Economic growth is just 200 years old

We live in a day and age where economic growth is taken for granted. China was growing at greater than 10% per year for a long time. In the recent past, the growth has slowed down to around 7% per year. If Chinese growth keeps slowing down, the world growth will also slow down.

The United States has grown at around 3% per year, over the long term. The world’s largest economy is now growing at a much slower pace. Economic growth in India has also slowed down over the last few years. And all this has got economists and people who follow such things worried.

Nevertheless, in the context of history, economic growth is a very recent phenomenon, and is just around 200 years old. As John Plender writes in Capitalism—Money, Morals and Markets: “The economist Angus Maddison calculated that in the period from 1500 to 1800, world domestic product per capita[income] grew at an annual average compound rate of just 0.04 percent—one-thirtieth of what has been achieved since 1820.”

While some economists have issues with the methodology Maddison used to arrive at the economic growth number, most agree with the broader point he makes. In fact, economic growth even before 1500 was nothing home to write about.

Why was this the case? There was a great fear of creative destruction that new inventions would unleash. As Daron Acemoglu and James A. Robinson write in Why Nations Fail—The Origins of Power, Prosperity and Poverty: “The fear of creative destruction is the main reason why there was no sustained increase in living standards between the Neolithic and Industrial revolutions. Technological innovation makes human societies prosperous, but also involves the replacement of the old with the new, and the destruction of the economic privileges and political power of certain people.”

Acemoglu and Robison take the example of the Roman Emperor Vespasian, who ruled between AD 69 and 79. The Emperor was approached by a man who had invented a device to cheaply transport heavy columns to the Capitol, the citadel of Rome. This cost the government a lot of money. By adopting the new invention, the government could have saved a lot of money.

The Emperor rejected the invention and declared: “How will it be possible for me to feed the populace?” The invention was rejected because it would have disturbed the way things stood at that point of time. The new device would have put many people out of work. As Acemoglu and Robinson explain: “The innovation was turned down because of the threat of creative destruction, not so much because of its economic impact…Vespian was concerned that unless he kept people happy and under control it would be politically destabilizing.”

A similar logic was used to put many inventions in the cold storage, including few in the textile industry, in the pre-industrial revolution era. The industrial revolution started in Great Britain in the second half of the eighteenth century and gradually spread to other parts of the Europe and the United States.
A major reason why the Industrial Revolution flourished was because governments no longer tried to stop creative destruction. They took it in their stride.  Further, as people and governments saw the benefits of economic growth that new inventions and creative destruction brought in, their approach towards economic activity changed as well. As Plender writes: “Economic activity was no longer perceived as a zero-sum game in which one man’s profit was another’s loss and thus morally questionable. It became easier to make great fortunes from industry and commerce than from land.”

To conclude, there is a lesson in this for Indian government. The only way sustained economic growth can be unleashed is by encouraging new ideas and inventions. This will only happen if the ease of doing business in this country improves. And on that front, there is a lot that still needs to be done.
The column originally appeared in the Bangalore Mirror on August 26, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)