The Rational Optimist: How Prosperity Evolves

by Matt Ridley

Exchange is to cultural evolution as sex is to biological evolution.

This is what prosperity is: the increase in the amount of goods or services you can earn with the same amount of work.

a million years of natural selection shaped human nature to be ambitious to rear successful children, not to settle for contentment: people are programmed to desire, not to appreciate.

Getting richer is not the only or even the best way of getting happier. Social and political liberation is far more effective,

The precautionary principle – better safe than sorry – condemns itself: in a sorry world there is no safety to be found in standing still.

In civilized society,’ wrote Adam Smith, an individual ‘stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.’

This is the diagnostic feature of modern life, the very definition of a high standard of living: diverse consumption, simplified production. Make one thing, use lots.

So this is what poverty means. You are poor to the extent that you cannot afford to sell your time for sufficient price to buy the services you need, and rich to the extent that you can afford to buy not just the services you need but also those you crave. Prosperity, or growth, has been synonymous with moving from self-sufficiency to interdependence, transforming the family from a unit of laborious, slow and diverse production to a unit of easy, fast and diverse consumption paid for by a burst of specialised production.

Two economists recently concluded, after studying the issue, that the entire concept of food miles is ‘a profoundly flawed sustainability indicator’. Getting food from the farmer to the shop causes just 4 per cent of all its lifetime emissions. Ten times as much carbon is emitted in refrigerating British food as in air-freighting it from abroad, and fifty times as much is emitted by the customer travelling to the shops.

In truth, far from being unsustainable, the interdependence of the world through trade is the very thing that makes modern life as sustainable as it is.

The cumulative accretion of knowledge by specialists that allows us each to consume more and more different things by each producing fewer and fewer is, I submit, the central story of humanity. Innovation changes the world but only because it aids the elaboration of the division of labour and encourages the division of time.

This is history’s greatest theme: the metastasis of exchange, specialisation and the invention it has called forth, the ‘creation’ of time.

Cooking enabled hominids to trade gut size for brain size.

Exchange is therefore a thing of explosive possibility,

Without trade, innovation just does not happen. Exchange is to technology as sex is to evolution. It stimulates novelty.

The success of human beings depends crucially, but precariously, on numbers and connections. A few hundred people cannot sustain a sophisticated technology: trade is a vital part of the story.

Money is not metal. It is trust inscribed. NIALL FERGUSON The Ascent of Money

Google’s code of conduct echoes Morgan: ‘Trust is the foundation upon which our success and prosperity rest, and it must be re-earned every day, in every way, by every one of us.’

The lesson of the last two centuries is that liberty and welfare march hand in hand with prosperity and trade.

firms are temporary aggregations of people to help them do their producing in such a way as to help others do their consuming.

Nor can there be any doubt that the collective brain enriches culture and stimulates the spirit. The intelligentsia generally looks down on commerce as irredeemably philistine, conventional and lowering in its taste. But for anybody who thinks great art and great philosophy have nothing to do with commerce, let him visit Athens and Baghdad to ask how Aristotle and al-Khwarizmi had the leisure time to philosophise. Let him visit Florence, Pisa and Venice and inquire into how Michelangelo, Galileo and Vivaldi were paid. Let him go to Amsterdam and London and ask what funded Spinoza, Rembrandt, Newton and Darwin. Where commerce thrives, creativity and compassion both flourish.

Good rules reward exchange and specialisation; bad rules reward confiscation and politicking.

For Adam Smith capital is ‘as it were, a certain quantity of labour stocked and stored up to be employed, if necessary, upon some other occasion

‘The denser societies made possible by agriculture can realize considerable returns to better exploitation of the potential of co-operation, co-ordination and the division of labour.’

The characteristic signature of prosperity is increasing specialisation. The characteristic signature of poverty is a return to self-sufficiency.

Merchants and craftsmen make prosperity; chiefs, priests and thieves fritter it away.

political fragmentation is often the friend, not the enemy, of economic advance, because of the stop which it gives ‘both to power and authority’.

Plainly, there is something beneficial to the growth of the division of labour when governments are limited (though not so weak that there is widespread piracy), republican or fragmented. The chief reason is surely that strong governments are, by definition, monopolies and monopolies always grow complacent, stagnant and self-serving.

They also fall for the perpetual fallacy that they can make business work more efficiently if they plan it rather than allow and encourage it to evolve.

governments gradually employ more and more ambitious elites who capture a greater and greater share of the society’s income by interfering more and more in people’s lives as they give themselves more and more rules to enforce, until they kill the goose that lays the golden eggs. There is a lesson for today. Economists are quick to speak of ‘market failure’, and rightly so, but a greater threat comes from ‘government failure’. Because it is a monopoly, government brings inefficiency and stagnation to most things it runs; government agencies pursue the inflation of their budgets rather than the service of their customers; pressure groups form an unholy alliance with agencies to extract more money from taxpayers for their members. Yet despite all this, most clever people still call for government to run more things and assume that if it did so, it would somehow be more perfect, more selfless, next time.

The message from history is so blatantly obvious – that free trade causes mutual prosperity while protectionism causes poverty – that it seems incredible that anybody ever thinks otherwise.

The Malthusian crisis comes not as a result of population growth directly, but because of decreasing specialisation. Increasing self-sufficiency is the very signature of a civilisation under stress, the definition of a falling standard of living.

So what might be the cause of these episodes of quite extraordinary downward shift in human fecundity? Top of the list of explanations, paradoxically, comes falling child mortality.

In other words, the best that can be said for sure about the demographic transition is that countries lower their birth rates as they grow healthier, wealthier, better educated, more urbanised and more emancipated.

Adam Smith’s words, to make ‘a smaller quantity of labour produce a greater quantity of work’.

Civilisation, like life itself, has always been about capturing energy.

Energy efficiency has been rising for a very long time and so has energy consumption. This is known as the Jevons paradox after the Victorian economist Stanley Jevons, who put it thus: ‘It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is the truth. As a rule, new modes of economy will lead to an increase of consumption.’

I can even imagine wind, tide, wave and biomass energy making small contributions, though these should be a last resort because they are so expensive and environmentally destructive. But this I know: we will need the watts from somewhere. They are our slaves. Thomas Edison deserves the last word: ‘I am ashamed at the number of things around my house and shops that are done by animals – human beings, I mean – and ought to be done by a motor without any sense of fatigue or pain. Hereafter a motor must do all the chores.’

The world of things – of pecans or power stations – is indeed often subject to diminishing returns. But the world of ideas is not. The more knowledge you generate, the more you can generate. And the engine that is driving prosperity in the modern world is the accelerating generation of useful knowledge.

As Friedrich Hayek argued, knowledge is dispersed throughout society, because each person has a special perspective. Knowledge can never be gathered together in one place. It is collective, not individual.

There is no equilibrium in nature; there is only constant dynamism. As Heraclitus put it, ‘Nothing endures but change.’

To explain the modern global economy, then, you have to explain where this perpetual innovation machine came from. What kick-started the increasing returns? They were not planned, directed or ordered: they emerged, evolved, bottom-up, from specialisation and exchange.

Innovation is like a bush fire that burns brightly for a short time, then dies down before flaring up somewhere else. At 50,000 years ago, the hottest hot-spot was west Asia (ovens, bows-and-arrows), at 10,000 the Fertile Crescent (farming, pottery), at 5,000 Mesopotamia (metal, cities), at 2,000 India (textiles, zero), at 1,000 China (porcelain, printing), at 500 Italy (double-entry book-keeping, Leonardo), at 400 the Low Countries (the Amsterdam Exchange Bank), at 300 France (Canal du Midi), at 200 England (steam), at 100 Germany (fertiliser); at 75 America (mass production), at 50 California (credit card), at 25 Japan (Walkman). No country remains for long the leader in knowledge creation.

the greatest impact of an increasing-return wave comes long after the technology is first invented. It comes when the technology is democratised.

This nicely captures the paradox of the modern world, that people embrace technological change and hate it at the same time.

Sites like Innocentive and yet2.com allow companies both to post problems they cannot solve,

The perpetual innovation machine that drives the modern economy owes its existence not mainly to science (which is its beneficiary more than its benefactor); nor to money (which is not always a limiting factor); nor to patents (which often get in the way); nor to government (which is bad at innovation). It is not a top-down process at all. Instead, I am going to try now to persuade you that one word will suffice to explain this conundrum: exchange. It is the ever-increasing exchange of ideas that causes the ever-increasing rate of innovation in the modern world.

The history of the modern world is a history of ideas meeting, mixing, mating and mutating.

‘Implicit confidence in the beneficence of progress’ said Hayek, ‘has come to be regarded as the sign of a shallow mind.’

the whole thrust of this book. The real danger comes from slowing down change. It is my proposition that the human race has become a collective problem-solving machine and it solves problems by changing its ways. It does so through invention driven often by the market: scarcity drives up price; that encourages the development of alternatives and of efficiencies.