WEBVTT NOTE Necessary and Sufficient Causes of the Industrial Revolution: Some Critical Remarks on Mises and His Explanation 1 00:00:00.000 --> 00:00:04.000 Okay, just first a few words about the theory. 2 00:00:04.000 --> 00:00:11.500 For economic theory, the question of how to increase wealth and get rich has a straightforward answer. 3 00:00:11.500 --> 00:00:17.000 It has three components. You get richer, A, through capital accumulation, that is, 4 00:00:17.000 --> 00:00:24.500 the construction of intermediate producer or capital goods that can produce more consumer goods per unit of time 5 00:00:24.500 --> 00:00:31.500 that can be produced without them or goods that cannot be produced at all with just land and labor 6 00:00:31.500 --> 00:00:36.500 and capital accumulation again has something to do with low time preference 7 00:00:36.500 --> 00:00:44.500 and B, the second part of the theory is you increase wealth through participation and integration in the division of labor 8 00:00:44.500 --> 00:00:52.500 and C, through population control that is by maintaining the optimal population size 9 00:00:52.500 --> 00:00:57.960 Now, I shall not comment further on the first two answer components, assuming that they 10 00:00:57.960 --> 00:01:08.180 are largely familiar. However, some comments on the third component are needed in this context. 11 00:01:08.180 --> 00:01:14.960 That wealth depends on the population size follows from the law of returns and the Malthusian 12 00:01:14.960 --> 00:01:21.840 law of population, which Ludwig von Mises has classified as indisputable laws and ranked 13 00:01:21.840 --> 00:01:25.640 among the truly great achievements of thought. 14 00:01:25.640 --> 00:01:31.960 Now the law of return states that for any combination of two or more production factors 15 00:01:31.960 --> 00:01:39.440 an optimum combination exists such that any deviation from this optimum combination involves 16 00:01:39.440 --> 00:01:43.320 material waste or efficiency losses. 17 00:01:43.320 --> 00:01:50.000 Applied to the two original factors of production that is land and labor, land being nature 18 00:01:50.000 --> 00:01:58.000 The law implies that if one were to increase the quantity of labor, that is, the population 19 00:01:58.000 --> 00:02:05.440 size, while the quantity of land and the available technology remain fixed, eventually a point 20 00:02:05.440 --> 00:02:11.620 will be reached where the physical output per labor input is maximized. 21 00:02:11.620 --> 00:02:15.160 This point marks the optimal population size. 22 00:02:15.160 --> 00:02:21.520 If there is no additional land available and technology is fixed at a given level, then 23 00:02:21.520 --> 00:02:27.720 any population increase beyond the optimal size will lead to a progressive decline in 24 00:02:27.720 --> 00:02:30.400 per capita incomes. 25 00:02:30.400 --> 00:02:36.240 Now I want to say a few things about economic history. 26 00:02:36.240 --> 00:02:42.160 I want to take a look at what appears to be the most fundamental datum of human economic 27 00:02:42.160 --> 00:02:49.160 History, and I will do this with the help of two charts. The first one, the upper one, 28 00:02:50.220 --> 00:02:57.220 is taken from Gregory Clarke, Farewell to Arms, which shows that for most of human history 29 00:02:57.940 --> 00:03:04.940 until sometime around 1800, real income per capita did not rise. This is indicated there. 30 00:03:04.940 --> 00:03:14.340 is indicated there. In short, this is the thesis that average living standards in 18th 31 00:03:14.340 --> 00:03:21.460 century England, for instance, were not higher than those in ancient Babylon. The second 32 00:03:21.460 --> 00:03:32.620 chart is taken from Colin McEverde and Richard Jones and the Atlas of World Population History 33 00:03:32.620 --> 00:03:41.500 And this chart complements the first and shows human population growth from about 12,000 34 00:03:41.500 --> 00:03:54.460 before Christ, as is not all the way indicated on this, until the present of year 2000. It 35 00:03:54.460 --> 00:04:01.900 likewise shows a significant break occurring during the late 18th or 19th century. Until 36 00:04:01.900 --> 00:04:10.000 Until then, until this point, the population size grew only slowly, and since then population 37 00:04:10.000 --> 00:04:13.660 growth has increased very sharply. 38 00:04:13.660 --> 00:04:20.300 In combination, both charts capture the world historic significance of the so-called Industrial 39 00:04:20.300 --> 00:04:27.220 Revolution, which occurred some 200 years ago, as well as the significance, and in particular 40 00:04:27.220 --> 00:04:35.340 the length of the previous so-called Malthusian stage of human development. During the Malthusian 41 00:04:35.340 --> 00:04:41.740 age, the population size continuously pressed against the means of subsistence. To be sure, 42 00:04:41.740 --> 00:04:48.980 the population size could grow mostly because more land was taken into possession and partly 43 00:04:48.980 --> 00:04:56.300 also because of better technology incorporated in better producer goods and an extended and 44 00:04:56.300 --> 00:04:59.160 Intensified Division of Labor. 45 00:04:59.160 --> 00:05:06.240 But all such economic gains were always eaten up quickly by a growing population that again 46 00:05:06.240 --> 00:05:12.820 encroached upon the available means of subsistence and led to overpopulation and the emergence 47 00:05:12.820 --> 00:05:20.720 of what Mises called supernumerary specimens for whom there was no place in the division 48 00:05:20.720 --> 00:05:27.720 of Labor and who consequently had to be weeded out due to a lack of substance, sustenance. 49 00:05:28.120 --> 00:05:35.120 Today in modern western societies no such supernumerary specimens exist, but for most 50 00:05:35.120 --> 00:05:40.520 of human history this was indeed the case and it is still the case in many parts of 51 00:05:40.520 --> 00:05:46.680 the so-called third world. There were ups and downs in real incomes during the Malthusian 52 00:05:46.680 --> 00:05:53.700 Age, owing to various external events and pronounced individual and regional income differences 53 00:05:53.700 --> 00:06:00.700 existed, but nowhere was there a continuous upward trend in real incomes per person, which 54 00:06:00.720 --> 00:06:06.820 we have come to take for granted since then. Throughout the entire age, the iron law of 55 00:06:06.820 --> 00:06:13.820 wages held sway. Income and wages were held down near subsistence level owing to the existence 56 00:06:13.820 --> 00:06:18.820 and the existence of a substantial number of supernumerary specimens. 57 00:06:18.820 --> 00:06:21.820 Now I come to the explanation. 58 00:06:21.820 --> 00:06:29.820 Now what is the cause of the lengthy Malthusian Age and of the only recent Industrial Revolution? 59 00:06:29.820 --> 00:06:35.820 The standard answer among economists and in particular among libertarian economists is 60 00:06:35.820 --> 00:06:42.820 there must have been institutional impediments, in particular an insufficient protection of private property rights 61 00:06:42.820 --> 00:06:50.820 that prevented a quicker development and these impediments were removed only recently, that is until about 1800. 62 00:06:50.820 --> 00:06:55.820 This essentially is also Mises' explanation, also Rothbard's by the way. 63 00:06:55.820 --> 00:07:02.820 And I want to argue that this explanation is mistaken and present at least the outlines of an alternative explanation. 64 00:07:02.820 --> 00:07:08.820 Most obviously the standard explanation is faulty because, put bluntly, 65 00:07:08.820 --> 00:07:13.940 Finally, there simply was no revolutionary institutional change concerning the security 66 00:07:13.940 --> 00:07:20.020 of private property that preceded or accompanied the Industrial Revolution. Property rights 67 00:07:20.020 --> 00:07:25.400 had been well protected at many places and many times among hunter-gatherers as well 68 00:07:25.400 --> 00:07:32.140 as in settled societies. And from all we know, for instance, property rights in 1200 England 69 00:07:32.140 --> 00:07:37.940 and in much of feudal Europe were better protected than they are today in contemporary England 70 00:07:37.940 --> 00:07:44.700 and Contemporary Europe. That is, every institutional incentive favorable to capital accumulation 71 00:07:44.700 --> 00:07:50.600 and the division of labor was long in place and yet nowhere until about 1800 did mankind 72 00:07:50.600 --> 00:07:57.100 succeed to extricate itself from the Malthusian trap. Today, we take it for granted that it 73 00:07:57.100 --> 00:08:03.260 is solely our unwillingness to consume less and to save more that imposes limits on economic 74 00:08:03.260 --> 00:08:09.000 and Growth. Yet this phenomenon is actually quite new. For most of human history, savings 75 00:08:09.000 --> 00:08:14.460 were held back by a lack of ideas of how to productively invest them. That is, of how 76 00:08:14.460 --> 00:08:20.280 to convert plain savings or storing of goods into productive savings, namely the production 77 00:08:20.280 --> 00:08:26.580 of producer goods. For Crusoe, for instance, it was not sufficient to have a low time preference 78 00:08:26.580 --> 00:08:33.140 into save. Rather, Crusoe also had to conceive the idea of a net, for instance, and must 79 00:08:33.140 --> 00:08:38.300 Property Rights have known how to build it from scratch. If no one is capable to do this 80 00:08:38.300 --> 00:08:44.660 or to imitate what someone else has invented before, even the safest of property rights 81 00:08:44.660 --> 00:08:51.100 will simply make no difference. Every incentive needs a receptor to work. And if a receptor 82 00:08:51.100 --> 00:08:57.540 is lacking or insufficiently sensitive, different incentive structures do not matter. Hence, 83 00:08:57.540 --> 00:09:02.780 the institution of property protection can be regarded as only a necessary but not also 84 00:09:02.780 --> 00:09:08.280 and also as a sufficient condition of economic growth, that is of rising per capita incomes. 85 00:09:08.280 --> 00:09:14.420 So some other empirical factor which does not figure in pure economic theory must explain 86 00:09:14.420 --> 00:09:18.940 the lengths of the Malthusian age and how we got out of it. 87 00:09:18.940 --> 00:09:25.700 And this missing factor is the historical variable of human intelligence. 88 00:09:25.700 --> 00:09:31.040 Man is physically weak and ill-equipped to deal with brute nature. 89 00:09:31.040 --> 00:09:36.200 It was advantageous for him to develop his intelligence, that is, his knowledge of cause 90 00:09:36.200 --> 00:09:41.920 and effect relations, and to be successful as hunter and gatherers and even more so as 91 00:09:41.920 --> 00:09:50.920 agriculturalists, and keep in mind until about 1,890% of the population worked in agriculture. 92 00:09:50.920 --> 00:09:53.520 This required some intelligence. 93 00:09:53.520 --> 00:09:59.620 Not every person was equally intelligent, however, and higher intelligence translated 94 00:09:59.620 --> 00:10:06.620 then into greater economic success and greater economic success in turn translated into greater 95 00:10:06.700 --> 00:10:13.700 reproductive success that is led to producing a larger number of surviving descendants. 96 00:10:14.320 --> 00:10:21.320 For the existence of both of these relationships, that is intelligence leads to success and 97 00:10:22.620 --> 00:10:27.920 greater success leads to reproductive success, there exists a massive amount of empirical 98 00:10:27.920 --> 00:10:36.000 Now, further, this tendency of selecting for higher intelligence would be particularly 99 00:10:36.000 --> 00:10:42.120 pronounced under harsh external conditions. If the human environment is unchangingly constant 100 00:10:42.120 --> 00:10:47.680 and mild, as in the seasonless tropics, for instance, where one day is like another year 101 00:10:47.680 --> 00:10:54.360 in and year out, high or exceptional intelligence offers a lesser advantage than in an inhospitable 102 00:10:54.360 --> 00:11:01.360 environment with widely fluctuating seasonal variations. The more challenging the environment, 103 00:11:01.720 --> 00:11:06.760 the higher the premium placed on intelligence as a requirement of economic and consequently 104 00:11:06.760 --> 00:11:12.520 of reproductive success. Hence, the growth of human intelligence would be most pronounced 105 00:11:12.520 --> 00:11:18.520 in harsher and that is historically of course in more northern regions of human habitation. 106 00:11:18.520 --> 00:11:24.520 Now, this theoretical explanation fits the historical data. The theory explains why it 107 00:11:24.520 --> 00:11:29.920 took so long to get out of the Malthusian trap and how such a feat was possible at all 108 00:11:29.920 --> 00:11:35.880 and we did not remain under Malthusian conditions forever. Mankind was simply not intelligent 109 00:11:35.880 --> 00:11:42.400 enough to achieve productivity increases that could continuously outstrip population growth. 110 00:11:42.400 --> 00:11:47.920 A certain threshold of average and exceptional intelligence had to be reached first for this 111 00:11:47.920 --> 00:11:54.920 is to become possible, and it took time, until about 1800, to breed such level of intelligence. 112 00:11:55.280 --> 00:12:01.260 In addition, the theory explains why the Industrial Revolution originated and then took hold immediately 113 00:12:01.260 --> 00:12:07.680 in some, generally northern regions, but not in others, and why there had always existed 114 00:12:07.680 --> 00:12:12.920 persistent regional income differences, and why these differences could have increased 115 00:12:12.920 --> 00:12:18.960 rather than decreased since the time of the Industrial Revolution. 116 00:12:18.960 --> 00:12:21.960 Now several implications follow from this. 117 00:12:21.960 --> 00:12:28.320 First, the theory that I sketched here entails a fundamental criticism of the egalitarianism 118 00:12:28.320 --> 00:12:34.200 that is rampant within the social sciences generally, but also among many libertarians. 119 00:12:34.200 --> 00:12:39.040 True, economists allow for instance for human differences in the form of different labor 120 00:12:39.040 --> 00:12:44.280 Productivities, but these differences are generally interpreted as a result of different 121 00:12:44.280 --> 00:12:49.800 external conditions, that is, of different endowments or different training. Only rarely 122 00:12:49.800 --> 00:12:56.640 are internal biologically anchored characteristics admitted as possible sources of human differences. 123 00:12:56.640 --> 00:13:01.780 And even if economists admit the obvious, that is, that human differences have internal 124 00:13:01.780 --> 00:13:08.240 biological sources as well, as Mises certainly does, they typically still ignore that these 125 00:13:08.240 --> 00:13:13.800 These differences are themselves in turn the outcome of a lengthy process of natural selection 126 00:13:13.800 --> 00:13:19.880 in favor of human characteristics and dispositions, physical and mental, that are determinant 127 00:13:19.880 --> 00:13:25.400 of economic success and more or less highly positively correlated with economic success 128 00:13:25.400 --> 00:13:27.160 of reproductive success. 129 00:13:27.160 --> 00:13:34.400 That is, it is still largely overlooked that we, the modern men, are a very different breed 130 00:13:34.400 --> 00:13:38.960 from our predecessors hundreds or even thousands of years ago. 131 00:13:38.960 --> 00:13:44.520 Second, once it is realized that the Industrial Revolution was first and foremost the outcome 132 00:13:44.520 --> 00:13:49.680 of the evolutionary growth of human intelligence rather than the mere removal of institutional 133 00:13:49.680 --> 00:13:54.740 barriers to growth, the role of the state can be recognized as fundamentally different 134 00:13:54.740 --> 00:13:59.120 under Malthusian versus post-Malthusian conditions. 135 00:13:59.120 --> 00:14:05.160 Under Malthusian conditions, the state doesn't matter much, at least as far as macro effects 136 00:14:05.160 --> 00:14:06.160 are concerned. 137 00:14:06.160 --> 00:14:11.400 A more exploitative state will simply lead to a lower population number, much like a 138 00:14:11.400 --> 00:14:15.720 pest would do, but it does not affect per capita income. 139 00:14:15.720 --> 00:14:22.440 In fact, in lowering the population density, income per capita may even rise, as it did, 140 00:14:22.440 --> 00:14:26.600 for instance, after the great pestilence in the mid-14th century. 141 00:14:26.600 --> 00:14:32.360 And in reverse a good less exploitative state will allow for a growing number of people 142 00:14:32.360 --> 00:14:39.000 but per capita incomes will not rise or may even fall because land per capita is reduced. 143 00:14:39.000 --> 00:14:44.840 Now all this changes with the industrial revolution for if productivity gains continuously outstripped 144 00:14:44.840 --> 00:14:51.280 population increases and allow for a steady increase in per capita incomes then an exploitative 145 00:14:51.280 --> 00:14:57.360 institutions such as the state can continuously grow without lowering the per capita income 146 00:14:57.360 --> 00:14:59.640 and reducing the population number. 147 00:14:59.640 --> 00:15:05.000 The state then becomes a permanent drag on the economy and per capita incomes. 148 00:15:05.000 --> 00:15:09.960 And the third implication that I want to mention is, whereas under Malthusian conditions positive 149 00:15:09.960 --> 00:15:16.160 eugenic effects reign, that is, the economically successful produce more offspring and the 150 00:15:16.160 --> 00:15:22.480 The population's stock is thus gradually bettered, so to speak. Under post-Malthusian conditions, 151 00:15:22.480 --> 00:15:28.160 the existence and the growth of the state produces a two-fold dysgenic effect, especially 152 00:15:28.160 --> 00:15:35.040 under democratic welfare conditions. For one, the economically challenged, so to speak, 153 00:15:35.040 --> 00:15:39.640 as the principal clients of the welfare state produce more offspring and the economically 154 00:15:39.640 --> 00:15:45.560 successful produce less. And secondly, the steady growth of a parasitic state made possible 155 00:15:45.560 --> 00:15:51.580 by a growing underlying economy systematically affects the requirements of success. 156 00:15:51.580 --> 00:15:56.760 Economic success becomes increasingly dependent on politics and political talent, that is 157 00:15:56.760 --> 00:16:01.440 the talent of using the state to enrich oneself at others' expense. 158 00:16:01.440 --> 00:16:08.040 And in any case, the population stock becomes increasingly worse as far as prosperity and 159 00:16:08.040 --> 00:16:14.520 economic growth is concerned rather than better as used to be the case under Malthusian conditions. 160 00:16:15.520 --> 00:16:17.520 Thank you very much.