The Puzzle of the Other Hockey Stick

I have been reading Dierdre’ McCloskey’s Bourgeouis Dignity, the second volume of a projected six volume project. Judging by the early chapters, the book contains three central theses:

1.    The graph of real per capita income over history is a hockey stick. For thousands of years, the overwhelming bulk of the world’s population lived at a real income equivalent to about three dollars a day. Over  the past two centuries, that increased roughly ten-fold averaged over the world population, twenty or thirty fold for developed countries, probably by a good deal more if one tries to allow for improvements in the quality of what was available to buy—electric lighting over candles, air conditioning over house fans. And the average continues to rise.

2.    Conventional material explanations of economic growth offered by economists with approaches ranging from Marx to the Chicago School cannot explain the size and speed of the change.

3.    The correct explanation is a change in attitude, the shift, first in North-west Europe and then increasingly in the rest of the world, from regarding “bourgeois” activities, trade, manufacturing, money making, as low status to regarding them as dignified and worthy of respect.

It’s an interesting thesis. The first part, so far as I can tell, is correct—we really are enormously better off than our ancestors. I am skeptical about the second part, not because I know what the right explanation is but because proving a negative is hard. Also, while the increase in material well being over two centuries is indeed enormous, it represents the cumulative effect of an average increase of less than two percent a year, which looks less startling and so easier to offer possible explanations for.

As for the third part, McCloskey is pretty clearly describing  a real and important change in attitudes—rich people no longer feel obliged to apologize for the fact that they made it in trade instead of inheriting it, and we no longer take it for granted that, having made a fortune in business, the only respectable thing to do with it is to use it to buy land and so buy your way into the landed elite. How much responsibility that change has for economic growth I do not know—but I am still in the early parts of the book.

I am struck, however, by a puzzle that McCloskey does not discuss in any detail—the long handle of the hockey stick. If, as she claims, real incomes were roughly constant for thousands of years, there must have been something keeping them that way, an equilibrating process that pushed incomes back down if some exogenous factor such as improving climate or the availability of new food crops was increasing it, and back up if some exogenous factor pushed it down.

The most plausible candidate for such a process was offered more than two hundred years ago by Thomas Malthus. His argument was not, as modern references sometimes imply, that population growth leads to catastrophe. It was rather that population growth made impossible any large sustained increase in the standard of living of the masses. The argument was simple and persuasive—and its implication strikingly inconsistent with what actually happened over the next two hundred years.

Malthus started with the observation that humans like sex, and sex produces babies. He concluded that, unless there were large costs to producing babies, population would increase at something close to the biological maximum, leading to an exponential growth rate high enough to overcome any plausible rate of increase in human productivity. Looking around him, he observed that  most people were poor enough so that the cost of supporting an additional child was a substantial burden. He concluded that if that was not the case, if, as Godwin and Condorcet, the authors he was responding to, expected, the future saw a sharp rise in the standard of living of the masses, making additional children only a minor burden, population would increase rapidly and the pressure of population against a fixed supply of land would push standards of living back down.

It’s an elegant argument and provides a plausible explanation for most of human history, but one that stopped working within the lifetime of its author. Why? What went wrong with Malthus’ model?

The answer cannot be simply that output increased, and kept increasing, fast enough to outweigh population growth, because if that had happened the population would eventually  have been growing at something close to the biological maximum, and although population in England during the 19th and 20th centuries did indeed increase, it did not increase nearly that fast.

One possibility is that Malthus overestimated the cost of holding down population growth. Implicit in his argument is the assumption that the only practical alternatives are having babies and not having sex. While modern contraceptive technology appeared too late to explain the first century or so of economic growth, contraception itself is a very old technology, in at least two forms. Coitus Interruptus, intercourse with withdrawal just before orgasm, is mentioned in the bible, discussed in medieval Islamic law, pretty clearly a known option for at least the past two thousand years and more. The rhythm method, refraining from intercourse during the woman’s fertile period, is a second low tech alternative, although it is less clear how far back the knowledge necessary to use it goes. And, of course, there are the various forms of non-vaginal intercourse.

Critics of the Catholic church’s stand on contraception sometimes blame it for large family sizes in poor Catholic countries. It occurred to me long ago that they were probably wrong. Rhythm is not as reliable a form of contraception as the pill, diaphragm, or IUD, but if the objective is only to have four children instead of eight, it does not have to be all that reliable. A mildly cynical defender of the Catholic doctrine might argue that it bans forms of contraception sufficiently reliable to make sinning—non-marital intercourse—safe, while permitting a form reliable enough to substantially reduce population growth.

Which brings me to an empirical question to which I do not know the answer, but someone else probably does: How effective are pre-modern forms of contraception? If a couple uses rhythm and withdrawal, does their birth rate go down from one child every two years to one child every twenty-five months, or does it go down to one child every five years? If the latter, then a central assumption of Malthus’ argument, the high cost of holding birth rates down, is wrong. That would explain why his prediction failed to hold through the 19th and 20th century but leaves us without an explanation of why it worked pretty well for millenia before that.

A second possibility is suggested by a modification of the argument introduced by Malthus’ friend David Ricardo, arguably the first great economic theorist. He argued that what level of income corresponded to the Malthusian population equilibrium depended on the tastes of the masses.The more luxurious the tastes of the working class, the higher the income level at which the cost of an additional child was no longer an adequate incentive to hold down the birth rate. Hence he concluded that the “friends of mankind” should wish that the workers have more luxurious tastes. Following out that argument, one might explain the rise of incomes over the past two centuries as a result of increases in the level of income that ordinary people considered acceptable. That would be a non-material explanation, although not the same as the one that McCloskey offers.

Like the previous possibility, that explains the past two centuries at the cost of failing to explain all of previous history. Standards of living have gone up and down at various points in the past. Why didn’t each increase result in a rise in expectations, ratcheting up the level of the Malthusian equilibrium?

Which brings me to a final possibility, and one that I think is consistent with at least the most obvious data. One of the assumptions that went into the Malthusian argument was the high cost of holding down birth rates. The other was the economic importance of land. Suppose we weaken the former assumption, for the reasons I have already suggested, and drop the latter.

Consider an economy in which land is a very important input, making per capita output very sensitive to population density. In such an economy, even a weak version of Malthus’ theory is sufficient to produce the Malthusian conclusion. If real incomes go up substantially population grows, even if at nothing like the biological maximum, and even a modest population growth is sufficient to push incomes back down.

Now introduce one change—technological progress that makes labor rather than land the key input. The logic of the situation is the same as before, but the magnitudes have changed. Rising income produces an increase in the birth rate, hence in population, but that exerts only a modest downward pressure on incomes—one that can be outweighed by technological improvement, better property rights, increased foreign trade, or any of a variety of other positive factors.

Forty some years ago, when population played the same role in public discourse that global warming now does—the looming catastrophe that could perhaps be prevented if only we took sufficiently strong measures against it—I did a simple calculation, designed to test the popular assumption that the reason poor countries were poor was overpopulation. I calculated population density across countries, and found the five most densely populated. Two were rich developed countries, Belgium and the Netherlands. Three were rapidly developing countries, Taiwan, South Korea, and Singapore. Hong Kong had about ten times the population density of Singapore, but I did not include it because it was not an independent country. I concluded that population density was probably not nearly as important a factor as generally supposed.

The reason, most spectacularly illustrated by the later history of Hong Kong, was that land in a modern economy is not all that important an input. I do not know enough economic history to say with any confidence just when the shift from land to labor as the most important input to production occurred, but it provides at least a possible explanation of the puzzle of McCloskey’s hockey stick, an explanation of both the long handle and the short, and steeply rising, blade.

Before ending I should say that although that particular puzzle is what has so far interested me most about the book, there is a great deal more there. McCloskey’s overall project, with which I am very much in sympathy, is a defense of the modern world, of capitalism very broadly defined, against its critics, left and right.