How Economics Explains the World: A Short History of Humanity

by Andrew Leigh

Measured in terms of artificial light, the earnings from work are 300,000 times higher today than they were in prehistoric times, and 30,000 times higher than they were in 1800.

Economics can be defined as a social science that studies how people maximise their wellbeing in the face of scarcity.

The secret of our discipline is that the most powerful insights come from a handful of big ideas that anyone can comprehend.

If you spent your life aiming to become reasonably good at everything, you’d probably end up as the human equivalent of a Swiss Army knife – with a finicky knife, annoyingly tiny scissors and an impractical screwdriver. Job specialisation is one of the keys to the modern economy.

Another principle of economics is that big events are rarely driven by sudden shifts in norms or culture. More often, dramatic changes are due to new technologies or changing policies.

Farming marked a turning point for the world economy because it allowed communities to build up a surplus.

As geographer Jared Diamond notes, these initial coincidences explain why Eurasia colonised Africa, the Americas and Oceania, rather than the other way around. Because wealth ultimately fuelled military might, bigger agricultural revolutions laid the groundwork for empire-building.

When labour costs are low, there is less incentive to invest in technologies that make workers more efficient.

Economic success requires more than inventions. It also takes the right institutions for inventions to change lives.

The Black Death also provides a dramatic illustration of economics in action.15 A scarcity of workers doubled European real wages (that is, wages after inflation). Suddenly land was relatively abundant, so rents declined. This helped shift the power balance in favour of peasants and against landowners. To a large extent, the plague killed feudalism.

In 1500, Spain was one of the world’s wealthiest nations. Two centuries later, it was a backwater. An echo of Spain’s experience is the modern-day resource curse, in which valuable mineral assets can end up impoverishing a nation. Among low-income nations, those with significant resource deposits tend to grow more slowly.

In West Africa, malaria and other tropical diseases claimed the lives of about half of all European settlers in the first year after arriving – effectively thwarting attempts to establish roads and institutions. There was little incentive to invest in areas where the chance of dying was so terrifyingly high.

Though nothing can excuse the barbarism of extractive colonialism, the differing prevalence of malaria helps explain why European settlers invested far more in the United States than in West Africa, and why the trans-Atlantic slave trade went from east to west, rather than the other way around.

Insurance is most useful when it covers a ruinous risk: the house burning down, crashing into an expensive car, the death of a family’s sole earner. But if the cost of an item is less than a month’s income, you’re probably better taking the risk. Insure your home, not your mobile phone.

In the modern economy, we expect growth to deliver higher living standards with each successive generation. But before the industrial revolution, economic growth was patchy and slow.

Across people, diminishing marginal utility can be used to make the case for progressive taxes and social welfare. If a dollar brings more happiness to a battler than a billionaire, then redistribution can improve overall utility.

French obstetrician Stéphane Tarnier developed the humidicrib to sustain infants born prematurely. Visiting the Paris Zoo in 1880, Tarnier saw an exhibit of incubators for exotic birds and realised the same principle could be applied to newborn babies.

The way that official statistics are handled by autocracies is a reminder that we should not take the role of statisticians for granted.

Across the world, sick leave, holiday leave, weekend pay loadings, safety standards, anti-discrimination laws, job security and pay itself have all been shaped by unions.

One theory of inequality is that it depends on the relative growth in education and technology.3 If education stagnates while technology advances, society tends to become more unequal. When the level of education grows faster than new technologies emerge, society becomes more equal. The best way of reducing inequality, according to this theory, is by ensuring that everyone gets a great education.

Today, the European Union is the world’s most significant trading bloc, comprising twenty-seven countries and over 400 million people.11 It allows people in smaller countries to enjoy many of the benefits that those in large democratic nations take for granted.

Countries that are more democratic tend to enjoy more rapid rates of economic growth.21 Nations with more rights for LGBTIQA+ people have higher incomes and higher rates of wellbeing.22 Countries that encourage women to participate fully in society generally have higher living standards.

Totalitarian governments are more prone to making policy mistakes, concealing the true extent of the disaster, and refusing outside assistance.

The changes were also a reminder of the economic tenet that societal changes tend to be driven more by technology and policy than social norms.

In general, countries tend to be more equal if education keeps pace with technological developments, if unions are strong and if taxes are progressive.

Those at the top are more likely to have friends from university, while those at the bottom are more likely to have close friends in their neighbourhood.

While money continues to buy more happiness, the principle of diminishing marginal utility still holds. Increases in happiness seem roughly proportional to the percentage increase in income

One of the best arguments for a redistributive welfare state and progressive taxation is that a dollar brings more pleasure to someone who does not have many dollars to begin with.

In the standard economic model, the only point of working is to earn income to consume. But the economics of identity reminds us that many people’s identity is centred around what they produce, rather than what they consume.

The rise of populist politicians is partly a backlash against the loss of secure working-class jobs, and a reminder of the importance of low unemployment to a stable society.

Economists talk about ‘tail risk’ – small chances of very bad outcomes. In the case of global warming, the tail risks come because we do not know how much carbon will be emitted in the future and how the planet will react to it.