, new modes of economy will lead to an increase of consumption.’

The more people you tell about bicycles, the more people will come back with useful new features for bicycles – mudguards, lighter frames, racing tyres, child seats, electric motors. The dissemination of useful knowledge causes that useful knowledge to breed more useful knowledge.

The possibility of new knowledge makes the steady state impossible. Somewhere somebody will have a new idea and that idea will enable him to invent a new combination of atoms both to create and to exploit imperfections in the market.

What kick-started the increasing returns? They were not planned, directed or ordered: they emerged, evolved, bottom-up, from specialisation and exchange.

admitted that even today scientists’ job is really to come along and explain the empirical findings of technological tinkerers after they have discovered something.

The seventeenth-century discoveries of gravity and the circulation of the blood were splendid additions to the sum of human knowledge. But they did less to raise standards of living than the cotton gin and the steam engine.

Though they may start out full of entrepreneurial zeal, once firms or bureaucracies grow large, they become risk-averse to the point of Luddism. The pioneer venture capitalist Georges Doriot said that the most dangerous moment in the life of a company was when it had succeeded, for then it stopped innovating.

3M – flush with success after its employee Art Fry dreamed up the idea of nonstick sticky notes (Post-its) while trying to mark the place in his hymn book in church in 1980 – told its technologists to spend 15 per cent of their time working on their own projects and by harvesting customers’ ideas.

The internet has revived this possibility in recent years. Sites like Innocentive and allow companies both to post problems they cannot solve, promising rewards for their solution, and to post technologies they have invented that are looking for applications.

I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage. JOHN STUART MILL Speech on ‘perfectibility’

Here’s the rub: this future sounds awfully like the feudal past. The Ming and Maoist emperors had rules restricting the growth of businesses; forbidding unauthorised travel; punishing innovation; limiting family size. They do not say so, but that is the inevitable world the pessimists want to return to when they speak of retreat.

They could find no evidence that aid resulted in growth in any countries. Ever.

As William Easterly puts it while criticising the shock therapy that did such harm in both the Soviet bloc and Africa, ‘you can’t plan a market’. The top-down imposition of a bottom-up system is bound to fail.

Unfortunately, when given out free by donor agencies, they often become fashion items instead, being sold on the black market for wedding veils or used as fishing nets. They undercut local merchants supplying them for money.

The four horsemen of the human apocalypse, which cause the most premature and avoidable death in poor countries, are and will be for many years the same: hunger, dirty water, indoor smoke and malaria, which kill respectively about seven, three, three and two people per minute. If you want to do your fellow human beings good, spend your effort on combating those so that people can prosper, ready to meet climate challenges as they arrive.

The way to choose which of these technologies to adopt is probably to enact a heavy carbon tax, and cut payroll taxes (National Insurance in Britain) to the same extent. That would encourage employment and discourage carbon emissions.

It is a common trick to forecast the future on the assumption of no technological change, and find it dire.

But here goes, none the less. I forecast that the twenty-first century will show a continuing expansion of catallaxy – Hayek’s word for spontaneous order created by exchange and specialisation.

So the human race will continue to expand and enrich its culture, despite setbacks and despite individual people having much the same evolved, unchanging nature. The twenty-first century will be a magnificent time to be alive. Dare to be an optimist.