Necessary and Sufficient Causes of the Industrial Revolution: Some Critical Remarks on Mises and His Explanation

0:00Okay, just first a few words about the theory. For economic theory, the question of how to increase wealth and get rich has a straightforward answer. It has three components. You get richer, A, through capital accumulation, that is, the construction of intermediate producer or capital goods that can produce more consumer goods per unit of time that can be produced without them or goods that cannot be produced at all with just land and labor and capital accumulation again has something to do with low time preference and B, the second part of the theory is you increase wealth through participation and integration in the division of labor and C, through population control that is by maintaining the optimal population size Now, I shall not comment further on the first two answer components, assuming that they are largely familiar. However, some comments on the third component are needed in this context.

1:08That wealth depends on the population size follows from the law of returns and the Malthusian law of population, which Ludwig von Mises has classified as indisputable laws and ranked among the truly great achievements of thought. Now the law of return states that for any combination of two or more production factors an optimum combination exists such that any deviation from this optimum combination involves material waste or efficiency losses. Applied to the two original factors of production that is land and labor, land being nature The law implies that if one were to increase the quantity of labor, that is, the population size, while the quantity of land and the available technology remain fixed, eventually a point will be reached where the physical output per labor input is maximized.

2:11This point marks the optimal population size. If there is no additional land available and technology is fixed at a given level, then any population increase beyond the optimal size will lead to a progressive decline in per capita incomes. Now I want to say a few things about economic history. I want to take a look at what appears to be the most fundamental datum of human economic History, and I will do this with the help of two charts. The first one, the upper one, is taken from Gregory Clarke, Farewell to Arms, which shows that for most of human history until sometime around 1800, real income per capita did not rise. This is indicated there.

3:04is indicated there. In short, this is the thesis that average living standards in 18th century England, for instance, were not higher than those in ancient Babylon. The second chart is taken from Colin McEverde and Richard Jones and the Atlas of World Population History And this chart complements the first and shows human population growth from about 12,000 before Christ, as is not all the way indicated on this, until the present of year 2000. It likewise shows a significant break occurring during the late 18th or 19th century. Until Until then, until this point, the population size grew only slowly, and since then population growth has increased very sharply.

4:13In combination, both charts capture the world historic significance of the so-called Industrial Revolution, which occurred some 200 years ago, as well as the significance, and in particular the length of the previous so-called Malthusian stage of human development. During the Malthusian age, the population size continuously pressed against the means of subsistence. To be sure, the population size could grow mostly because more land was taken into possession and partly also because of better technology incorporated in better producer goods and an extended and Intensified Division of Labor.

4:59But all such economic gains were always eaten up quickly by a growing population that again encroached upon the available means of subsistence and led to overpopulation and the emergence of what Mises called supernumerary specimens for whom there was no place in the division of Labor and who consequently had to be weeded out due to a lack of substance, sustenance. Today in modern western societies no such supernumerary specimens exist, but for most of human history this was indeed the case and it is still the case in many parts of the so-called third world. There were ups and downs in real incomes during the Malthusian Age, owing to various external events and pronounced individual and regional income differences existed, but nowhere was there a continuous upward trend in real incomes per person, which we have come to take for granted since then. Throughout the entire age, the iron law of wages held sway. Income and wages were held down near subsistence level owing to the existence and the existence of a substantial number of supernumerary specimens.

6:18Now I come to the explanation. Now what is the cause of the lengthy Malthusian Age and of the only recent Industrial Revolution? The standard answer among economists and in particular among libertarian economists is there must have been institutional impediments, in particular an insufficient protection of private property rights that prevented a quicker development and these impediments were removed only recently, that is until about 1800. This essentially is also Mises' explanation, also Rothbard's by the way. And I want to argue that this explanation is mistaken and present at least the outlines of an alternative explanation. Most obviously the standard explanation is faulty because, put bluntly, Finally, there simply was no revolutionary institutional change concerning the security of private property that preceded or accompanied the Industrial Revolution. Property rights had been well protected at many places and many times among hunter-gatherers as well as in settled societies. And from all we know, for instance, property rights in 1200 England and in much of feudal Europe were better protected than they are today in contemporary England

7:37and Contemporary Europe. That is, every institutional incentive favorable to capital accumulation and the division of labor was long in place and yet nowhere until about 1800 did mankind succeed to extricate itself from the Malthusian trap. Today, we take it for granted that it is solely our unwillingness to consume less and to save more that imposes limits on economic and Growth. Yet this phenomenon is actually quite new. For most of human history, savings were held back by a lack of ideas of how to productively invest them. That is, of how to convert plain savings or storing of goods into productive savings, namely the production of producer goods. For Crusoe, for instance, it was not sufficient to have a low time preference into save. Rather, Crusoe also had to conceive the idea of a net, for instance, and must Property Rights have known how to build it from scratch. If no one is capable to do this or to imitate what someone else has invented before, even the safest of property rights

8:44will simply make no difference. Every incentive needs a receptor to work. And if a receptor is lacking or insufficiently sensitive, different incentive structures do not matter. Hence, the institution of property protection can be regarded as only a necessary but not also and also as a sufficient condition of economic growth, that is of rising per capita incomes. So some other empirical factor which does not figure in pure economic theory must explain the lengths of the Malthusian age and how we got out of it. And this missing factor is the historical variable of human intelligence. Man is physically weak and ill-equipped to deal with brute nature.

9:31It was advantageous for him to develop his intelligence, that is, his knowledge of cause and effect relations, and to be successful as hunter and gatherers and even more so as agriculturalists, and keep in mind until about 1,890% of the population worked in agriculture. This required some intelligence. Not every person was equally intelligent, however, and higher intelligence translated then into greater economic success and greater economic success in turn translated into greater reproductive success that is led to producing a larger number of surviving descendants. For the existence of both of these relationships, that is intelligence leads to success and greater success leads to reproductive success, there exists a massive amount of empirical Now, further, this tendency of selecting for higher intelligence would be particularly pronounced under harsh external conditions. If the human environment is unchangingly constant and mild, as in the seasonless tropics, for instance, where one day is like another year in and year out, high or exceptional intelligence offers a lesser advantage than in an inhospitable

10:54environment with widely fluctuating seasonal variations. The more challenging the environment, the higher the premium placed on intelligence as a requirement of economic and consequently of reproductive success. Hence, the growth of human intelligence would be most pronounced in harsher and that is historically of course in more northern regions of human habitation. Now, this theoretical explanation fits the historical data. The theory explains why it took so long to get out of the Malthusian trap and how such a feat was possible at all and we did not remain under Malthusian conditions forever. Mankind was simply not intelligent enough to achieve productivity increases that could continuously outstrip population growth.

11:42A certain threshold of average and exceptional intelligence had to be reached first for this is to become possible, and it took time, until about 1800, to breed such level of intelligence. In addition, the theory explains why the Industrial Revolution originated and then took hold immediately in some, generally northern regions, but not in others, and why there had always existed persistent regional income differences, and why these differences could have increased rather than decreased since the time of the Industrial Revolution. Now several implications follow from this. First, the theory that I sketched here entails a fundamental criticism of the egalitarianism that is rampant within the social sciences generally, but also among many libertarians.

12:34True, economists allow for instance for human differences in the form of different labor Productivities, but these differences are generally interpreted as a result of different external conditions, that is, of different endowments or different training. Only rarely are internal biologically anchored characteristics admitted as possible sources of human differences. And even if economists admit the obvious, that is, that human differences have internal biological sources as well, as Mises certainly does, they typically still ignore that these These differences are themselves in turn the outcome of a lengthy process of natural selection in favor of human characteristics and dispositions, physical and mental, that are determinant of economic success and more or less highly positively correlated with economic success of reproductive success.

13:27That is, it is still largely overlooked that we, the modern men, are a very different breed from our predecessors hundreds or even thousands of years ago. Second, once it is realized that the Industrial Revolution was first and foremost the outcome of the evolutionary growth of human intelligence rather than the mere removal of institutional barriers to growth, the role of the state can be recognized as fundamentally different under Malthusian versus post-Malthusian conditions. Under Malthusian conditions, the state doesn't matter much, at least as far as macro effects are concerned. A more exploitative state will simply lead to a lower population number, much like a pest would do, but it does not affect per capita income.

14:15In fact, in lowering the population density, income per capita may even rise, as it did, for instance, after the great pestilence in the mid-14th century. And in reverse a good less exploitative state will allow for a growing number of people but per capita incomes will not rise or may even fall because land per capita is reduced. Now all this changes with the industrial revolution for if productivity gains continuously outstripped population increases and allow for a steady increase in per capita incomes then an exploitative institutions such as the state can continuously grow without lowering the per capita income and reducing the population number. The state then becomes a permanent drag on the economy and per capita incomes.

15:05And the third implication that I want to mention is, whereas under Malthusian conditions positive eugenic effects reign, that is, the economically successful produce more offspring and the The population's stock is thus gradually bettered, so to speak. Under post-Malthusian conditions, the existence and the growth of the state produces a two-fold dysgenic effect, especially under democratic welfare conditions. For one, the economically challenged, so to speak, as the principal clients of the welfare state produce more offspring and the economically successful produce less. And secondly, the steady growth of a parasitic state made possible by a growing underlying economy systematically affects the requirements of success.

15:51Economic success becomes increasingly dependent on politics and political talent, that is the talent of using the state to enrich oneself at others' expense. And in any case, the population stock becomes increasingly worse as far as prosperity and economic growth is concerned rather than better as used to be the case under Malthusian conditions. Thank you very much.