It is a very interesting book on economic history by William Bernstein. It analyzes the reasons behind the prosperity of modern world and makes a case that this prosperity is much more robust and sustainable compared to the achievements of any previous era (Mesopotamian, Roman, European etc.).

The author points out that from the start of recorded history till 1820, the world experienced close to zero growth. It was only after 1820 that the world economy broke from this pattern and started on its journey to ever improving economic standing and standards of living. This came because of the confluence of 4 factors:

• Property rights: for physical as well as intellectual property. These rights incentivise the innovators and entrepreneurs to take risks.


• Scientific rationalism: innovators and entrepreneurs thrive only in an environment where proper intellectual tools are available and new ideas can be explored without the fear of retribution.


• Capital markets: provide necessary capital to entrepreneurs to pursue their visions.


• Transportation and communication: for rapid and efficient access to goods and information.

According to the author, the earlier prosperous civilizations failed because one of more of these 4 factors were absent. I found the book quite a fascinating read for the most part: it condenses history with economic analysis and does so through numerous anecdotes and analogies. Last few chapters are text-bookish though.

A few interesting excerpts:

Capital Flows from Developed to Developing Nations

In every age, capital flows from nations with mature economies and excess wealth to nations that require it for development. As England transformed itself from a political and economic backwater into a world power in the seventeenth century, the major river of capital flowed from Amsterdam to London. In the nineteenth century, the highly developed English economy provided capital for the developing US. The US, in its turn, became the major source of capital for developing nations in the twentieth century. And so it goes.

Dutch Bankers Shear Investors in 1800

The late 18th century war bonds of foreign nations, many of which would default no matter which side won the conflict, were priced to yield slightly more than the secure 4% domestic issues – profitable for the underwriters but a rotten deal for credulous small investors because of the risk of default.

Generating Power, Speed and Light
By the turn of the 19th century, mankind had decisively escaped the age-old limits imposed by muscle, water and wind. The output of one person manning a factory machine or pneumatic coal hammer might be a few dozen times or even a hundred times that of his predecessors. Ships no longer depended on the vicissitude of nature. More significant, the newfound ability to produce an abundance of mechanical energy would inspire inventions that previously were inconceivable. Two of these inventions – the railroad locomotive and the electrical generator – would soon transform the very substance of everyday life and in the process yield up the final piece of the global prosperity puzzle.

Erie Canal Led to the Prosperity of New York City

The Erie Canal (completed in 1825) made New York City the entrepot for the vast agricultural output of the Midwest, which flowed through the canal to the Hudson River and thence to the city’s wharves for transshipment to its final destination, usually elsewhere on the East Coast or in Europe.

Importance of Labor Specialization

Modern prosperity can be thought of as an automobile’s drive train, its engine being the four basic factors (mentioned above), and the wheels the resulting productivity. The ‘transmission’ that passes power from the engine to the wheels (GDP) is the degree of labor specialization. An economy with little specialization can only putt-putt along in the first gear, while one with a high degree of specialization can travel at great speed.

Pitfalls of the New World

[Describing USA’s early history] An abundance of land and resources blessed the new country, but its huge continental geography, even with its long rivers, was not at all favorable to economic prosperity, particularly compared with that of England or Holland. From the very start, the US inherited from England a far more valuable commodity: the world’s best institutions. It chose those that encouraged liberty and commerce, discarded those that did not, and invented some of its own. Only its own peculiar flaws, particularly the institution of slavery, which would precipitate a devastating civil war, could delay its assumption of the dominant place among the world’s nations.

Modern Developed Nations are ‘Service States’

The very step towards prosperity is a ruler’s awareness of the link between his welfare and that of his subjects. The modern developed nation is a ‘service state’ that actively provides public goods that enhance commerce. To name a few, these are:
* Education for its young
* Police protection
* Justice administered by independent courts to assure citizen loyalty
* Roads to transport labor and products
* Switch in state revenues from monopoly rents toward a broad-based excise-tax system

(Rent seeking behavior is defined as the propensity to use special privileges, as opposed to enterprise and hard work, to earn money.)

Natural Resources are NOT Important for Prosperity

In the 19th century, serious institutional defects delayed economic development in France, Spain and Japan. In the modern world, these same institutional flaws have derailed prosperity in the Muslim world and in most of Latin America. No analysis of why some nations lag others is complete without mentioning that natural resources are not important.

There may well be an inverse correlation between wealth and natural resources. Cast your gaze upon the Habsburg Empire (Spain and its colonies of fourteenth and fifteenth centuries), as well as modern Nigeria, Saudi Arabia and Zaire, and it is difficult not to conclude that abundant natural resources are a curse. The production of wealth from commercial enterprise born of risk taking and sweat encourages healthy governmental institutions and begets further wealth. The production of wealth from a limited number of holes in the ground, owned or controlled by the government, begets rent seeking and corruption. The only natural endowment that matters is a topography that is favorable to internal transport.

Maslow’s Hierarchy, Lincoln and Gandhi

The higher up the [Maslow’s] pyramid you ascend, the more internally secure you feel. The highest point on the hierarchy became the Holy Grail of the New Age: ‘self actualization’. Maslow described the characteristics of those who had attained this exalted state, such as Lincoln and Gandhi. They lacked egotism, differentiated means from ends, solved rather than complained and filtered out the corrosive effects of peer pressure.

Democracy Follows Prosperity: on the way to a Democratic China!

Four Factors --> Prosperity --> Citizen Empowerment --> Democracy

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