The persistence of history’s effects on economic growth is significant and remarkably robust to negative shocks.

A paper by Comin, Easterly, and Gong asks the question “Was the wealth of nations determined in 1000 B.C.?” The paper looks at the relationship between the technology available in various regions in 1000 BC, 1500 A.D., and levels of per capita income today. Their findings suggest that history from three thousand years ago can be a strong predictor of economic standards of living today. The results are even stronger for the connection between 1500 AD and contemporary per capita incomes. These two chosen periods of time are picked as a way to tease out the impacts of industrialization and colonization, two massive forces prone to cause noise in the analysis. In a pre-explorer world with very little long-distance trade and very high isolation, the math of compound economic growth suggests, as the paper writes, “those who started out ahead would be even further ahead in both population and income today.” Further evidence from Nunn and Wantchekon (2011) shows that areas of Africa with higher participation in the slave trade centuries ago still suffer from lower levels of trust.

The larger question I think this idea begs is how persistent certain X-factors of economic growth can be throughout time. Economists theorize about factors like institutional quality, levels of trust, culture, access to trade, and natural resource environment, among many others, as the catalyzing “ingredients” for economic growth. However difficult it may be to nail down what these x-factor ingredients are, evidence suggests that the x-factors can survive massive external forces.

All areas started out as poor at one point. What made countries that initially escaped economic misery centuries ago in northwest Europe rich was the subject matter of Adam Smith’s Wealth of Nations. Of course many other countries have since followed suit, with the East Asian Tigers rising up to “Western” levels of wealth, and so-called emerging market economies realizing double digit economic growth. The exact recipe for a country to grow is debatable and varies across countries, but as a country finds this special recipe for economic growth, it’s nearly impossible for it to regress. Some countries may stagnate or exhaust their potential for a period of time. But only one country – Argentina – was considered high-income a century ago and middle-income today.

Think of the dramatic events that can happen that would seem to shake the x-factors out of its crucial hold. Political upheaval leading to “failed states,” a currency or financial crisis that breaks the economy, a civil war that breaks social fabric and kills millions of people. Surely, these would reset the conditions needed for economic growth?

While watching the great Babylon Berlin television show, I’m drawn to the powerful example of Weimar Germany – the country’s history between the two world wars. Consider what happened in Germany after 1913: first, the country led the losing side of a world war that killed 60-80 thousand of its soldiers and was fought partially in its backyard; then, experiencing massive sovereign debt and unable to reach any stability, the country entered a debilitating economic depression and accompanying hyperinflation that ravaged any sense of social fabric and functioning economy; then, Hitler took power and… you know this part of the story; then, the country was rebuilt in significant part by Turkish immigrants because so many German men had died; then the country was physically divided by a wall for the almost-45 years after WW2 ended, governed on one side by social democracy and the other by Soviet proxy rule. The tumult, uncertainty, constant mindless death, identity struggles, ripe distrust, and sheer hopelessness seem like overwhelming forces that would keep the country poor for a long time. Yet ten years after the Wall falls, the country is the de facto leader of the European Union, hosts the European Central Bank, and today has a top 5 economy in the world.

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Hyperinflation in Weimar Germany

 

There seems to be an implied “potential” GDP per capital level in Germany that was able to sustain itself throughout that near-century of struggle. Countries with less conflict and instability were poorer than Germany in 1913 and continue to be today. Very few Germans were alive before World War I that saw the transition into the euro currency on January 1, 1999. So what characteristic is it that Germany kept during the 1913-1989 period that allowed its potential standard of living to stay the same? The formal governmental institutions have changed dramatically, the demographic makeup has changed, and the surrounding world is entirely different. The physical geography has remained relatively constant, but this is not the underlying reason Germany is the 5th richest economy in the world today.

“Culture” is a squishy catch-all term that some social scientists like to use as the significant explanatory variable in economic growth. It could be a “Protestant work ethic” or the entrepreneurial spirit of diasporas like the Murid sect of Islam that explain why some groups are rich and others poor. If this is so, is culture really that persistent – and robust to so many outside forces – that it withstands the strongest winds of history?

Another set of evidence comes from Alexander de Tocqueville’s Democracy in America. de Tocqueville was writing in the 1830s as a Frenchman describing what made America so different than its European counterparts. There’s a question about how accurate his descriptions were for the time, but he notes cultural differences between the regions of New England, Mid-Atlantic, and Southern colonies in his chapter “Origin of the Anglo-Americans.” His analysis is apt to ascribe contemporary differences as being borne out of differences set centuries before. For example, compared to England settlers, “the men sent to Virginia were seekers of gold, adventures, without resources and without character, whose turbulent and restless spirit endangered the infant colony.” Remarking on the lasting impact of of slavery in the South:

[slavery] was the main circumstance which has exercised so prodigious an influence on the character, laws, and all the future prospects of the South…it introduces idleness into society, and with idleness, ignorance, and pride, luxury and distress. It enervates the powers of the mind, and benumbs the activity of man. The influence of slavery, united to the English character, explains the manners and the social condition of the Southern States.

The areas were settled under slightly different circumstances and by slightly different groups that determined the nature of their political institutions and cultures. Remember, the settlement of these places by European pilgrims was centuries before – yet in his eyes, the differences persisted to that day. Even now, many of his descriptions of the regions ring true, at least to our intuitive sides – whether it be the individualism on the frontier or the commitment to localized governance. What’s striking is the strength of this persistence. The quality and type of institutions and culture that were set up at square one had such strong path-dependence that all of the coinciding forces that one would assume would “reset” the environments were in reality unable to change.

Perhaps revolutions can reset these environments. But do political revolutions change what we might believe to be the crucial x-factors conducive to economic growth?De Tocqueville also believed the American Revolution to be borne out of an ethos present at initial settlement, “the doctrine of the sovereignty of the people, which had been nurtured in the townships and municipalities, [that] took possession of the State.” Maybe cultural revolutions – that at least claim to change the underlying social fabric of a nation – reset and redefine these conditions. But what are examples of true cultural revolutions? Did Mao’s gruesome one really change thousands of years of history for the Chinese people? Maybe on the surface, but I’m unconvinced it was a “reset” in the way meaningful to economic potential.

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Alexander de Tocqueville

But the vast majority of Americans are not children of Puritans, at least in the biological sense. Today, German is the most common ethnic group in the United States. And, importantly for this analysis, New England is now dominated by non-English people. Over 37% of New York City residents are foreign-born. In fact, every region has had its demographic makeup totally shaken up and redefined with each new wave of immigration and cross-mating of ethnicities and religions. If different groups are assumed to have a “culture” or “work ethic,” did the newcomers to these regions adopt the local customs rather than modify the regions to be more like their homelands? Compared to Germany’s 20th century, which has seen a nontrivial amount of inward migration, America’s demographic makeup has changed even more.

Yet the regions of the United States, as far as I can tell, are not defined by the Native American tribes that resided there pre-colonization. It could be that the newcomer migrants, unlike the original colonizers that wiped out the native population, never arrived in a critical enough mass to totally redefine the areas they moved into. Instead, their relatively small numbers meant they had no choice but to assimilate to the pre-existing norms, cultures, and customs of their destination. This usually meant they added their own flavor with a nod to their homeland, but it wasn’t a total reset.

So did the governments that were set up in Plymouth or Jamestown or the Pascua Florida peninsula in the 1500s – seemingly arbitrary and highly fungible at the time – define the destiny of these areas nearly five hundred years later? Does this mean that America’s national fabric – struggling to find itself amidst contemporary politics – will continue on relatively unscathed? The past shows that underlying cultural x-factors can have an incredible amount of resilience.

I have written a concept album with a band called The Benevolent Dictators all about Adam Smith, and the first song was just released.

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My motivations for writing the album and general vibe will be left for another time, but I feel inclined to discuss more about this particular song’s thematic significance. The song is inspired by text from The Wealth of Nations, Book 3, Chapters 2-4. The summary: commerce liberated the masses from the feudal system.

[Adam Smith was an 18th century Scotsman. His first book, Theory of Moral Sentiments, is about morality and human nature. His second book, Wealth of Nations, is considered the starting point for modern economic thought.]

The story begins just after the Roman Empire’s demise. Everything is in chaos and eventually order is restored via different sovereign monarchs throughout the former Empire. The monarchs don’t have the capability to enforce laws and protect everyone in their respective polities, so they enlist the help of others in exchange for big chunks of land. These estates produce enough food for the feudal landlords to survive. But, Smith observes, our desire for food is limited to the extent our bellies can make space. To utilize the surplus food, the feudal lords give their additional food to individuals in exchange for their servitude in the feudal estate. At the time, the feudal lords had no other outlets for their surplus food. Thus, their best option was to increase their power by making commoners dependent on them for food.

Meanwhile, a bunch of city dwellers (called “Burghers”) were given a special exemption by the king to start making stuff. These are the artisans and merchants. Soon, the Burghers had shiny baubles and trinkets that they were looking to sell. The feudal landlords might have limits for their desire to fill their bellies, but they have no boundaries on their childish vanity. The feudal lords wanted to show off how great they were and get their hands on these diamond trinkets. As a result, they started to trade their surplus food not for the servitude of commoners, but for the luxury goods the merchants were selling.

What they used to exchange for the servitude of hundreds, sometimes thousands of men, was now going to service their childish vanity. As the demand for these trinkets went up, so did the supply, so the previously dependent commoners now could join in on the market. Before, when the commoners were given subsistence-level resources in exchange for their work, there was of course no incentive to innovate or increase efficiency. They did the bare minimum that allowed them to survive, because any extra work would go unrewarded. Now, they began to cultivate different areas, knowing the fruits of their labor would mean more money for themselves. Prosperity follows.

In addition to the cultivation, this new market brought about interdependence where dependence used to be. In a sense, all of the parties involved were just as reliant on each other as before. The commoners of course needed the landlords as consumers of their goods, and the landlords needed an outlet for their surplus food. The difference now was that the power was completely decentralized. Rather than a commoner being subjected to the whims of one feudal lord, the market gave him the ability to appeal to the childish vanity of all the landlords to which he could ship his goods.

What is more exciting than reading about how peaceful commercial exchange liberated the masses from the tyranny of the feudal system? Smith emphasizes how this ‘silent revolution’ came about not because a top-down authority dictated it, and not because anyone was consciously trying to bring about positive change for the masses.

A revolution of the greatest importance to the public happiness was in this manner brought about by two different orders of people who had not the least intention to serve the public. To gratify the most childish vanity was the sole motive of the great proprietors. The merchants and artificers, much less ridiculous, acted merely from a view to their own interest, and in pursuit of their own pedlar principle of turning a penny wherever a penny was to be got. Neither of them had either knowledge or foresight of that great revolution which the folly of the one, and the industry of the other, was gradually bringing about.

There are free PDFs all around the internet if you’d like to read the passages in their entirety. Here is one.

I leave you with the lyrics of Silent Revolution:

They say beauty is in order
What’s left over in so few hands
But the landlords spell their doom
Wanting the jewelry the merchants have

The price they paid could buy them
A thousand different men
And though they get the diamond
Power leaves them
And commerce wins instead

Here comes the silent revolution
Moving slowly, no certainty
Interdependence, cultivation
From no design comes prosperity

Without any intention
Without beneficence
The feudal system’s dying
Lords made obsolete from
Their childish vanity

Without any intention
Without beneficence
The feudal system’s dying
Lords made obsolete from
Their childish vanity