The Rational Optimist: How Prosperity Evolves

by Matt Ridley

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

Even more than in Mesopotamia, Egypt followed the path of irrigation, centralisation, monument building and eventual stagnation.

The urban revolution was an extension of the division of labour.

It is common to find that two traders both think their counterparts are idiotically overpaying:

The chief reason is surely that strong governments are, by definition, monopolies and monopolies always grow complacent, stagnant and self-serving.

The scientist and historian Terence Kealey points out that entrepreneurs are rational and if they find that wealth can more easily be stolen than created, then they will steal

The sudden emergence of an all-conquering prophet in the middle of a desert in the seventh century is rather baffling as the tale is usually told – one of religious inspiration and military leadership. What is missing from the story is the economic reason that Arabs were suddenly in a position to carry all before them. Thanks to a newly perfected technology, the camel, the people of the Arabian Peninsula found themselves well placed to profit from trade between East and West. The camel caravans of Arabia were the source of the wealth that carried Muhammad and his followers to power.

Not coincidentally, the free-trading Arabs exchanged ideas as well as goods and culture thrived. As they spilled out of their homeland, Arabs brought luxury and learning to an area stretching from Aden to Cordoba, before the inevitable imperial complacency and then severe priestly repression set in at home. Once the priesthood tightened its grip, books were burned, not read.

Like all the best entrepreneurs, they thrived despite, rather than because of their government.

China’s best moments came when it was fragmented, not united.

Empires, indeed governments generally, tend to be good things at first and bad things the longer they last.

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.

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.

Ming officials had high social status and low salaries, a combination that inevitably bred corruption and rent-seeking. Like all bureaucrats they instinctively mistrusted innovation as a threat to their positions and spent more and more of their energy on looking after their own interests rather than the goals they were put there to pursue.

For a while the Romans achieved a sort of European unity, and the result was just like the Ming: stagnation and bureaucracy.

Then after the Second World War, the entire continent of Latin America broke with free trade under the influence of an Argentinian economist named Raul Prebisch, who thought he had found the flaw in Ricardo’s logic, and achieved decades of stagnation. India, under Jawaharlal Nehru, went for autarky too, closing its borders to trade in the hope of sparking a boom in import substitution. It too found stagnation. Still they tried: North Korea under Kim Il Sung, Albania under Enver Hoxha, China under Mao Zedong, Cuba under Fidel Castro – every country that tried protectionism suffered. Countries that went the other way include Singapore, Hong Kong, Taiwan, South Korea and later Mauritius, bywords for miraculous growth.

Cheap imports can destroy jobs at home – though in doing so they always create far more both at home and abroad, by freeing up consumers’ cash to buy other goods and services. If Europeans find their shoes made cheaply in Vietnam, then they have more to spend on getting their hair done and there are more nice jobs for Europeans in hair salons and fewer dull ones in shoe factories.

Nike’s sweatshops in Vietnam, for example, pay wages three times as high as local state owned factories and have far better facilities.

Rural self-sufficiency is a romantic mirage. Urban opportunity is what people want. In 2008 for the first time more than half the people in the world lived in cities.

Dhaka, São Paolo, Mexico City, New York and Calcutta. As far as the planet is concerned, this is good news because city dwellers take up less space, use less energy and have less impact on natural ecosystems than country dwellers.

‘Urban sprawl’ may disgust some American environmentalists, but on a global scale, the very opposite is happening: as villages empty, people are living in denser and denser anthills.

In the animal world, this is unique. In no animal species do individuals become more specialised as population is rising, nor less specialised as population is stalling or falling.

That meant they sold wool for cash rather than strove for self-sufficiency. They presumably used that cash to buy bread from the baker who bought flour from the miller, who bought grain from other farmers, who therefore got cash too. Instead of self-sufficiency, everybody was now in the market and had disposable income. People wanted to travel to the market in nearby Salisbury to buy things: so the carter was doing well, too, and the merchants in Salisbury.

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. The more babies are likely to die, the more their parents bear.

today’s 40-year-olds will surely be happier to continue operating computers in their seventies than today’s 70-year-olds are to continue operating machine tools.

The explosions are petering out; and the declines are bottoming out. The more prosperous and free that people become, the more their birth rate settles at around two children per woman with no coercion necessary. Now, is that not good news?

‘One of the most extraordinary facts of the [eighteenth] century was the enlargement of the consuming classes,’

a low level of demand from the masses was far more important than a rich demand from a few:

There was never going to be enough wind, water or wood in England to power the factories, let alone in the right place.

Heck, it even affects the birth rate as television replaces procreation as an evening activity.

Suppose you had said to my hypothetical family of 1800, eating their gristly stew in front of a log fire, that in two centuries their descendants would need to fetch no logs or water, and carry out no sewage, because water, gas and a magic form of invisible power called electricity would come into their home through pipes and wires. They would jump at the chance to have such a home, but they would warily ask how they could possibly afford it. Suppose that you then told them that to earn such a home, they need only ensure that father and mother both have to go to work for eight hours in an office, travelling roughly forty minutes each way in a horseless carriage, and that the children need not work at all, but should go to school to be sure of getting such jobs when they started work at twenty. They would be more than dumbfounded; they would be delirious with excitement. Where, they would cry, is the catch?

Oil, coal and gas are finite. But between them they will last decades, perhaps centuries, and people will find alternatives long before they run out. Fuel can be synthesised from water using any source of power, such as nuclear or solar. At the moment, it costs too much to do so, but as efficiency increases and oil prices rise, then the equation will look different.

Wind turbines require five to ten times as much concrete and steel per watt as nuclear power plants, not to mention miles of paved roads and overhead cables. To label the land-devouring monsters of renewable energy ‘green’, virtuous or clean strikes me as bizarre. If you like wilderness, as I do, the last thing you want is to go back to the medieval habit of using the landscape surrounding us to make power. Just one wind farm at Altamont in California kills twenty-four golden eagles every year: if an oil firm did that it would be in court. Hundreds of orang-utans are killed a year because they get in the way of oil-palm biofuel plantations. ‘Let’s stop sanctifying false and minor gods,’ says the energy expert Jesse Ausubel, ‘and heretically chant “Renewables are not green”.’

But since Americans are in effect being taxed thrice over to pay for the ethanol industry – they subsidise the growing of maize, they subsidise the manufacture of ethanol and they pay more for their food – the ability of American consumers to contribute to demand for manufactured goods is actually hurt by ethanol, not helped. Meanwhile, the environmental benefits of biofuels are not just illusory; they are negative. Fermenting carbohydrate is an inefficient business compared with burning hydrocarbon. Every acre of maize or sugar cane requires tractor fuel, fertilisers, pesticides, truck fuel and distillation fuel – all of which are fuel.

each unit of energy put into growing maize ethanol produces 1.34 units of output, but only by counting the energy of dried distillers’ grain, a by-product of the production process that can go into cattle feed. Without that, the gain was just 9 per cent. Other studies, though, came to less positive conclusions, including one estimate that there was a 29 per cent loss of energy in the process. Drilling for and refining oil, by contrast, gets you a 600 per cent energy return or more on your energy used.

Converting the cerrado soils of Brazil to soybean diesel, or the peat lands of Malaysia to palm-oil diesel, says Joseph Fargione of the Nature Conservancy, releases ‘17–420 times more CO2 than the annual greenhouse gas reductions that these biofuels would provide by displacing fossil fuels’. Or, to put it another way, it would take decades or centuries for the investment to pay back in climate terms.

you want to reduce carbon dioxide in the atmosphere, replant a forest on former farmland.

Moreover, it takes about 130 gallons of water to grow, and five gallons of water to distil a single gallon of maize ethanol – assuming that only 15 per cent of the crop is irrigated. By contrast, it takes less than three gallons of wat...

But do not forget the single most important problem with biofuels, the one that makes them so capable of making environmental problems worse – they need land. A sustainable future for nine billion people on one planet is going to come from using as little land as possible for each of people’s needs.

just as a successful species is one that converts the sun’s energy into offspring more rapidly than another species, so the same is true of a nation.

The dissemination of useful knowledge causes that useful knowledge to breed more useful knowledge.

In an exactly analogous way, the science of ecology has an enduring fallacy that in the natural world there is some perfect state of balance to which an ecosystem will return after disturbance. This obsession with ‘the balance of nature’ runs right through Western science, since even before Aristotle, and sees its recent expression in concepts like ecological climax, the natural vegetation that will clothe an area if it is left for long enough. But it is bunk.

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

and place of that change was itself always changing. 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 death of distance may not be new, but it has been made affordable to all. Speed was once a luxury. In Orwell’s day only the richest or most politically powerful could afford to travel by air or to import exotic goods or make an international telephone call. Now almost everybody can afford the cheap goods carried by container ships; almost everybody can afford the internet; almost everybody can afford to travel by jet.

Throughout the industrial revolution, scientists were the beneficiaries of new technology, much more than they were the benefactors.

‘a semi-directed, groping, bumbling process of trial and error by clever, dexterous professionals with a vague but gradually clearer notion of the processes at work’. It is a stretch to call most of this science, however. It is what happens today in the garages and cafés of Silicon Valley, but not in the labs of Stanford University.

The inescapable fact is that most technological change comes from attempts to improve existing technology.

Aspirin was curing headaches for more than a century before anybody had the faintest idea of how. Penicillin’s ability to kill bacteria was finally understood around the time bacteria learnt to defeat it. Lime juice was preventing scurvy centuries before the discovery of vitamin C. Food was being preserved by canning long before anybody had any germ theory to explain why it helped.

Private sector companies, haunted by the Schumpeterian fear that innovation can pull their whole market from them, and equally dazzled by dreams that they can pull the whole market from under their rivals, had gradually learnt to sew innovation into their culture and to set aside budgets for it.