Bayesian Investor Blog

Book review: The Birth of Plenty : How the Prosperity of the Modern World was Created by William Bernstein.
This book contains many ideas about the causes of economic growth that are approximately right, but rarely backs them up with good arguments.
He starts by saying four institutions are needed to escape from a Malthusian trap: property rights (rule of law), reason (scientific methods), capital markets, and fast transportation/communication. But later when discussing why some countries were slow to develop, he adds ad hoc explanations (e.g. “excessive military expenditure” “reliably derails great nations”).
The biggest shortcoming of the book is that it ignores evidence that China provides a counter-example to his main claims. He doesn’t acknowledge expert claims that parts of China around 1800 had a degree of property rights and rule of law that was comparable to England at that time, nor does he discuss the recent dramatic Chinese takeoff that happened with a mediocre degree of property rights and rule of law.
He gives many hints about why those four institutions are helpful, but provides little evidence that any one is essential. About the closest he comes to providing rigorous evidence is a graph indicating how much of economic growth appears to be explained by a Rule-of-Law indicator. He follows that with a similar graph of how government spending levels explain economic growth, and claims the negative effect of government spending would be invisible without the computed trend line, but the rule-of-law trend is more impressive. I see those graphs differently. The most obvious trend is that government spending over about 15 to 18% (of GDP?) reduces growth, with no obvious pattern for lower spending levels. The most obvious trend in the rule-of-law graph is that low values on the rule-of-law indicator are associated with larger variations in economic growth, which is somewhat contrary to his claim that such values reliably prevent growth.
The section I found most valuable was the one describing reasons for thinking that 16th century Holland created the beginnings of the industrial revolution.
There are enough misleading or false statements in the book to convince me not to trust him. For example, he refers to eclipse prediction around 1700 as a spectacular change to what was previously a mystery. He appears unaware that eclipses had been predicted more than a millennium earlier.
He often digresses into anecdotes that have no apparent relevance. For example, he claims “a healthy market for government debt is, in fact, essential for funding business”. After giving two implausible theoretical reasons for that claim, he says it was “vividly demonstrated in the U.S.” in 1862, but then gives a description of how government bonds were sold, without mentioning anything about the effect on business.
His discussion of the possible trade-offs between inflation and unemployment makes a claim that increased unemployment caused more unhappiness than “an identical rise in inflation”. But inflation is measured in different units that unemployment. If we happened to measure inflation in percent per presidential election, the naive comparison would work much differently. (He is subtly misinterpreting a serious paper that is hard to fully explain to laymen).
His advice to undeveloped nations includes “before a nation builds roads … it must first train lawyers”, which makes me doubt his understanding of what causes the rule of law.