Its been a while since I finished the third and last part of A Farewell to Alms; let me knot down some thoughts. I’ve commented on part one and two earlier; after discussing the pre-industrial world and the Industrial Revolution, Clark devotes part three to the development in the world after the Industrial Revolution. While all parts of Clark’s book is interesting, the final part was the part I enjoyed the most. Perhaps because he discusses current issues and more familiar problems, or perhaps because of his ideas are in fact interesting. It could also be Clark’s powerful expression and how he violently dismisses the economic mainstream.
Clark begins part three by discussing world growth since 1800: While some societies has become very rich, others are still poor, many even poorer than before the Industrial Revolution. Clark calls the development the Gread Divergence and raises the puzzle Why did it happen? Clark seem to have the answer. Before he gets to it, however, he wastes no time characterizing the economic mainstream for failing to understand and deal with the observed divergence:
Commentators, having visited climate, race, nutrition, education, and culture, have persistently returned to one theme: the failure of political and social institutions in poor countries. Yet, as we shall see, this theme can be shown to manifestly fail in two ways. It does not describe the anatomy of the divergence we observe: the details of why poor countries remain poor. And the medicine of institutional and political reform has failed repeatedly to cure the patient […] Yet, like the physicians of the prescientific era who prescribed bloodletting as the cure for ailments they did not understand, the modern economic doctors continue to prescribe the same treatment year after year through such cult centers as the World Bank and the International Monetary Fund. If the medicine fails to cure, then the only conclusion is that more is needed [p. 328].
The main source of the divergence, Clark claims, is differences in efficiency. In particular, the difference is ‘rooted in an inability to effectively employ labor in production’ (p. 329). As he does throughout the book, Clark justifies his claim with ample evidence and a number of examples. Seldom has I read a book which collects, discusses, and uses as much data to drive the arguments home. From the evidence, Clark concludes:
Thus the crucial variable in explaining the success or failure of economies in the years 1800-2000 is the efficiency of the production process within the economy. Inefficiencies in poor countries took a very specific form: the employment of extra production workers per machine without any corresponding gain in output per unit of capital [p. 351].
Clark moves on to discuss evidence of differences in the quality of labor across societies. These differences, however, did not stem from the Industrial Revolution; rather, they were inbuilt in the societies from the Malthusian era. So what changed during the Industrial Revolution to produce the Great Divergence? There are three main reasons, according to Clark (see pp. 365-366). The first is that, under the Malthusian trap, differences in the quality of labor had no effect on the average income, only the population level. When population and income were decoupled, the differences in quality of labor expressed itself through the Great Divergence. Secondly, modern medicine reduced the subsistence wage such that populations could expand despite lower incomes than earlier. Thirdly, modern production techniques increased the wage premium for high quality labor.
When it comes to the causes of differences in quality of labor, there is no satisfactory theory, according to Clark (p. 370).
Arriving to the final chapter, rather exhausted, I must admit, after Clark had laid out his theory of world economic history in three, extensive parts, I ended up underlining almost the entire chapter. I cannot put it all in here, but the chapter, titled ‘Conclusion: Strange New World,’ begins like this:
God clearly created the laws of the economic world in order to have a little fun at economists’ expense [p. 371].
The value of a strong, opening line cannot be underestimated! Some more bashing on mainstream economics cannot hurt, either, seemingly:
Our economic world is one that the deluge of economics journal articles, working papers, and books devoted to ever more technically detailed studies of capital markets, trade flows, tax incidence, sovereign borrowing risk, corruption indices, rule of law serves more to obscure that to illuminate […] The great engines of economic life in the sweep of history demography, technology, and labor efficiency seem uncoupled from these quotidian economic concerns [p. 372].
In the end, Clark makes an interesting observation on the research into happiness; income seem to have only a slight effect on happiness. Clark offers the potential conclusion that humans may be programmed to be strivers for the relative rather than the absolute; the contented ones have been sorted out. At any rate, if happiness was our measuring rod, it leads to somewhat surprising conclusions (see pp. 376-377; perhaps the surprise is that happiness is not what society strives for).
Although Clark’s outlook is a simple one; the Industrial Revolution is the one, significant event in world economic history, he makes room for further dwellings on the issue in the last paragraph:
World economic history is […] full of counterintuitive effects, surprises, and puzzles. It is intertwined with who we are and how our culture was formed. No one can claim to be truly intellectually alive without having understood and wrestled, at least a little, with these mysteries of how we arrived at our present affluence only after millennia in the wilderness, and of why it is so hard for many societies to join us in the material Promised Land [p. 377].