The Rational Optimist (P.S.)

by Matt Ridley

to say that life is the same as it was 32,000 years ago would be absurd. In that time my species has multiplied by 100,000 per cent, from perhaps three million to nearly seven billion people.

To argue that human nature has not changed, but human culture has, does not mean rejecting evolution – quite the reverse.

The evolutionary biologist Richard Dawkins in 1976 coined the term ‘meme’ for a unit of cultural imitation.

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.

This book dares the human race to embrace change, to be rationally optimistic and thereby to strive for the betterment of humankind and the world it inhabits.

But much has happened since Adam Smith to change, challenge, adjust and amplify his insight. He did not realise, for instance, that he was living through the early stages of an industrial revolution.

(Markets in goods and services need less regulation.)

Rational optimism holds that the world will pull out of the current crisis because of the way that markets in goods, services and ideas allow human beings to exchange and specialise honestly for the betterment of all.

There were also moments in the half-century when you could have caught countries in episodes of dreadful deterioration of living standards or life chances – China in the 1960s, Cambodia in the 1970s, Ethiopia in the 1980s, Rwanda in the 1990s, Congo in the 2000s, North Korea throughout. Argentina had a disappointingly stagnant twentieth century. But overall, after fifty years, the outcome for the world is remarkably, astonishingly, dramatically positive.

The United Nations estimates that poverty was reduced more in the last fifty years than in the previous 500.

Hitler, Stalin and Mao

Today, of Americans officially designated as ‘poor’, 99 per cent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning.

The four most basic human needs – food, clothing, fuel and shelter –

an hour of work today earns you 300 days’ worth of reading light; an hour of work in 1800 earned you ten minutes of reading light.

Time: that is the key. Forget dollars, cowrie shells or gold. The true measure of something’s worth is the hours it takes to acquire it. If you have to acquire it for yourself, it usually takes longer than if you get it ready-made by other people.

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

Falling consumer prices is what enriches people (deflation of asset prices can ruin them, but that is because they are using asset prices to get them the wherewithal to purchase consumer items). 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.

Politicians latched on and governments from Thailand to Britain began to think about how to maximise gross national happiness instead of gross national product.

‘Easterlin paradox’

Rich people are happier than poor people; rich countries have happier people than poor countries; and people get happier as they get richer.

That is to say, on average, across the board, on the whole, other things being equal, more money does make you happier.

a tax on consumption to encourage saving for investment instead is not necessarily a bad idea.

Until he was rumbled in 2008, Bernard Madoff offered his investors high and steady returns of more than 1 per cent a month on their money for thirty years. He did so by paying new investors’ capital out to old investors as revenue, a chain-letter con trick that could not last. When the music stopped, $65 billion of investors’ funds had been looted. It was roughly what John Law did in Paris with the Mississippi Company in 1719, what John Blunt did in London with the South Sea company in 1720, what Charles Ponzi did in Boston in 1920 with reply coupons for postage stamps, what Ken Lay did with Enron’s stock in 2001.

The banking system makes it possible for people to borrow and consume when they are young and to save and lend when they are old, smoothing their family living standards over the decades.

If somebody somewhere takes out a mortgage, which he will repay in three decades’ time, to invest in a business that invents a gadget that saves his customers time, then that money, brought forward from the future, will enrich both him and those customers to the point where the loan can be repaid to posterity. That is growth. If, on the other hand, somebody takes out a loan just to support his luxury lifestyle, or to speculate on asset markets by buying a second home, then posterity will be the loser. That is what, it is now clear, far too many people and businesses did in the 2000s – they borrowed more from posterity than their innovation rate would support. They misallocated the resources to unproductive ends. Most past bursts of human prosperity have come to naught because they allocated too little money to innovation and too much to asset price inflation or to war, corruption, luxury and theft.

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.

Where does all this free time come from? It comes from exchange and specialisation and from the resulting division of labour.

Self-sufficiency is therefore not the route to prosperity.

In 1900, the average American spent $76 of every $100 on food, clothing and shelter. Today he spends $37.

‘To produce implies that the producer desires to consume’ said John Stuart Mill; ‘why else should he give himself useless labour?’

My point is that you have far, far more than 498 servants at your immediate beck and call. Of course, unlike the Sun King’s servants, these people work for many other people too, but from your perspective what is the difference? That is the magic that exchange and specialisation have wrought for the human species.

You are not just consuming the labour and resources of others. You are consuming others’ inventions, too.

you number among your servants John Logie Baird, Alexander Graham Bell, Sir Tim Berners-Lee, Thomas Crapper, Jonas Salk and myriad assorted other inventors.

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.

Self-sufficiency i...

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.

Interdependence spreads risk.

There is no such thing as unproductive employment, so long as people are prepared to buy the service you are offering.

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. Forget wars, religions, famines and poems for the moment. This is history’s greatest theme: the metastasis of exchange, specialisation and the invention it has called forth, the ‘creation’ of time.

Evolutionary change happens largely by the replacement of species by daughter species, not by the changing of habits in species.

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

the ever-expanding possibility generated by a growing division of labour.

‘No man ever saw a dog make fair and deliberate exchange of a bone with another dog,’ said Adam Smith.

Reciprocity means giving each other the same thing (usually) at different times. Exchange – call it barter or trade if you like – means giving each other different things (usually) at the same time: simultaneously swapping two different objects. In Adam Smith’s words, ‘Give me that which I want, and you shall have this which you want.’

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.

My argument is that this habit of exchanging, this appetite for barter, had somehow appeared in our African ancestors some time before 100,000 years ago.