By Eric Vandenbroeck and co-workers
As we have seen in part one, survival and reproduction. Living standards bordered on the subsistence level and scarcely varied over millennia. We have experienced a dramatic improvement in the quality of life.
Living standards bordered on the subsistence level and scarcely varied over millennia. We have experienced a dramatic improvement in the quality of life.
This desperate mass exodus, in which people not only endanger their lives but leave behind their families and homeland, and pay considerable sums they can scarcely afford to human traffickers, is primarily a result of the immense inequality in living standards across world regions – manifesting as gaps in human rights, civil liberties, socio-political stability, quality of education, life expectancy, and earning capacity, as well as, most urgently in recent years, the prevalence of violent conflict.
This disparity in living conditions is so vast that the reality of life at one end of the spectrum is difficult to conceive for someone at the other. In 2017, in most developed nations, life expectancy exceeded eighty years, infant mortality was lower than five deaths per 1,000 live births, nearly all the population had access to electricity, a significant fraction had an internet connection, and the prevalence of undernourishment was about 2.5 percent. In the least developed nations, by contrast, life expectancy was lower than sixty-two years, infant mortality rates surpassed sixty deaths per 1,000 births, less than 47 percent of the population had access to electricity, less than a tenth of 1 percent had an internet connection, and 19.4 percent suffered from undernourishment.
Equally disconcerting is the gap in living standards across social, ethnic, and racial lines within societies, manifesting as disparities in education, income, and health. In 2019, before the impact of Covid-19, in the world’s most prosperous country, the United States, the life expectancy of African Americans was 74.7, whereas that of white Americans was 78.8; infant mortality rates per 1,000 were 10.8 for African Americans and 4.6 for white Americans; and 26.1 percent of African Americans had a college degree by the age of twenty-five, in contrast to 41.1 percent of white Americans.
Even so, the gulf in living standards between the richest and the poorest countries is so much more significant than millions of women and men risk their lives to reach the developed world.
But why do the citizens of some countries earn significantly more than the residents of others? This earning gap partly reflects differences in ‘labor productivity: each hour of work in some world regions produces goods or services of more excellent value than an equivalent hour of work elsewhere. Agricultural labor productivity, for instance, varies enormously across countries. In the United States, agricultural productivity per worker in 2018 is nearly 147 times higher than in Ethiopia, 90 times higher than in Uganda, 77 times higher than in Kenya, 46 times higher than in India, 48 times higher than in Bolivia, 22 times higher than in China and six times higher than in Brazil. But again, why do American farmers reap a far bigger harvest than the farmers of sub-Saharan Africa, South East Asia, and most of South America?
The answer should come as no surprise: these differences are primarily a reflection of the technologies for cultivation and harvesting used in each country, as well as the skills, education, and training of farmers. For example, American farmers use tractors, trucks, and combine harvesters, while farmers in sub-Saharan Africa are more likely to rely on wooden plows often pulled by oxen. Moreover, American farmers are better trained and can use genetically modified seeds, advanced fertilizers, and refrigerated transportation, which may not be feasible or profitable in the developing world.
Nonetheless, this chain of proximate causes does not shed light on the roots of the disparity. It simply directs us to a more fundamental question: Why does the production process in certain countries benefit from more skilled workers and more sophisticated technologies?
Rusty Tools Previous attempts to understand economic growth, like that of Nobel Prize-winning economist Robert Solow, focused on the importance of the accumulation of physical capital – straw baskets, rakes, tractors, and other machines – to economic growth.
Suppose that a couple harvests enough wheat to bake a few dozen loaves of bread a week. They use some of these loaves to feed their family and sell the remainder at the village market. Once they have saved enough, they purchase a plow, increasing their stock of physical capital, their harvests, and ultimately the number of loaves of bread they can bake per week. As long as the couple does not have additional children, this accumulation of capital (the addition of a plow) will help them increase their per capita income. The impact of this physical capital accumulation, however, is constrained by the law of diminishing marginal productivity: as the amount of land and time available to them is limited, then if that first plow boosts the couple’s output by five loaves of bread a week, a second plow might only contribute three more loaves, while the fifth plow may hardly boost productivity at all.
The necessary corollary of this analysis is that only perpetual improvements in the efficiency of the plow will deliver long-term income growth for these villagers. Furthermore, acquiring a new plow would spur faster growth on a poor farm than on a more advanced farm of equal size because this would likely be the first on the poor farm, whereas it might be the third or the fourth on the rich one. Thus, a relatively poor farm should grow more quickly than a more advanced one, and over time the income gap between the poor and the prosperous farms should narrow.
Solow’s growth model suggests that economic growth cannot be sustained indefinitely in the absence of technological and scientific progress. Moreover, it predicts that, with time, income disparities between countries that differ only in their initial levels of per capita income and capital stocks should diminish.
Evolution of Per Capita Income across Countries, 1850-2016
Imagine a marathon race where the further runners get from the starting point, the harder each additional step becomes. If one group of runners starts the race a few minutes earlier than a second, equally talented group of runners, the first group will keep ahead of the latecomers. Still, the gap between the two will be narrowing with every stride they take. Analogously, in countries that differ only in their initial levels of per capita income and capital stock, those poorer economies that started the race later should gradually converge with those more prosperous economies that started the race earlier. Thus the income gaps across these nations should eventually decline.
As the above figure shows, the economies of the developed and developing nations have not converged. Quite the contrary, in fact: the gaps in living standards between regions have primarily expanded over the past two centuries.
What prompted this significant divergence between some countries? And what are the forces that have prevented some poorer nations from catching up with richer ones? In the second half of the twentieth century, policymakers advanced programs to raise the living standards of developing countries based on the insight that technological progress and the accumulation of physical and human capital stimulate economic growth. However, inequality across nations persists to such an extent as to suggest that these policies have had a limited impact. Too narrow a focus on observable factors on the surface – the manifested disparities – rather than on the underlying causes that created them has prevented the design of policies that would help poorer nations overcome the less visible but more persistent obstacles they face. These forces could have made a barrier that inhibited investments, education, and the adoption of new technologies, contributing to uneven development across the globe. It is these underlying causes and obstacles that we will need to identify if we wish to decipher the Mystery of Inequality and foster global prosperity.
Trade, Colonialism and Uneven Development
During the nineteenth century, international trade rose significantly. The rapid industrialization of north-western Europe triggered it, enabled and fuelled by colonialism and encouraged by reducing trade barriers and transportation costs. Of the entire world’s output in 1800, only 2 percent was traded internationally. By 1870 that share had risen five-fold to 10 percent; by 1900, it was 17 percent, and by 1913, on the eve of World War I, it stood at 21 percent. While a significant portion of this commerce took place between the industrialized societies, developing economies were an important and growing market for their exports. The patterns that emerged over this period were unambiguous: north-western European countries were net exporters of manufactured goods, whereas the exports of Asian, Latin American, and African economies were overwhelmingly composed of agricultural-based products and raw materials.
While technological advances during this era could have spawned the Industrial Revolution without the contribution of the expansion of international trade, the pace of industrialization and the rate of growth in Western European nations was intensified by this commerce, as well as by the exploitation of colonies, their natural resources, their native populations, and enslaved Africans and their descendants. Likewise, the Atlantic triangular trade, which was at its height in the preceding centuries, and the growing trade with Asia and Africa had a major impact on Western European economies. The trade-in goods itself was highly profitable. Still, it also provided raw materials such as timber, rubber, and natural cotton for the process of industrialization, all cheaply produced through enslaved people and forced labor. Meanwhile, the production in the European colonies of agricultural products such as wheat, rice, sugar, and tea enabled European nations to enhance their specialization in the production of industrial goods and benefit from the expanding markets for their products in the colonies.
The share of national income derived from international trade in the UK grew significantly: from 10 percent in the 1780s to 26 percent in 1837-45, and 51 percent in 1909-13. Exports were critical for the viability of some sectors, especially the cotton industry, in which 70 percent of UK output was exported in the 1870s. Other European economies experienced a similar pattern. The proportion of national income resulting from foreign trade on the eve of World War I was 54 percent in France, 40 percent in Sweden, 38 percent in Germany, and 34 percent in Italy.
This expansion of international trade in the early phases of industrialization had a significant – and asymmetrical – effect on the development of industrial and non-industrial economies. In industrial economies, it encouraged and enhanced specialization in producing industrial goods that required a relatively highly skilled workforce. The associated rise in demand for skilled labor in these nations intensified their investment in human capital and expedited their demographic transition, further stimulating technological progress and enhancing their comparative advantage in producing such goods. In non-industrial economies, by contrast, international trade incentivized specialization in producing relatively low-skilled agricultural goods and raw materials. The absence of significant demand for educated workers in these sectors limited the incentive for investment in human capital and thus delayed their demographic transition, further increasing their relative abundance of low-skilled labor and enhancing their comparative disadvantage in the production of ‘skill-intensive’ goods.
Accordingly, globalization and colonization contributed to the divergence in the wealth of nations in the past two centuries. While in industrial countries, the gains from trade were directed primarily towards investment in education and led to growth in income per capita. A more significant portion of the profits from trade in non-industrial nations was channeled towards increased fertility and population growth. These forces persistently affected the distribution of population, skills, and technologies worldwide, widening the technological and education gaps between industrial and non-industrial economies and so enhancing rather than diminishing the initial patterns of comparative advantage. The premise of this argument – that international trade generated opposing effects on fertility rates and education levels in developed and less developed economies – is supported by regional and cross-country analysis based on current and historical data.
This asymmetric impact of globalization and colonization is also strikingly evident from the rate of industrializationof industrialization in developed and developing countries. The level of industrialization per capita in the United Kingdom rose 50 percent between 1750 and 1800, quadrupled between 1800 and 1860, and nearly doubled between 1860 and 1913. In the United States, it increased four-fold between 1750 and 1860 and six-fold between 1860 and 1913. A comparable pattern was experienced by Germany, France, Sweden, Switzerland, Belgium and Canada. In contrast, developing economies experienced a decline in per capita industrialization during the nineteenth century, and it took nearly two centuries for them to revert to their initial levels before finally taking off in the second half of the twentieth century.
The trading relationship between the UK and its colony India exemplifies this pattern. Between 1813 and 1850, as India experienced a rapid expansion in its exports and imports, the country gradually transformed from being an exporter of manufactured products – predominantly textiles – into a supplier of agricultural goods and raw materials. Trade with the UK was fundamental in this process. The UK supplied over two-thirds of India’s imports (primarily manufactured goods) for most of the nineteenth century and was the market for over a third of its exports.
The effect this had in the UK will by now be familiar. By fostering the process of industrialization, trade helped contribute to the significant increase in demand for skilled labor in the second phase of the Industrial Revolution. The average years of schooling of the male labor force of England, which did not change significantly until the 1830s, had tripled by the beginning of the twentieth century. School enrolment at the age of ten increased from 40 percent in 1870 to nearly 100 percent in 1902. In the 1870s, the overall fertility rate in the UK started to drop, and in the subsequent fifty years, it declined from about five children per woman to nearly 2.5. Over this same period, the economy transitioned into sustained growth in income per capita at almost 2 percent per year.
The Impact of Globalisation: Industrialisation and Deindustrialisation across the Globe
In contrast, India experienced a decline in its per capita level of industrialization. The entrenchment of the agricultural sector in India, for which education was not essential, contributed to the persistence of widespread illiteracy well into the twentieth century. In the twentieth century, attempts to enlarge primary education were hampered by low attendance and high dropout rates. Despite the gradual spread of education, 72 percent of Indians beyond fifteen had no schooling in 1960. In the absence of significant human capital formation, the demographic transition in India was delayed well into the second half of the twentieth century.
And yet, domination, exploitation, and asymmetric trade patterns during the colonial age enhanced pre-existing patterns of comparative advantage rather than generating them in the first place. What accounts for the uneven development before the colonial period? What allowed some countries to become colonizers and forced others to become non-industrialized colonized?
To decipher the Mystery of Inequality, we will need to unveil more deeply rooted factors than the ones identified thus far.
Imagine that one bright morning you pull yourself out of bed, brew a cup of coffee and while stepping outside to greet the day, discover that the grass is greener outside your neighbors’ house.
Why is their lawn so lush? A technical reply might be that your neighbors’ grass reflects light at wavelengths in the green range of the spectrum, while yours reflects light closer to the yellow range. This explanation, while perfectly accurate, is not particularly helpful – it gets us no closer to understanding the root of the matter. A more thorough, less pedantic response would focus on the differences in the timing, intensity and methods that you and your neighbors have used in taking care of your lawns: irrigating, mowing, fertilizing, and applying pesticides.
Nevertheless, these reasons, vital as they may be, still might not uncover the root causes for your neighbors’ grass being greener. They represent proximate causes for the visible differences in the quality of the two lawns, behind which are the underlying reasons that explain why your neighbors irrigate their lawn more regularly, or why they are more successful at pest control. If you fail to understand the roles of these deep-rooted factors, your attempts to emulate your neighbors’ gardening methods, persistent as they may be, might not yield the dazzling green hue that you desperately crave.
Geographical factors might lie behind the visible differences between the two lawns – variations in soil quality and exposure to sunlight might frustrate your efforts to mimic your neighbors’ success. Alternatively, the differences might reflect underlying cultural factors that reflect the environment in which they and you were raised and the nature of the education you received – cultural traits, such as an especially future-oriented mindset, that drive them to great lavish care and attention on their lawn, watering and mowing it at the optimal times.
It might be that the two properties are under the jurisdiction of different municipal authorities. Your local council has imposed a watering ban to conserve water, while your neighbours are free to water their lawn to their heart’s content. So it could be an institutional factor that prevents you from imitating your neighbors’ gardening techniques and closing the gap between the two lawns. Or it could be a deeper reason, still, in your respective municipalities, that leads to these institutional differences, something associated with the very make-up of your neighbors’ community. More homogeneous communities are better positioned to implement regulations and collective decisions about public investment in irrigation infrastructure and the eradication of pests. In contrast, more heterogeneous communities might benefit from the cross-fertilization of diverse, innovative gardening techniques. In this sense, it could be that population diversity is the underlying cause of the gap between the two lawns.
Like the differences between the two lawns, the immense disparities in the wealth of nations are rooted in a chain of causal factors: at the surface are proximate factors, such as the technological and educational differences between countries; at the core are the more profound and ultimate factors – institutions, culture, geography, and population diversity – that lie at the root of it all. Although it may be challenging to disentangle the impact of proximate and ultimate factors, the distinction is critical if we understand how these deep-rooted factors have affected the speed at which the great cogs of human history have turned and thus governed the pace of economic development in different places.
The Korean Peninsula Satellite imagery of night-time light
In the bottom portion of the picture is the prosperous country of South Korea, late in the evening: a glittering galaxy of stars radiating the light of prosperity. South Koreans drive back from work on illuminated roads, spend their evenings in restaurants, malls, cultural centers flooded with light, or with their families in their well-lit homes. In contrast, the top segment of the picture contains one of the poorest countries on Earth – North Korea, engulfed in darkness. Most North Koreans prepare for an early bedtime in the gloom of intermittent power outages. Their country does not produce sufficient energy to keep its electricity grid permanently switched on even in the capital city, Pyongyang.
The disparities between North and South Korea are neither the result of geographical or cultural differences nor a reflection of North Koreans’ lack of knowledge about building and maintaining a functioning electricity grid. For most of the past millennium, the Korean Peninsula essentially formed a single social entity, whose inhabitants shared a common language and culture. However, the partition of Korea after World War II into Soviet and American spheres of influence brought about divergent political and economic institutions. North Korea’s poverty and technological underdevelopment – like that of East Germany before the fall of the Berlin Wall – originates in political and financial institutions that restricted personal and economic freedoms. Insufficient constraints on government power, the limited rule of law, insecure property rights, andrently inefficient central planning hav hindered entrepreneurship and innovation whileraging corruption and fostering stagnation and poverty. Not surprisingly, South Koreans enjoyed per capita income levels twenty-four times higher than that of their northern neighbors in 2018 and a life expectancy eleven years longer in 2020; differences based on other measures of quality of life are no less drastic.
More than two hundred years ago, the British political economists Adam Smith and David Ricardo highlighted the importance of specialization and trade for economic prosperity. Yet, as argued by the Nobel Prize-winning American economic historian Douglass North, a critical precondition for the existence of trade is the presence of political and economic institutions, such as binding and enforceable contracts, that enable and encourage it. Put, if the governing institutions fail to prevent the violation of agreements – or indeed racketeering, theft, intimidation, nepotism, or discrimination – trade is likely to be significantly more complex and the typical gains it conveys less available.
Societies relied on kinship ties, tribal and ethnic networks, and informal institutions to facilitate and foster trade in the distant past. Medieval Maghribi traders, for example, imposed collective sanctions on those who violated agreements and built on the specialties between far-flung communities to develop a flourishing transnational trade across North Africa and beyond. However, as human societies grew more extensive and more complex, it became necessary to formalize these norms. Societies that ultimately developed institutions conducive to trade – shared currencies, property rights protections, and a set of uniformly enforced laws – would have been better able to foster economic growth, reinforcing the virtuous cycle between the size and composition of the population and technological progress. Societies that were late to develop pro-trade institutions would have lagged.
Throughout human history, the concentration of political and economic power in the hands of a narrow elite, empowering them to protect their privileges and preserve existing disparities, has typically held back the tide of progress. It has stifled free enterprise, prevented significant investment in education, and suppressed economic growth and development. Scholars refer to institutions that enable elites to monopolize power and perpetuate inequality as extractive institutions. In contrast, institutions that decentralize political power, protect property rights and encourage private enterprise and social mobility are considered inclusive. In their book Why Nations Fail, the economists Daron Acemoglu and James A. Robinson have demonstrated that differences in political institutions of this sort have contributed to the gaps between nations. Extractive institutions have typically hindered human capital accumulation, entrepreneurship, and technological progress, delaying the transition from stagnation to long-term economic growth, whereas inclusive institutions have reinforced these processes.
Yet history suggests that extractive political institutions need not be detrimental at every stage of economic development. Dictators have occasionally orchestrated major reforms in response to external threats to their regimes, as happened in Prussia in the aftermath of its defeat by Napoleon in 1806 and Japan in the late nineteenth century during the Meiji Restoration. Moreover, for decades after the partition of the Korean Peninsula, South Korea was a dictatorship – it did not begin its transition towards democracy until 1987 – and yet over these three decades, it enjoyed impressive growth while North Korea remained undeveloped. Both Koreas were ruled initially by autocracies; their fundamental difference lay in their economic doctrines. The dictators in Seoul adopted private property protections and far-reaching agrarian reforms that decentralized political and economic power, while their rivals in Pyongyang opted for a massive nationalization of private property and land and centralized decision-making. These early differences provided South Korea with a significant economic head start over North Korea, long before it became a democracy. Similarly, the non-democratic regimes that used to rule Chile, Singapore, and Taiwan – and the ones that still govern China and Vietnam – successfully spurred long-term economic growth by promoting investment in infrastructure and human capital, the adoption of advanced technologies, and the promotion of a market economy.
Nevertheless, while non-inclusive political institutions can coexist with viable inclusive economic institutions, this has mainly been the exception rather than the rule – and at critical junctures in human history, the rule appears to have been a pivotal one. Inclusive institutions might partly explain why the Industrial Revolution first began in Britain of all places. In contrast, the presence of extractive institutions may shed light on why some previously colonized parts of the world continue to lag, decades after their official liberation from colonial rule.
Institutional Origins of the British Ascent
Britain’s unprecedented leap forward during the Industrial Revolution allowed the country to seize control of vast swathes of the planet and build one of the most powerful empires in history. And yet, for most of human history, the inhabitants of the British Isles lagged behind their neighbors in France, the Netherlands, and northern Italy in terms of wealth and education; Britain was a mere backwater on the edges of Western Europe. British society was agricultural and feudal; a narrow elite held political and economic power, and in the early seventeenth century, many sectors of the economy were aristocratic monopolies by royal decree. Given England's dearth of competition and free enterprise, these monopolized industries were spectacularly unproductive in developing new technologies.
Like many other rulers, English monarchs were hostile to technological change and thwarted their kingdom’s technological progress. One famous and ironic example is associated with the delayed inception of the British textile industry. In 1589, Queen Elizabeth I refused to grant the clergyman and inventor William Lee a patent for his novel knitting machine. She feared that his invention would harm the local guilds of hand knitters, fostering unemployment and, therefore, unrest. Rejected by the English queen, Lee relocated to France, where King Henry IV gladly awarded him the desired patent. Only several decades later did William Lee’s brother sail back to Britain to market this cutting-edge technology, which became the cornerstone of the British textile industry.
However, in the late seventeenth century, Britain’s governing institutions were radically overhauled. King James II’s efforts to entrench an absolutist monarchy and his conversion to Roman Catholicism provoked stiff opposition. The king’s rivals found a savior: William of Orange, stadtholder of various Protestant counties of the Dutch Republic (and husband of Princess Mary, the king’s eldest daughter). They urged him to seize power in Britain. William heeded their call, deposed his father-in-law, and was crowned King William III of England, Ireland, and Scotland. This coup, known as the Glorious Revolution because it was considered, somewhat mistakenly, to be associated with relatively little bloodshed, transformed the balance of political forces in Britain. As a foreign king without a domestic base of support in England, William III depended heavily on Parliament in a way that his predecessor had not.
In 1689, the king gave royal consent to the Bill of Rights, which abolished the monarch’s powers to suspend parliamentary legislation and raise taxes and mobilize armies without Parliament’s consent. England became a constitutional monarchy. Parliament began to represent a relatively wide range of interests, including those of the rising mercantile class. Britain established inclusive institutions that protected private property rights, encouraged private enterprise, and promoted equality of opportunity and economic growth.
Britain intensified its attempts to abolish monopolies in the aftermath of the Glorious Revolution. King Charles II had been awarded a monopoly over the African slave trade, was just one of many companies to lose power. Parliament also passed new legislation to promote competition in the growing industrial sector, undermining the economic interests of the aristocracy. In particular, it reduced taxes on industrial furnaces while raising duties on land, which was largely owned by the nobility.
These reforms, which were unique to Britain at the time, created incentives that did not exist elsewhere in Europe. In Spain, for example, the Crown zealously guarded its control on profits from its transatlantic trade, often funneling them into funding wars and the consumption of luxury goods. In Britain, the gains from the transatlantic trade in raw materials, goods, and enslaved Africans were shared by a broad class of merchants. They were, therefore primarily invested in capital accumulation and economic development. These investments laid the foundations for the unprecedented technological innovations of the Industrial Revolution.
Britain’s financial system also underwent a dramatic metamorphosis at the time, further enhancing economic development. King William III adopted the advanced financial institutions of his native Holland, including the stock exchange, government bonds, and a central bank. Some of these reforms expanded access to credit for non-aristocratic entrepreneurs and encouraged the English government to be more disciplined in balancing government expenditure and tax revenue. Parliament gained stronger powers of oversight over public debt issuance, and bondholders – those who had lent money to the Crown – won representation in the decision-making process concerning fiscal and monetary policies. Britain thus came to enjoy greater credibility in the international credit market, reducing its borrowing costs compared to other European kingdoms.
The industrial revolution
Ultimately, the quest for some of the deepest roots of modern-day prosperity led us further back to where it all began: the initial steps of the human species out of Africa, tens of thousands of years ago. The degree of diversity within each society, as determined partly by the course of that exodus, has had a long-lasting effect on economic prosperity over the entire course of human history – with those who enjoyed the sweet spot of innovation-inducing cross-fertilization and social cohesiveness benefiting most.
In recent decades, the rapid diffusion of development among poorer countries has promoted the adoption of growth-enhancing cultural and institutional characteristics in all regions of the world and contributed to the growth of developing nations. Modern transportation, medical and information technologies have diminished the adverse effects of geography on economic development, and the intensification of technological progress has further enhanced the potential benefits of diversity for prosperity. If these trends were combined with policies that enabled diverse societies to achieve greater social cohesion and homogeneous ones to benefit from intellectual cross-pollination, then we could begin to address contemporary wealth inequalities at their very roots. Today on Tanna Island, one can find a real airport; primary schools are available for most children; islanders own mobile phones; and streams of tourists, attracted by the Mount Yasur volcano and traditional culture, provide vital revenues to the local economy. While income per capita in the nation of Vanuatu to which the Island belongs is still very modest, it has more than doubled in the past two decades. Despite the long shadow of history, the fate of nations has not been carved in stone. As the great cogs that have governed the journey of humanity continue to turn, measures that enhance future orientation, education, and innovation, along with gender equality, pluralism, and respect for difference, hold the key to universal prosperity.in England may have been contributed to by even earlier institutional reforms. In the fourteenth century, the Black Death killed nearly 40 percent of the inhabitants of the British Isles. The resulting scarcity of agricultural workers increased the serfs’ bargaining power. It forced the landed aristocracy to raise their tenant farmers’ wages to prevent their migration from rural areas to the cities. In hindsight, the plague had delivered a fatal blow to the feudal system, and England’s political institutions became more inclusive and less extractive. The decentralized political and economic power encouraged social mobility and allowed a more significant segment of society to innovate and participate in wealth creation. In Eastern Europe, by contrast, the existence of a harsher feudal order and lower rates of urbanization, along with a growing demand for agricultural output from the West, strengthened the landed aristocracy and its extractive institutions in the aftermath of the Black Death. In other words, what might have been insignificant institutional variations between Western and Eastern Europe before the Black Death led to a major divergence after its outbreak, placing Western Europe on a radically different growth trajectory from Eastern Europe.
The relative weakness of the guilds in Britain also contributed to some of the institutional changes that preceded Britain’s Industrial Revolution. The guilds, which operated across Europe, were institutions that defended the interests of their members – skilled artisans engaged in a particular trade. They often used their monopolistic powers to stifle entrepreneurship and technological progress. For example, the Scribes Guild in late-fifteenth-century Paris managed to bar the entry of the city’s first printing press for nearly twenty years. In 1561, the Red-Metal Turners Guild of Nuremberg pressured the city council to deter a local coppersmith by Hans Spaichi, who had invented a superior slide rest lathe, from spreading his invention, ultimately threatening to jail anyone who dared to adopt his new production techniques. In 1579, the Danzig city council ordered the inventor of a new ribbon loom, which threatened traditional ribbon weavers, to be drowned in secret. And in the early nineteenth century, an angry mob of the Weavers Guild in France protested against Joseph-Marie Jacquard (1752–1834), the inventor of an innovative loom operated using a series of punched cards – technology that would later inspire the programming of the first computers. In contrast, the British guilds were less powerful than their European counterparts, which may have been partly a consequence of the rapid and largely unregulated rebuilding of the City of London in the aftermath of the Great Fire of 1666, as well as rapid market expansion elsewhere, leading to a greater demand for craftsmen than the guilds could supply. Their weakness made it easier for Parliament to protect and enable inventors, allowing British industrialists to adopt new technology quickly and efficiently.
Ultimately, the quest for some of the deepest roots of modern-day prosperity led us further back to where it all began: the initial steps of the human species out of Africa, tens of thousands of years ago. The degree of diversity within each society, as determined partly by that exodus, has had a long-lasting effect on economic prosperity over the entire course of human history – with those who enjoyed the sweet spot of innovation-inducing cross-fertilization and social cohesiveness benefiting most.
In recent decades, the rapid diffusion of development among poorer countries has promoted the adoption of growth-enhancing cultural and institutional characteristics in all regions of the world and contributed to the growth of developing nations. Modern transportation, medical and information technologies have diminished the adverse effects of geography on economic development. The intensification of technological progress has further enhanced the potential benefits of diversity for prosperity. Suppose these trends were combined with policies that enabled diverse societies to achieve greater social cohesion and homogeneous ones to benefit from intellectual cross-pollination. In that case, we could begin to address contemporary wealth inequalities at their very roots. Today on Tanna Island, one can find an actual airport; primary schools are available for most children; islanders own mobile phones; and streams of tourists, attracted by the Mount Yasur volcano and traditional culture, provide vital revenues to the local economy. While income per capita in the nation of Vanuatu to which the Island belongs is still very modest, it has more than doubled in the past two decades. Despite the long shadow of history, the fate of nations has not been carved in stone. As the great cogs that have governed humanity's journey continue to turn, measures that enhance future orientation, education, and innovation, along with gender equality, pluralism, and respect for difference, hold the key to universal prosperity.