The Economic History of the Last 2000 Years: Part II

The graph above is an economic history of the world, after 1 AD, from a research letter written by Michael Cembalest, chairman of market and investment strategy at JP Morgan. I posted it yesterday with this summary: "Everything to the left of 1800 is an approximation of population distribution around the world and everything to the right of 1800 is a demonstration of productivity divergences around the world."

But that's not exactly right. The Industrial Revolution that occurred in Western Europe around 1800 did dramatically raise productivity and personal income far above what any country had seen in the previous millennia. But in fact, GDP per capita -- an approximation for productivity and income -- started to diverge centuries before the steam engine.

What follows is a deeper -- but still shallow -- dive into 2000 years of economic history, this time through the lens of GDP per capita around the world. This metric helps us identify where growth in wealth occurred, as opposed to just growth in population (e.g.: India and China had thee-quarters of world GDP in 1 AD because they had three-quarters of the world's population).

The first graph is a good picture of what we call the Malthusian Trap. For the vast majority of human history, the most important determinant of wages was births and deaths. With too many births, income fell. After a plague, a roughly stable supply of food and goods shared among a smaller number of people made everybody richer. That is, until births rose, and incomes fell again.

But between 1000 and 1500 wages in Western Europe started to inch up thanks to moderate technologies and agrarian organization, such as three-field rotation and horse harnesses.

... and if you take graph the GDP/capita data between Jesus and Napoleon, you can see even better a real divergence between Western Europe and the rest of the world.

But the thing about the graph above is that the X-axis plays a game of hopscotch. We have data (or an approximation of data) for 1 AD, then another 1000 years later, and another 500 years later, followed by 100-year increments.

So what happens when we zoom back in to the year 1500, when century-by-century data becomes available, and play out the story until the 20th century? You get a really good look at the massive power of the Industrial Revolution, which makes all income growth before about 1800 look pathetic.

There are enough theories about why the Industrial Revolution happened in northern Europe between 1700 and 1800 to fill a million blog posts. Two well-known recent additions are Guns, Germs and Steel, which focuses on the peculiar and advantageous geography of norther Europe and its natural resources, and A Farewell to Alms, which provides the quirky but often persuasive explanation that the Malthusian Trap ironically populated England with workers whose upper-class values made them biologically better adapted to invent and use modern technology.

Our last graph is the full 2000 year sweep of the world through GDP/capita (mind the X-axis, of course). The industrial revolution didn't happen everywhere at the same time, but it did have the same effect everywhere: massively rising GDP/person.

The Japanese and Chinese stories are the most dramatic. Japan, which was behind Eastern Europe before World War I, nearly caught the United States by the end of the 20th century. China, which fell behind Africa in the middle of the 20th century, is now perhaps the most massive success story in industrialization history.