29 December 2016
By Warwick Smith and Mitchell Eddy
When the industrial revolution hit in the 1800s, countries with large disparities in wealth, low property ownership, deficient democracies and disparate education systems were left behind.
There’s a new industrial revolution just around the corner, driven by artificial intelligence and robotics. Deterioration within the key institutions of suffrage, education, and land policy indicate that Australia may be one of the countries left behind this time.
The first millennium
One way to anticipate the future is to look to the past.
British economist Angus Maddison has estimated that in the year 0, the population of Western Europe was 24.7 million. 1,000 years later it was 25.4 million – an increase of just 700,000. Total global population increased by only 37.3 million in a millennium. If we had continued at this pace, in 2015 there would have been 312 million people on Earth.
Gross domestic product fared even worse than population. Between the year 0 and 1,000, GDP per capita was stagnant or fell across all of Maddison’s seven global zones.
Over the next 800 years, the pace quickened (a little). World population quadrupled to crack the billion for the first time. By 1819, the Eastern European population of 91.2 million generated some $60.9 billion worth of stuff (1990 International $) or $665 per person.
Then in 1820 everything changed.
Well, sort of.
Fuelled by a potent mix of technology, ideas, appropriated resources and a distressing number of slaves, the Great European powers began to make themselves Great. Certain colonies prospered as well. Countries like the United States and Australia increased their output markedly, quickly distancing themselves from some of the other colonies.
What went right (or wrong)?
There are two key explanations for the changing fortunes of different colonies: factor endowments and institutions (or some combination of the two).
In Guns, Germs and Steel Jared Diamond proposed a particularly entertaining version of the former, where the ability to grow nutritious grains, the presence of draft animals and immunity-inducing epidemics saw Europe come to dominate the world.
Others have argued that, while factor endowments were important, it was the institutions that they gave rise to that really made the difference. With a focus on entrepreneurship and property rights, MIT professor Daron Acemoglu and his colleagues have argued that the presence of disease in certain colonies led to the development of “extractive” economies. Low settlement rates saw a small group of elites seek to concentrate power, appropriating as much wealth as possible and exporting resources back home.
Conversely, places without tropical diseases became “settler colonies”. When Europeans settled these places, the institutional arrangements there mimicked those of the home country. Land and livestock were privately owned by new migrants, which incentivised increases in productivity. Once the industrial revolution came to town, these colonies dramatically increased their output.
Without the hope of social mobility or the pressure of competition, extractive economies failed to take advantage of new opportunities and were left standing at the station while the Industrial Revolution brought wealth to the rest of the world.
While the “private property prescription” is a temptingly simple answer, evidence suggests that a more crucial factor appears to be whether a country developed institutions with a broad franchise (read: equality and equal opportunity) or narrow franchise (inequality and lack of social mobility). Private property certainly has a role to play, but only as part of a wider suite of institutional arrangements.
Characteristics of success
When we look across those countries that did well, a number of key factors stand out.
Suffrage: Countries that broke away from the pack in the 1800s were those in which citizens could vote. This makes sense; the more people that can have a say in government, then the more inclusive government policy should be. The rapid growth of the USA and Australia coincided with a high proportionate of the population able to vote.
In the USA 79.2% of the adult male population voted in the 1844 presidential election. In Australia, economic qualifications for voters were removed in South Australia, Victoria and New South Wales in the 1850s.
Conversely, colonies that were left behind often saw the vast proportion of the population excluded from participating in government elections. Indeed, it was not until the very late 1800s that a number of Latin American countries saw more than 1 or 2% of people voting
Education: Educated people are more productive, flexible and are able to take advantage of technological change. Australia’s egalitarian society saw educational opportunities extended to a broad spectrum of the populace. By 1844, approximately half of its non-Indigenous children were receiving a formal education. By 1901, literacy rates were around 80%.
This occurred in stark contrast to other colonies (including other British colonies, such as in the Caribbean). Despite immense wealth being generated, basic schooling infrastructure was not established on a broad scale – elites sent their children to private schools while other children went without. Up to 1900, literacy rates remained at or below 30% in Bolivia, Brazil, Guatemala, Honduras, Mexico and Paraguay, and was likely below 30% in Columbia, Peru, Puerto Rico and Venezuela.
Land policy: Epitomised by the encomienda system (a system popularised by the Spanish Crown, under which conquerors were rewarded with the labour of certain groups of people), land policy in countries that were left behind attempted to shut people out of the property market. Land was selectively offered in large chunks at prices only the wealthiest could afford.
In Australia, land policy was designed to encourage new migrants and sought to break down the system of class privilege that calcified Mother England. Country lands were sold for as little as £1 per acre, payable over time, and acreages were limited to prevent large holdings.
Australia is becoming a more unequal country. Institutions that had previously fostered greater equality now do the opposite.
This is a problem because it was Australia’s relatively low levels of inequality that put us in an advantageous position during the last industrial revolution. Rapid advances in robotics, automation and Artificial Intelligence suggest a new industrial revolution is just around the corner, but Australia’s key institutions have been so badly eroded that we may be disadvantaged when the full force of this technological change hits.
Home ownership rates are falling and many are shut out of the market. There are substantial funding gaps between private and public schoolsand we are slipping in global education rankings. Australia still has universal suffrage, though only 43% of us believe that it makes any difference whether the Liberal-National Coalition or Labor are in the top spot.
Societies with these characteristics performed particularly badly during the last period of rapid technological change. Many have never recovered. We should be concerned that the institutions that once allowed us to pull ahead may soon be the reason we fall behind.