The Rational Optimist: How Prosperity Evolves

by Matt Ridley

The answer, I believe, is that at some point in human history, ideas began to meet and mate, to have sex with each other.

And so it is with culture. If culture consisted simply of learning habits from others, it would soon stagnate. For culture to turn cumulative, ideas needed to meet and mate. The ‘cross-fertilisation of ideas’ is a cliché, but one with unintentional fecundity. ‘To create is to recombine’ said the molecular biologist François Jacob.

Specialisation encouraged innovation, because it encouraged the investment of time in a tool-making tool. That saved time, and prosperity is simply time saved, which is proportional to the division of labour. The more human beings diversified as consumers and specialised as producers, and the more they then exchanged, the better off they have been, are and will be. And the good news is that there is no inevitable end to this process. The more people are drawn into the global division of labour, the more people can specialise and exchange, the wealthier we will all be.

Moreover, I find myself continually surprised by how few people think about the problem of tumultuous cultural change. I find the world is full of people who think that their dependence on others is decreasing, or that they would be better off if they were more self-sufficient, or that technological progress has brought no improvement in the standard of living, or that the world is steadily deteriorating, or that the exchange of things and ideas is a superfluous irrelevance.

The experience has left me mistrustful of markets in capital and assets, yet passionately in favour of markets in goods and services.

Had I only known it, experiments in laboratories by the economist Vernon Smith and his colleagues have long confirmed that markets in goods and services for immediate consumption – haircuts and hamburgers – work so well that it is hard to design them so they fail to deliver efficiency and innovation; while markets in assets are so automatically prone to bubbles and crashes that it is hard to design them so they work at all.

Above all, it is a book about the benefits of change. I find that my disagreement is mostly with reactionaries of all political colours: blue ones who dislike cultural change, red ones who dislike economic change and green ones who dislike technological change.

Over that half-century, real income per head ended a little lower in only six countries (Afghanistan, Haiti, Congo, Liberia, Sierra Leone and Somalia), life expectancy in three (Russia, Swaziland and Zimbabwe), and infant survival in none.

He was right that Americans were especially well off compared with others: they were three inches taller in 1950 than they had been at the turn of the century and spent twice as much on medicine as funerals – the reverse of the ratio in 1900. Roughly eight out of ten American households had running water, central heating, electric light, washing machines and refrigerators by 1955. Almost none had these luxuries in 1900. In his 1890 classic How the Other Half Lives, Jacob Riis encountered a family of nine in New York living in a ten-foot-square room plus a tiny kitchen, and women earning 60 cents a day for sixteen hours’ work in sweatshops and unable to afford more than one meal a day. This would have been unthinkable by mid-century.

It is a levelling-up caused by an equalisation of nutrition, stimulation or diversity of childhood experience. You can, of course, argue that IQ may not be truly representative of intelligence, but you cannot argue that something is getting better – and more equal at the same time. Even justice has improved thanks to new technology exposing false convictions and identifying true criminals. To date 234 innocent Americans have been freed as a result of DNA fingerprinting after serving an average of twelve years in prison; seventeen of them were on death row. The very first forensic use of DNA in 1986 exonerated an innocent man and then helped to catch the real murderer, a pattern that has been repeated many times since.

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

And, once again, notice that the true metric of prosperity is time. If Cornelius Vanderbilt or Henry Ford not only moves you faster to where you want to go, but requires you to work fewer hours to earn the ticket price, then he has enriched you by granting you a dollop of free time. If you choose to spend that spare time consuming somebody else’s production then you can enrich him in turn; if you choose to spend it producing for his consumption then you have also further enriched yourself.

Governments prevent this by, first, using planning or zoning laws to restrict supply (especially in Britain); second, using the tax system to encourage mortgage borrowing (in the United States at least – no longer in Britain); and third, doing all they can to stop property prices falling after a bubble.

So long as somebody allocates sufficient capital to innovation, then the credit crunch will not in the long run prevent the relentless upward march of human living standards. If you look at a graph of world per capita GDP, the Great Depression of the 1930s is just a dip in the slope. By 1939 even the worst-affected countries, America and Germany, were richer than they were in 1930.

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

Think of it this way. You don’t expect to get better and better at walking in each successive generation – or breathing, or laughing, or chewing. For Palaeolithic hominids, hand-axe making was like walking, something you grew good at through practice and never thought about again. It was almost a bodily function. It was no doubt passed on partly by imitation and learning, but unlike modern cultural traditions it showed little regional and local variation. It was part of what Richard Dawkins called ‘the extended phenotype’ of the erectus hominid species, the external expression of its genes.

Cooking enabled hominids to trade gut size for brain size. Erectus hominids, in other words, had almost everything we might call human: two legs, two hands, a big brain, opposable thumbs, fire, cooking, tools, technology, cooperation, long childhoods, kindly demeanour. And yet there was no sign of cultural take-off, little progress in technology, little expansion of range or niche.

As you can tell, I like neither theory. I am going to argue that the answer lies not in climate, nor genetics, nor in archaeology, nor even entirely in ‘culture’, but in economics. Human beings had started to do something to and with each other that in effect began to build a collective intelligence. They had started, for the very first time, to exchange things between unrelated, unmarried individuals; to share, swap, barter and trade. Hence the Nassarius shells moving inland from the Mediterranean. The effect of this was to cause specialisation, which in turn caused technological innovation, which in turn encouraged more specialisation, which led to more exchange – and ‘progress’ was born, by which I mean technology and habits changing faster than anatomy. They had stumbled on what Friedrich Hayek called the catallaxy: the ever-expanding possibility generated by a growing division of labour. This is something that amplifies itself once begun.

Evolutionary psychologists have assumed that it is rare for conditions to exist in which two people simultaneously have value to offer to each other. But this is just not true, because people can value highly what they do not have access to. And the more they rely on exchange, the more they specialise, which makes exchange still more attractive. Exchange is therefore a thing of explosive possibility, a thing that breeds, explodes, grows, auto-catalyses. It may have built upon an older animal instinct of reciprocity, and it may have been greatly and uniquely facilitated by language – I am not arguing that these were not vital ingredients of human nature that allowed the habit to get started. But I am saying that barter – the simultaneous exchange of different objects – was itself a human breakthrough, perhaps even the chief thing that led to the ecological dominance and burgeoning material prosperity of the species. Fundamentally, other animals do not do barter.

Soon they came across their distant cousins, the descendants of Homo erectus, with whom they last shared an ancestor half a million years before. They got close enough to acquire the latter’s lice to add to their own, so louse genes suggest, and conceivably even close enough to acquire a smattering of their cousins’ genes by interbreeding.

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

‘Cultures, it seems, like to shoot messengers.’ People do their utmost to cut themselves off from the free flow of ideas, technologies and habits, limiting the impact of specialisation and exchange.

Specialisation would lead to expertise, and expertise would lead to improvement.

Where modern hunter-gatherers have been deprived of access to a large population of trading partners – in sparsely populated Australia, especially Tasmania, and on the Andaman islands, for example – their technological virtuosity was stunted and barely progressed beyond those of Neanderthals. There was nothing special about the brains of the moderns; it was their trade networks that made the difference – their collective brains.

Tools are in effect a measure of the extent of the division of labour and, as Adam Smith argued, the division of labour is limited by the extent of the market. The Tasmanian market was too small to sustain many specialised skills

But by 2001, fewer than 0.01 per cent of all transactions on the site were fraud attempts. John Clippinger draws an optimistic conclusion: ‘The success of trust-based peer organizations such as eBay, Wikipedia, and the open-source movement, indicates that trust is a highly expandable network property.’ Perhaps the internet has returned us to a world a bit like the Stone Age in which there is no place for a fraudster to hide.

For instance, as evolutionary psychologists confirm, sometimes the motivation behind conspicuous displays of virtue by the very rich are far from pure. When shown a photograph of an attractive man and asked to write a story about an ideal date with him, a woman will say she is prepared to spend time on conspicuous pro-social volunteering. By contrast, a woman shown a photograph of a street scene and asked to write about ideal weather for being there, shows no such sudden urge to philanthropy. (A man in the same ‘mating-primed’ condition will want to spend more on conspicuous luxuries, or on heroic acts.) That Charles Darwin’s wealthy spinster aunt Sarah Wedgwood’s funding of the anti-slavery movement (she was the movement’s biggest donor) may have a hint of unconscious sexual motives, is a charming surprise. But it does not detract from the good she did, or from the fact that commerce paid for that good.

The inherent illiberalism of the bureaucracy, not to mention its tendency to corruption and extravagance, was a threat Spencer warned against in vain.

Like Milton Friedman, I notice that ‘business corporations in general are not defenders of free enterprise. On the contrary, they are one of the chief sources of danger.’ They are addicted to corporate welfare, they love regulations that erect barriers to entry to their small competitors, they yearn for monopoly and they grow flabby and inefficient with age.

Moreover, for all their eventual sins, entrepreneurial corporations can do enormous good while they are young and growing. Consider the case of discount retailing. The burst of increasing productivity that countries like America and Britain rather unexpectedly experienced in the 1990s at first puzzled many economists. They wanted to credit computers, but as the economist Robert Solow had quipped in 1987, ‘you can see the computer everywhere but in the productivity statistics’, and those of us who experienced how easy it was to waste time using a computer in those days agreed. A study by McKinsey concluded that the 1990s surge in the United States was caused by (drum roll of excitement) logistical changes in business (groan of disappointment), especially in the retail business and especially in just one firm – Wal-Mart.

In that sense ‘capitalism’ is dying, and fast. The size of the average American company is down from twenty-five employees to ten in just twenty-five years. The market economy is evolving a new form in which even to speak about the power of corporations is to miss the point. Tomorrow’s largely self-employed workers, clocking on to work online in bursts for different clients when and where it suits them, will surely look back on the days of bosses and foremen, of meetings and appraisals, of time sheets and trade unions, with amusement. I repeat: firms are temporary aggregations of people to help them do their producing in such a way as to help others do their consuming.

So while it is true that institutional innovators in the public sphere are just as vital as technological innovators in the private, I suspect that specialisation is the key to both. Just as becoming a specialist axe maker for the whole tribe gives you the time, the capital and the market to develop a new and better form of axe, so becoming the specialist bicycle racer enables you to make up rules about bicycle racing. Human history is driven by a co-evolution of rules and tools. The increasing specialisation of the human species, and the enlarging habit of exchange, are the root cause of innovation in both.

Oetzi was also the beneficiary of capital investment. He lived right at the beginning of the metal age, when copper was first being smelted. His pristine copper axe, 99.7 per cent pure, had been smelted in a furnace that had consumed a lot of somebody’s capital to build. The chaff in his clothing came from a grain crop grown with invested capital in the form of stored seeds and stored labour. 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 Fertile Crescent was probably the place where agriculture first took hold, and from there the habit gradually spread south to Egypt, west into Asia Minor and east to India, but farming was quickly invented in at least six other places in a short time, driven by the same ratchet of trade, population growth, stable climate and increasingly vegetarian intensification.

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

Arguing against vitamin-enriched rice, the Indian activist Vandana Shiva, echoing Marie-Antoinette, recommended that Indians should eat more meat, spinach and mangoes rather than relying on golden rice.