How Economics Explains the World

andrew leigh.

how economics explains the world.

a short history of humanity.

behind every aspect of how our world functions, from inflation and climate change to your monday morning coffee, there's an economics story waiting to be uncovered.

economics isn't just about numbers or wall street, it's about the choices we make every day, often without realising it.

in this chapter, we'll explore how the principles of economics have shaped the world around us.

you'll gain insights into why the industrial revolution sparked unprecedented growth, how world wars reshaped the global economy and what drives modern economic policies.

whether you're a history enthusiast, an aspiring economist or simply curious about how today's global economic landscape came to be, this chapter offers a captivating journey into the unseen economic forces that have steered history.

why did some nations become economic powerhouses while others struggled?

what factors make certain regions more conducive to innovation and prosperity?

the answers lie in the interplay of geography, resources and human ingenuity.

from the creation of trade routes to the spread of technology and culture, the evolution of the world economy is a story of resilience and adaptability.

this chapter sheds light on how seemingly distant historical events continue to influence the global economic landscape today.

whether you're intrigued by history, fascinated by economics or just curious about how the world works, understanding these historical forces will provide valuable insights into today's economic challenges and future opportunities.

the agricultural revolution have you ever wondered why some regions of the world advanced more rapidly than others?

the answer stretches back over 12,000 years to the agricultural revolution, a transformative period that reshaped human societies.

imagine a world, around 10,000 bc, where everyone's sole focus was finding food.

this was the reality for our nomadic hunter-gatherer ancestors, who lived under harsh conditions, with high infant mortality and a life expectancy of just 33 years.

then came a monumental shift, the rise of settled agriculture.

one early example of this change is found in north-western india, where archaeologists uncovered the world's oldest ploughed field, dating back to 2800 bc.

this seemingly simple innovation allowed communities to build food surpluses, smoothing out consumption and providing a crucial buffer against famine.

with more food available, people could specialise in other crafts, leading to the development of tools, toys and even early plumbing systems in advanced societies.

however, the agricultural revolution also brought new challenges.

diets became less diverse, leading to malnutrition, and the ability to accumulate wealth introduced inequality and oppression, as some rulers used surpluses to fund armies and maintain brutal regimes.

geography also played a critical role in determining which regions flourished.

eurasia, with its abundance of domesticable plants and animals and an east-west axis, allowed the spread of crops, animals and technologies across similar climates, accelerating agricultural and technological progress.

in contrast, regions like africa and the americas, with north-south orientations and diverse climates, faced natural barriers that slowed development.

this geographic advantage helps explain why eurasian societies developed faster and eventually colonised other parts of the world.

the agricultural revolution also laid the foundation for intellectual and technological breakthroughs.

as food production became more efficient, an intellectual elite emerged, fostering advancements in mathematics, astronomy and early forms of social welfare.

ultimately, while the revolution brought both benefits and challenges, it paved the way for the complex, innovative societies we know today.

a reminder that major societal shifts come with both costs and opportunities, shaping the world in ways we might never have imagined.

the age of sale geography played a crucial role in shaping history during the agricultural revolution, but once humans learned to master and overcome it, they gained the power to steer history themselves.

a striking example of this is china's grand canal, which reveals how transformative infrastructure can drive economic and societal change.

at over 1,600 km long, this marvel of ancient engineering connected the yellow and yangtze rivers, with construction beginning as early as the 5th century bc and major expansions during the sui dynasty from 581 to 618.

initially built to help the government collect grain taxes, its impact extended far beyond that.

the canal became a critical artery for trade between northern and southern china, contributing to the country's thriving economy and cosmopolitan atmosphere.

by the year 1000 ce, china's average daily income surpassed that of england, underscoring the transformative power of infrastructure in shaping a prosperous society.

on a global scale, other advances in maritime technology slowly began to revolutionise trade and exploration as well.

the age of sale led to groundbreaking expeditions by explorers like christopher columbus and vasco da gama, kick-starting the exchange of crops, animals, and sadly, diseases between the old and new worlds.

these developments facilitated unprecedented growth in international commerce but also had dark consequences, like the rise of european colonialism and the atlantic slave trade.

coastal cities like lisbon, alexandria, and athens flourished as financial hubs.

innovations in risk-sharing, such as venice's colaganza system, allowed poorer merchants to participate in sea voyages.

this new economic system created pathways for social mobility.

however, the story of venice serves as a cautionary tale.

when established families closed off opportunities to commoners, innovation stagnated and the city's economic prominence waned.

this illustrates a crucial economic principle.

societies that limit social mobility often limit their own potential for growth and innovation.

the era also saw groundbreaking inventions like reading glasses and the movable-type printing press, which spread rapidly across regions.

these innovations demonstrate the power of non-rivalrous ideas, concepts that can be shared without diminishing their value.

unlike physical goods, ideas can spark widespread change and development.

religious shifts, such as the reformation, also played a significant role in economic development by inadvertently boosting literacy and education levels in protestant areas.

this fascinating period of history shows us how seemingly unrelated factors, from canals and maritime trade to religious movements and technological innovations, can intertwine to shape economies and societies.

it's a reminder that economic development is often the result of complex, interconnected forces that extend far beyond simple financial transactions.

the industrial revolution how did the world economy transition from basic bartering to the vast global networks of trade and finance we see today?

well, enter the industrial revolution, a truly pivotal moment in human history.

for centuries, living standards remained relatively stagnant.

however, the 18th century brought about dramatic change with the introduction of new technologies and manufacturing processes.

james watt's steam engine, for example, revolutionised factories and transportation, laying the foundation for rapid industrialisation.

yet the benefits of these innovations weren't felt immediately.

significant improvements in wages and living conditions for workers didn't materialise until the mid-19th century.

trade also played a crucial role in this economic transformation.

as nations opened their borders, commerce expanded, creating new opportunities.

the abolition of the corn laws in britain in 1846, which marked a major shift toward free trade, exemplifies this evolution.

however, not all trade was voluntary or beneficial.

the opium wars, during which britain forced china to accept opium imports, highlight the darker side of international commerce.

in parallel, the rise of corporations and financial institutions reshaped the global economic landscape.

limited liability companies enabled investors to pool resources and take risks without personal ruin, while central banks like the us federal reserve emerged to stabilise financial systems and prevent bank runs.

these developments fuelled economic growth but also concentrated power in the hands of a few.

all the while, technological advancements continued to drive economic change.

henry ford's assembly line revolutionised manufacturing, making cars affordable for the masses, while retail giants like woolworth's five and dime stores transformed the shopping experience.

migration was another key factor in economic development.

improved transportation allowed millions to seek better opportunities abroad, contributing to economic growth in destination countries and reshaping societies in profound ways.

the story of economic evolution is one of both progress and pitfalls.

while innovations and trade have dramatically improved living standards for many, they have also created new inequalities and challenges, reminding us that economic growth often comes with a complex mix of benefits and drawbacks.

the world wars inequality remains a defining feature of the global economy, with some countries thriving while others continue to struggle.

but what factors have set certain nations on the path to success while others falter?

the answer lies in the enduring impacts of two world wars and the economic tug-of-war that shaped the latter half of the 20th century.

the period between world war i and world war ii was marked by significant economic upheaval.

after world war i, germany faced crippling hyperinflation as it struggled to pay massive war reparations, contributing to the conditions that led to the rise of hitler.

globally, the 1920s had brought prosperity to many, but this boom ended abruptly with the stock market crash of 1929, sparking the great depression.

this crisis ignited a fierce debate between two influential economists, john maynard keynes, who advocated for government intervention to stimulate the economy, and friedrich von hayek, who believed recessions were necessary to cleanse the system of bad investments.

world war ii's outcome hinged on the economic power of the allied nations.

in its aftermath, efforts to build a more stable international economic order led to the creation of institutions like the world bank and the international monetary fund.

economists further developed keynesian ideas, emphasising the importance of government involvement in managing the economy.

as a result, many countries expanded welfare programmes and social services, laying the foundation for broad economic growth.

this set the stage for the latter half of the 20th century, a period often called the glorious thirty, during which unions wielded significant power, the wealthiest paid tax rates as high as 95%, and a single income could support home ownership.

taking place from 1945 to 1975, this era saw unprecedented economic expansion in many western nations, but prosperity wasn't equally distributed around the world.

while americans were buying their first televisions, chinese farmers under mao's disastrous great leap forward were melting down pots and pans in a futile attempt to boost steel production.

meanwhile, india's heavily regulated economy crawled along at an average of 3.5 to 4%, which was derisively called the hindu rate of growth by late economist raj krishna.

it wasn't until the late 1970s that the global economic landscape began to shift once again.

the inflation solution the 1970s marked a seismic shift in economic thinking across the globe.

for example, in china, a group of villagers secretly agreed to farm private plots, risking execution but dramatically increasing their harvests.

small acts of defiance like this sparked china's economic miracle, eventually lifting millions out of poverty.

meanwhile, in the west, economic attitudes were also undergoing a transformation.

economists like milton friedman became household names, advocating for smaller government and freer markets.

politicians like margaret thatcher in the uk and ronald reagan in the us championed these free market policies.

imagine your local power company suddenly being sold off to private investors, or your union losing its bargaining power overnight.

as with any revolution, there were winners and losers.

while some countries experienced rapid growth, others faced rising inequality.

the 1980s and 1990s brought another pivotal shift in global economic management.

many countries were grappling with hyperinflation, prices were spiralling out of control in places like hungary, argentina and zimbabwe, to the point where atms couldn't handle the number of zeros.

to combat this chaos, a new approach emerged – inflation targeting.

new zealand led the way in 1990, mandating its central bank to keep inflation between zero and two percent.

it was like giving the economy a thermostat, allowing central bankers to adjust interest rates and maintain stability.

this shift also took monetary policy out of the hands of politicians, handing it over to independent central bankers.

no longer could politicians engineer pre-election booms followed by post-election busts.

in many countries, inflation was tamed from a roaring lion to a purring kitten.

for instance, the us saw inflation plummet from a peak of 14% in 1980 to consistently low levels through the 1990s and 2000s.

but the revolution didn't stop at inflation control.

countries like india undertook sweeping economic reforms, opening up to foreign investment and scaling back government control.

the result was explosive growth and the rise of indian multinational companies like tata.

at the same time, global trade expanded rapidly, knitting countries together more tightly than ever.

the creation of the world trade organization in 1994 and the adoption of the euro in 1999 further accelerated this interconnectedness.

these changes reshaped the global economy, driving unprecedented growth, particularly in asia.

however, they also introduced new challenges, most notably the rise in inequality in many parts of the world.

the future of economics as we reflect on the journey of economics and human progress, it's remarkable to see how far we've come.

economics has helped us understand how specialization and trade can drive prosperity, how technology sparks revolutions in economic activity, and how market forces can simultaneously generate wealth and deepen inequality.

over time, the discipline has evolved from simplistic models of rational actors to more nuanced understandings of human behavior, identity, and social dynamics.

despite this progress, our journey is far from complete.

we face daunting challenges, from climate change to the potential risks posed by artificial intelligence.

these issues demand that we think carefully about long-term consequences and tail risks, low-probability, high-impact events that could have catastrophic effects.

economics continues to provide valuable tools for addressing these challenges.

it helps us grasp the importance of pricing carbon emissions, investing in ethical ai, and fostering global cooperation to mitigate existential risks.

on a more everyday level, economics offers insights into ongoing issues like traffic congestion and recurring economic crises, while also providing frameworks for personal decision-making by encouraging us to weigh opportunity costs and marginal benefits.

as we look ahead, economics will undoubtedly continue to evolve.

it will need to adapt to new technologies, shifting social norms and global challenges.

yet, at its core, economics remains a powerful tool for understanding human behavior and societal progress.

ultimately, the story of economics is the story of human ingenuity and our constant striving for a better life.

it reminds us of how far we've come while pointing the way toward the challenges and opportunities that lie ahead.

by understanding this pivotal journey, we gain valuable insights into why our world looks the way it does today and how we can shape a better future.

the main takeaway of this chapter to how economics explains the world by andrew leit is that economic change has shaped the course of history.

economics helps us trace humanity's progress from hunter-gatherer societies to the modern global economy.

pivotal moments like the agricultural revolution, which allowed for food surpluses and specialization, and the age of sale, which facilitated global trade and colonization, shaped the course of history.

the industrial revolution marked a turning point, dramatically improving living standards through technological innovations.

the world wars and subsequent economic theories shaped 20th century policies, leading to periods of prosperity but also inequality.

later, inflation targeting and free market reforms transformed global economics.

throughout, geography, technology, and institutions played crucial roles in determining economic success.

as societies continue to evolve, economics remains a crucial tool to assessing challenges and risks.

okay, that's it for this chapter.

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see you in the next chapter.