Book Review: Global Economic History

Review and commentary on Robert Allen's "Global Economic History: A Very Short Introduction"

This book is subtitled "A Very Short Introduction" and is one of the smallest books I've ever seen, about three ounces. Three ounces is exactly the amount of global economic history that my brain can absorb before turning to mush, so I was glad to find it.

Why is the West richer than the rest of the world? Why have some non-Western countries (Japan, China) come from behind and mostly caught up? Why have others failed to replicate the West's trajectory and stayed underdeveloped despite seemingly having enough time to catch up? GEH:VSI tries to answer these questions.

It explicitly disavows explanations that lean too heavily on some populations being better (smarter, harder working, etc) than others, or on narratives of colonial exploitation - sorry if you were looking for anything too juicy. Given its brevity, it can only gesture at justifications for this choice. It's skeptical of the Protestant work ethic because, however much it matched experience in 18-whatever, today "Catholic Italy [is richer than] Protestant Britain" (is this true? Britain has higher GDP today, but Italy was higher when this book was written) It's skeptical of ideas that some countries are "traditionalist" and resistant to change because of [long list of those countries adopting various profitable innovations] - for example African farmers now mostly grow more productive New World crops (but couldn't countries be willing to change in some ways but traditionalist in others?). The reluctance to invoke colonialism too heavily is even less well-explained, but I think it relies on differences between never-colonized countries - for example, Russia and the Ottomans lagged behind the West in much the same way as Asia and Latin America, and even Austria lagged Britain (GEH:VSI does talk about particular problems with colonial policies when they come up, as part of its general policy survey). Overall I think of these exclusions more as a commitment to a paradigm: what would it look like to pursue a project of understanding global economic history without invoking either of these tempting but curiosity-stopping explanations?

GEH:VSI is also nervous talking too much about institutions, especially along the lines of strong property rights or other libertarian-adjacent ideas. While it admits that they matter to some degree, it also points out that some of the most successfully-developing economies, including Britain in the 1700s and Japan in the Meiji period, had unusually strong governments, high taxes, and poor property rights. The strong governments pursued strong industrial policies, the high taxes paid for infrastructure, and the poor property rights let governments use eminent domain to build canals, railroads, et cetera. In other cases, the book just isn't sure these helped that much. For example, China gets a lot of credit for its free-market reforms under Deng Xiaoping, but these reforms just took China from "literally Mao" to "kind of an average level of market freedom for developing countries". Given that the average developing country has an average-for-developing-countries level of market freedom, but does not experience a China-level economic miracle, these can gain only partial credit for China's success.

So what does spur development? GEH:VSI takes a historical perspective. It starts by saying that "The differences in prosperity between countries in 1500 were small", then uses this as an excuse to basically round them off to zero and start its account of the Divergence with the Age of Discovery and the Industrial Revolution. I'm nervous about this; the book will later declare the rule that tiny advantages compound so that the rich get richer; that makes the admittedly-small advantage the Europeans held in 1500 crucially important. But the book drops this and talks about the Age of Discovery a lot.

And this part also isn't very clear. During the 1500s and 1600s, first the Netherlands and then Britain experienced a sort of mini-boom. Probably this was because of the Age Of Discovery in some way, although the book leaves us to fill in the details, including why this didn't happen to fellow Discoverers like France, Spain, and Portugal. Colonial trade goods played a role, but so did Northern European ships trading in various non-colonial ways, eg in the Mediterranean. Whatever the reason, these countries saw increasing wages, increasing literacy, urbanization, and the development of a strong mercantile class.

Here the book finally feels comfortable making a strong claim: the Industrial Revolution started in Britain because of its high wages. Other countries had some of the same scientific acumen and proto-technology, but only in Britain was it worth actually building machinery; everywhere else it was cheaper just to hire more laborers (or buy more slaves). The beginning of industrialization caused a positive feedback loop; the new machines raised wages (since workers were more productive), creating even more demand for even more machines. Britain became a center of machine-making expertise (the fact that it was full of giant coal and iron deposits didn't hurt), and the rest is history.

(for more on exactly when British high wages happened and why, see Part III here).

Soon the world was flooded with cheap British goods, and everywhere else's manufacturing industries collapsed. In 1600, India, the Middle East, and Africa all had their native traditions of manufacturing. These might not have been giant factories, but people were making textiles, iron, tools, weapons, etc at various levels of sophistication. They all disappeared as Britain outcompeted them: "In Bihar [India], the share of the work force in manufacturing dropped from 22% around 1810 to 9% in 1901." These regions switched back to farming, especially growing crops that British people wanted.

These places didn't adopt the new British technology. Sometimes this was for simple reasons: Britain tried to keep it secret, some of these places were British colonies banned from competing with the mother country, some of these places (eg Spain) had stupid policies. But the book focuses on the idea that these places' wages were too low to make the machinery competitive. I was pretty boggled by this: either wages were so low that the machines weren't necessary (in which case these places can outcompete Britain), or these places were being outcompeted by Britain (in which case they would be incentivized to adopt the new machines, which they should be able to do better than Britain given how cheap the operators' wages would be). The book does a poor job explaining what's going on here, but my impression is that Britain had more of the know-how, network effects, and industrial base to make the machines work, and it would have been more difficult and expensive to try to create them in India. The cheap Indian labor meant it wasn't profitable to do this once you added in all the other costs. This will become important later.

By 1800, we're already starting to see the developed/undeveloped country gap we know today. The 1800s version of the gap was: Britain was developed, everyone else was undeveloped. Various Western countries noticed this and invented what Allen calls the Standard Development Model. This was the first time anyone had ever tried to do development economics or answer the question "How do countries industrialize and how can we do it faster?" - Britain had industrialized kind of by accident and never considered the question. But other intellectuals in other Western countries started considering the question around this time, especially Friedrich List in Germany and Alexander Hamilton in the US. They and others independently converged on a four-pronged plan:

1. "Create a large internal market by abolishing [internal] tariffs and improving transportation"
2. "Erect an external tariff to protect 'infant industries' from British competition"
3. "Create banks to stabilize the currency and provide businesses with capital"
4. "Establish mass education to speed the adoption and invention of technology".

The USA and most of Western Europe tried this in the early 1800s, and it went pretty well. By the late 1800s, these countries were competitive with Britain, and the US had surpassed it (Allen attributes US ascendancy to the American frontier; US bosses had to offer good wages to keep factory workers from going West and becoming pioneer farmers instead; unusually high American wages meant unusually strong American pressure to industrialize). All of this was nice and straightforward and lulled everyone else into a false sense of security.

Other countries tried the Standard Model but couldn't quite get it to work. Mexico tried, but was screwed over by geography and racial inequality. Mexico's industrial heartland is in the center of the country, in the mountains near Mexico City, and there wasn't a great way to get products to the coast where they could be traded with Europe. Also, its racial caste system made the elites nervous about educating the (mostly mestizo) masses, so they were never able to really get the education prong worked out (the US had the same issue with blacks, but blacks are only 12% of Americans, and mestizos are ~80% of Mexicans). The independent countries of western South America had similar problems. Russia tried this a little, but also had crappy geography and serfdom. Other countries were mostly European colonies at this point; their colonial masters did a pretty good job with Prong 1 (especially building railroads), but absolutely banned Prong 2 and were generally weak on the others.

Japan was a weird special case. It almost missed the industrialization boat, but eventually succeeded through a very strong central government with excellent industrial policy, a lot of local smart people willing to adapt foreign inventions to the needs of Japan, and a lot of luck (eg the isolationist Tokugawa-era policies helped create a surprisingly strong educated urban class).

By the early 20th century, a clear gap had emerged between Europe, North America, and Japan (on one side), and everyone else (on the other). After World War II, the former colonies declared independence from Europe, hoping to try the Standard Development Model at long last and get the same easy successes the West had. But this no longer worked; they had missed the boat entirely. GEH:VSI invokes the increasing gap between developed and less developed countries; when the gap was still small, the Standard Model prongs were enough to overcome it. By the 20th century, developed countries were so far ahead that the model made less sense. If you're 1820s France trying to catch up to Britain, you can probably find some craftsmen somewhere in your economy who can make something like a textile mill, train them a bit, get them to make textile mills, use some clever investment policy to create whatever prerequisites to textile mills you don't already have, and eventually end up with textile mills without too much trouble. If you're 2000s Bangladesh trying to catch up to the West, you want semiconductor factories. Scrounging around a mostly-agrarian economy and eventually cobbling together enough expertise and capital to make a textile mill is one thing. Making a semiconductor factory is a lot harder. And if you decide to just make the textile mill instead, what if First World textile mills are some sort of amazing robotic wonderland now and nobody wants your crappy 1800s-technology textiles? Development needs a lot more slack now before it can become profitable.

Is it still possible to succeed? Allen points to South Korea, the USSR, and China as examples that it might be. He describes their strategy as "the Big Push" - a strong central government producing lots of (not immediately useful or profitable) industry, in the hopes that it will pay off later:

This is Big Push industrialization. It raises difficult problems since everything is built ahead of supply and demand. The steel mills are built before the auto factories that will use their rolled sheets. The auto plants are built before the steel they will fabricate is available, and indeed before there is effective demand for their product. Every investment depends on faith that the complementary investments will materialize. The success of the grand design requires a planning authority to coordinate the activities and ensure that they are carried out. The large economies that have broken out of poverty in the 20th century have managed to do this, although they varied considerably in their planning apparatus.

There follows some discussion of the Soviet Union and China. Both did this well, but the Soviet economy stagnated anyway in the 1970s. Allen seems kind of unsure about why this happened, and is willing to entertain both the possibility it was random and contingent (maybe the planners made a mistake in trying to pour so much investment into parts of Siberia that weren't really habitable), and the possibility that planned economies are fundamentally better at catch-up growth than at the technological frontier (central planners can force people to make steel mills if you know steel mills are next up on your tech tree, but if you don't know what's next on the tech tree it's hard to plan for it). This wasn't a very conclusive section, but I appreciated the confirmation that the Soviet economy actually worked pretty okay until 1970 or so, then became a basketcase for kind of unclear reasons. The author is most impressed with China, which seems to have gotten this part right (maybe by accident): they communismed until they reached the technological frontier, then uncommunismed in time to get on the path to being a normal developed country. GEH:VSI isn't very big on prescriptions, but I think it would probably suggest having a pretty heavily planned economy while you're playing catch-up, and then unwinding it once you're close to where you want to be.

Overall there was a lot in this book that was unsatisfying. The discussion of the Great Divergence devoted all its effort to a few links in the causal chain while leaving others entirely obscure. Parts of the discussion on wages confused me. And the more I think about it, the more unsatisfied I am with the book's kind of limited thesis. For example, why did settler colonies (eg Canada, Australia, New Zealand, South Africa) converge to British levels of development so quickly? The book doesn't answer this, and as far as I can tell its thesis predicts this wouldn’t happen. How come all of the mid-20th-century success stories are in East Asia and not somewhere else? As far as I can tell, GEH:VSI would have to call this coincidence. Maybe it shouldn't have thrown culture out so quickly?

And how does globalization fit into this picture? New parts of existing countries are able to develop relatively quickly - for example, when the US took California from Mexico, it eventually converged to US (not Mexican) standards of living. If a New California were to rise out of the Pacific Ocean just west of the regular one, and Americans were to colonize it, I would expect it to also converge to normal US standards of living eventually. Why? In 2021, New California has nothing, and (eg) India has much more than nothing. How come we are more certain that New California will soon get First World living standards than that India will? If the answer is something like “because American companies can expand to New California and trade with other Americans without tariffs”, doesn’t that mean that if India invites US companies in, lowers tariffs, and has good institutions - then they too can quickly converge to US standards of living? But isn’t that the opposite of GED:VSI’s thesis? I’m not saying they’re wrong - I assume development economists know what they’re talking about - but it confuses me and this book didn’t give me a great answer.

But I did find the book to be a useful counterbalance to some of my libertarian tendencies. Although there are probably times when the free market is useful, it also seems like there's a strong case for some planned-economy-like things when you're trying to develop (and possibly afterwards? Soviet Russia seems like a counterexample but I don't know how many other people have tried this or what the space of possible options looks like). High tariffs and high wages are important components of helping a country develop (though I wish they had expanded on the high wages - these were helpful during the early Industrial Revolution, but is it useful for countries to have high wages now? Do artificially high wages through eg minimum wage policies or UBI help as much as naturally high wages? Should developing countries have high minimum wage laws?)

I think I also failed to previously appreciate how hard a problem development economics was. To a first approximation, Britain (and to a lesser degree other Western countries) developed pretty easily by having kind of laissez-faire policies and giving its hard-working and inventive population free rein. I had assumed that meant countries today should try the same - and insofar as they were failing to develop, it was because they weren't laissez-faire enough, or because they weren't correctly aping successful Western institutions. This book presents a strong argument that this isn't true, and that these countries have to solve a different and harder problem without a lot of shortcuts.