The Shortest History of Economics E-Book

Andrew Leigh

• Herausgeber: Old Street Publishing
• Kategorie: Fachliteratur
• Serie: Shortest Histories
• Sprache: Englisch

Seitenzahl: 280

Veröffentlichungsjahr: 2024

Beschreibung

'If you read just one book about economics, make it Andrew Leigh's clear, insightful, remarkable - and short - work' Claudia Goldin, Winner of the 2023 Nobel Prize in Economics The Shortest History of Economics unearths the hidden economic forces behind war, innovation and social transformation, tracing how capitalism and the market system emerged. From the emergence of agriculture to the war in Ukraine, Andrew Leigh weaves a fascinating narrative punctuated by expert insights into major moments in human history – why the invention of the plough led to gender inequality, how certain diseases determined the patterns of colonialism, and even how New York's robber barons inspired the board game Monopoly. Always accessible, expertly written and highly illuminating, The Shortest History of Economics is a perfect introduction to the subject.

Leseprobe

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Praise for The Shortest History of Economics

‘If you read just one book about economics, make it Andrew Leigh’s clear, insightful, remarkable – and short – work’

Claudia Goldin, Professor of Economics, Harvard UniversityWINNER OF THE 2023 NOBEL PRIZE IN ECONOMICS

‘This short book is bursting with insights about economics, illustrated by memorable stories and historical events. People who are curious about but confused by economics will learn enough from this to be conversant for life’

Caroline M. Hoxby, Professor of Economics, Stanford University

‘Essential reading for anyone looking to understand today’s economy’

Betsey Stevenson, Professor of Economics, University of Michiganiiiii

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Contents

Title PageIntroduction1.Out of Africa and into Agriculture2.The Grand Canal, the Printing Press and the Plague3.The Age of Sail4.The Industrial Revolution and the Wealth of Nations5.Trade, Travel and Technology Take Off6.Economic Models and the Modern Factory7.World War I and the Depression8.World War II and Bretton Woods9.The Glorious Thirty?10.Markets, Markets Everywhere11.Inflation Targeting and Inequality12.Hot Markets and a Hotter Planet13.The Pandemic and Beyondviii14.Economics: Past, Present and FutureAcknowledgementsImage CreditsIndexAlso in this seriesCopyright

1

Introduction

in prehistoric times, the only source of artificial light was a wood fire. To produce as much light as a regular household lightbulb now gives off in an hour would have taken our prehistoric ancestors fifty-eight hours of foraging for timber.1 By Babylonian times, the best lighting technology was a lamp that burned sesame oil. To produce the same amount of light, a Babylonian worker in around 1750 BCE would have had to work for forty-one hours.

An earthenware lamp, which used a cotton wick and oil or ghee.

Then came candles. Initially made from animal fat, they were time-consuming to produce (and smelt awful). Even in the late 1700s, the typical worker would have to devote five 2hours’ work to producing candles that emitted as much light as a regular household lightbulb gives off in an hour. Through the 1800s came developments in gas lamps, which reduced the time cost of an hour of light to a few hours of work.

With the invention of the electric bulb, light got cheaper still. By the early 1900s, it took just minutes of work to buy an hour of light. Today, less than one second of work will earn you enough money to run a modern household lightbulb for an hour. Measured in terms of artificial light, the earnings from work are 300,000 times higher today than they were in prehistoric times, and 30,000 times higher than they were in 1800. Where our ancient ancestors once toiled to brighten their nights, we rarely even think about the cost as we flick on a light.

The progression of lighting technology: a candle, incandescent bulb, fluorescent bulb and LED bulb.

3Two forces have driven this remarkable change. Lighting technologies are better (and still improving by the day). And workers are more productive, which means that we earn more in an hour than our ancestors did.

The history of light illuminates some key themes of this book. Where prehistoric people had to do everything, modern workers specialise in what we do best. Markets allow us to exchange our output with that of other people. Prices create incentives to produce more when there’s a shortage and less when there’s a glut. Yet the market system is far from perfect. Unemployment, cartels, traffic congestion, overfishing and pollution are just a few of the problems that emerge when markets fail.

This small book tells a big story. It is the story of capitalism – of how our market system developed. It is the story of the discipline of economics, and some of the key figures who formed it. And it is the story of how economic forces have shaped world history. Why didn’t Africa colonise Europe instead of the other way around? What happened when countries erected trade and immigration barriers in the 1930s? Why did the Allies win World War II? Why did inequality in many advanced countries fall during the 1950s and 1960s? How did property rights drive China’s growth surge in the 1980s? How does climate change threaten our future prosperity? You’ll find answers to these questions and more in this book.

Economics can be defined as a social science that studies how people maximise their wellbeing in the face of scarcity. 4It considers the behaviour of people as individuals, and how we work together in households and corporations. It focuses on how we interact in markets, in which buyers and sellers together determine the equilibrium price. Economics also considers what happens when markets fail, and how public policy might ameliorate poverty, climate change or price-fixing.

This is a story that blends microeconomics and macroeconomics.2 Microeconomics is the study of how individuals make decisions. Macroeconomics looks at the economy as a whole. Too often, popular books about economics focus on one or the other. Freakonomics, Discover Your Inner Economist and 50 Things That Made the Modern Economy introduce the reader to microeconomics. TheReturnofDepressionEconomics, Slouching Towards Utopia and This Time Is Differenthelp explain macroeconomics. This book synthesises both perspectives. We’ll move chronologically through history, touching on the decisions of individuals and the trajectory of entire societies.

Critics who think economics is bleak, moneygrubbing or narrow-minded like to quote Thomas Carlyle’s description of the discipline as ‘the dismal science’, ignoring where the criticism comes from. Carlyle, an influential British essayist of the 1800s, was a racist who believed that slavery should be reintroduced in the West Indies. The ‘dismal’ view Carlyle was attacking was that all people are equal. Like many economists, I wear the insult with pride.

Carlyle also disparagingly said, ‘Teach a parrot the terms supply and demand and you’ve got an economist.’3 Supply and 5demand graphs can be handy, but you won’t find them in this book. And you certainly don’t need to have studied any economics to enjoy the stories that follow. Learning to think like an economist can change your life for the better. The secret of our discipline is that the most powerful insights come from a handful of big ideas that anyone can comprehend.

I’ve mentioned one of these ideas already: incentives. In sporting contests where there’s a big first prize and a small second prize, performance improves. Runners go faster. Golfers finish in fewer shots.4 Incentives can even affect when we’re born. When Australia introduced a ‘baby bonus’ for children born on or after 1 July 2004, that day set a record for the number of births.5 Why? Because expectant mothers delayed induction procedures and caesarean section operations to get the financial reward. When the United States changed inheritance tax rates, the timing of deaths shifted too: indicating that a small number of people died later (or earlier) to minimise their tax bill.6 There’s a cliché that nothing in life is certain except death and taxes. In this case, tax rates changed, and death rates followed.

That’s not to say that economics is all about greed. Elinor Ostrom, the first woman to win the Nobel Prize in economics, found many contexts – from fisheries in Indonesia to forests in Nepal – in which people cooperated to manage scarce resources. In her Nobel Prize lecture in 2009, Ostrom criticised the tendency of economists to design institutions for entirely self-interested individuals. Instead, she argued, ‘a core goal of public policy should be to facilitate the development of 6institutions that bring out the best in humans’. Incentives matter, but I’ll endeavour to capture Ostrom’s optimism, and show that economists can be idealists too.

Another big idea of economics is specialisation. How many of us can provide a good haircut, replace a broken car windscreen, turn grapes into wine, or write a smartphone app? Given a few months, most people could learn to do each of these tasks with some level of proficiency, but unless you’d enjoy the experience, a better approach is to pay an expert, and focus instead on what you do best. If you spent your life aiming to become reasonably good at everything, you’d probably end up as the human equivalent of a Swiss Army knife – with a finicky knife, annoyingly tiny scissors and an impractical screwdriver. Job specialisation is one of the keys to the modern economy.

The process of making things has become specialised too. For example, some Chinese cities have become expert in making a single kind of product. Yiwu produces most of the world’s Christmas decorations. Huludao makes a quarter of the world’s swimwear. Danyang is known as ‘spectacles city’. Taizhou, which has long specialised in bathroom products, has now become a global centre for innovation in intelligent toilets.7

As specialisation flourishes, trade becomes invaluable. Boeing’s 787 Dreamliner includes batteries from Japan, wing tips from South Korea, floor beams from India, horizontal stabilisers from Italy, landing gear from France, cargo doors from Sweden and thrust reversers from Mexico.8 A typical 7smartphone could most accurately be labelled ‘Made in the World’. By sourcing components and raw materials from the lowest-cost suppliers, it becomes possible to create items that would be unaffordable if they had to be built using only local materials.

Perhaps the most powerful illustration of specialisation came when designer Thomas Thwaites decided to make a toaster from scratch – using only his own labour and raw materials he had personally sourced.9 Thwaites obtained iron ore from a disused mine in England, copper from a mine in Wales, and mica from a mountain in Scotland. When a home blast furnace failed to make steel, he resorted to smelting iron ore in his microwave. The plastic casing came from melting down garbage. In the end, Thwaites’s toaster experiment took nine months. If we value his time at the average wage in the United Kingdom at the time, the labour cost was £19,000, plus around £1000 for expenses.10 Thwaites’s £20,000 toaster was about 5000 times costlier than if he had bought one at his local retailer for £4. Oh, and store-bought toasters actually work. When Thwaites plugged his toaster in, it lasted five seconds before it began melting down.

Another principle of economics is that big events are rarely driven by sudden shifts in norms or culture. More often, dramatic changes are due to new technologies or changing policies. If you want to understand why international trade boomed in the post-war decades, it helps to know about the invention of the standardised shipping container in 1956 and the reduction in global tariffs through successive rounds of 8world trade talks. If you want to know why basketball games today are more exciting than half a century ago, consider the role of the shot clock and the three-point rule. This book seeks to unearth the hidden economic forces behind wars, religious movements and social transformations.

The story of economics starts with the agricultural revolution that saw communities move from hunter-gatherer tribes to create the civilisations of Ancient Egypt, Greece and Rome. Trade between regions was enabled by water-borne transport. China’s Grand Canal connected provinces. The age of sail connected Europe, Africa and the Americas – transporting agricultural products, manufactured goods and enslaved people in a highly profitable triangular trade.

The next major revolution was the industrial revolution, which kickstarted manufacturing and turbocharged economic growth. Alongside the new gadgets came intellectual breakthroughs, as the discipline of economics took shape. By the early 1900s, the innovation of the assembly line saw cars produced at ever-decreasing prices, and globalisation knitted the world together like never before. Two world wars and the Great Depression broke many of those connections, destroying lives, livelihoods and linkages.

For many in the advanced world, the post-war era was a period of shared prosperity, but growth was patchier elsewhere. In China, the early decades of communist rule were marked by capricious policies that undermined growth until the country’s market turn in 1978. In India, the big change came in 1990. Growth across much of Asia saw a growing 9divergence between living standards in that region and those in slower-growing Africa. By the beginning of the twenty-first century, inequality within many countries had risen sharply.

Much of economics is now focused on questions of market failure. A great deal of competition policy is motivated by curtailing monopoly power. A central concern of the macroeconomics pioneered by John Maynard Keynes is reducing unemployment. Climate policy addresses the market failure that means pollution can be profitable for companies, but ruinous for the planet. Similarly, behavioural economics acknowledges that humans do not always behave like cool, calculating happiness-maximising machines, but tend to deviate in systematic ways from the rational rule. As the discipline of economics has evolved, both theory and data have allowed researchers to build better models of human behaviour, making economics more interesting and more useful.

But before we get to Homoeconomicus, we must start at the beginning, with the way that economics shaped our species, Homosapiens.10

199Notes

1. William Nordhaus, 1997, ‘Do real-output and real-wage measures capture reality? The history of lighting suggests not’ in William Nordhaus and Charles Hulten (eds), The Economics of New Goods, University of Chicago Press, Chicago, pp. 29–66.

2. The blending of microeconomics and macroeconomics has a long history. For a discussion of Paul Samuelson’s 1948 Neoclassical Synthesis and the teaching of modern economics through the CORE curriculum, see Samuel Bowles and Wendy Carlin, 2020, ‘What students learn in economics 101: Time for a change’, Journal of Economic Literature, 58(1): 176–214.

3. Quoted in Avinash Dixit, 2014, Microeconomics: A Very Short Introduction, Oxford University Press, Oxford, p. 50.

4. Jeff Borland, 2008, Microeconomics: Case Studies and Applications, Cengage, Melbourne, p. 19.

5. Joshua Gans and Andrew Leigh, 2009, ‘Born on the first of July: An (un) natural experiment in birth timing’, Journal of Public Economics, 93.1–2: 246–63.

6. Wojciech Kopczuk and Joel Slemrod, 2003, ‘Dying to save taxes: Evidence from estate-tax returns on the death elasticity’, Review of Economics andStatistics 85(2): 256–65.

7. Lucy Black, 2020, ‘Picking a product’, CKGSB Knowledge, 19 November.

8. Benjamin Zhang, 2017, ‘Trump just used Boeing’s new global airliner to attack globalization’, Business Insider, 18 February.

9. Thomas Thwaites, 2011, The Toaster Project. Or A Heroic Attempt to Builda Simple Electric Appliance from Scratch, Princeton Architectural Press, Princeton, NJ.

10. The median UK weekly wage in 2009 was around £490, or £19,000 for nine months. Thwaites’s parts and travel totalled £1187. When I emailed him to check these figures, Thwaites wryly noted that my estimate of £20,000 was precisely the price at which he had sold the toaster to the V&A Museum.

11

1

Out of Africa and into Agriculture

modern humans evolved in southern africa around 300,000 years ago.1 Our ancient ancestors had language, art and dance, raised children in family units and told stories. Around 65,000 years ago, they invented spears and bows for hunting, needles for sewing and boats for travelling.2 Unlike earlier primates, their capacity for language and abstract thought allowed Homosapiensto engage in collective learning: building a shared knowledge base that exceeded the capacity of any individual person.3 But their lives largely remained nomadic: hunting animals and feeding on local plants, then moving on when the resources were gone.

Early societies differed in providing for those who could not work. Some prehistoric societies show evidence of caring for the elderly – carving canes so they could walk and chewing food for those whose teeth no longer worked. Other hunter-gatherer societies – especially the ones that moved long distances – tended to kill or abandon those who were elderly or 12disabled, lest they endanger the whole group’s prospects.

So what was life like for most people in this era? ‘Nothing is more gentle than man in his primitive state,’ wrote Swiss philosopher Jean-Jacques Rousseau. His English counterpart Thomas Hobbes took an utterly different view, declaring that early human life was ‘solitary, poor, nasty, brutish, and short’.

Thanks to forensic archaeology (sometimes dubbed ‘CSI Palaeolithic’), modern researchers have been able to glean a great deal about life in this era. They estimate that two-fifths of babies did not live to see their first birthday. Life expectancy was around thirty-three years.4 Violence was ever-present – from competitors in your own tribe and attackers from neighbouring groups. Up to 15 per cent of people in nomadic societies died a violent death.5 Before the age of farming, most people would have shivered through winter, and gone to bed with growling stomachs. Hobbes was right. Rousseau was wrong.

Settled agriculture has no single origin point, but one of the ‘firsts’ took place in northwestern India. The town of Kalibangan, about three hours’ drive from the border with Pakistan, was once the confluence of two rivers. It is home to one of the world’s major archaeological sites: the oldest ploughed field. Here, furrows are ploughed both north–south and east–west, suggesting that two crops were grown together – perhaps cereals and mustard.6

Kalibangan was a major city in the Indus Valley civilisation, which prospered from 3300 to 1300 BCE. Farming allowed people to settle and build more comfortable homes – some 13even had flush toilets. Their builders hit upon the ideal brick size: the dimensional ratio of 1:2:4 that is still in use today.7 Adults wielded bronze tools and played dice games. Archaeologists have unearthed children’s toys such as whistles and spinning tops. In contrast with nomadic living, settled agriculture provided the environment in which tools and toys could be made and used.

The agricultural revolution spurred the Indus Valley civilisation to trade with others. To move goods across land, its citizens built carts – possibly the first use of wheeled transport in history. Their cities were laid out in a grid pattern, just as many modern cities are today. They built boats and dredged a canal. Indus Valley traders brought back raw materials such as jade from China, cedar wood from the Himalayas and lapis lazuli from Afghanistan. In return, they sold jewellery, pottery and metal tools.

At its peak, the Indus Valley civilisation had a population of around 5 million people.8 Yet it remained undiscovered by archaeologists until the 1920s. A major reason for this is that the civilisation was relatively equal. Ancient Egyptians built the pyramids, Ancient Greeks built the Acropolis, and Ancient Romans built the Pantheon. Big edifices were typically a marker of vast differences in wealth and power – what one scholar has called the ‘monumental problem’.9 By contrast, the Indus Valley civilisation constructed few monuments. At the time, this served their people well, but it meant that Indus Valley cities remained unseen for over 2000 years after the area’s rivers dried up and the civilisation collapsed.14

The Indus Valley civilisation did not build the kinds of monuments that signified wealth inequality in other civilisations.

Farming marked a turning point for the world economy because it allowed communities to build up a surplus. Storing food enabled people to eat well all year round. It also provided an early form of insurance against famine if the harvest failed. When people’s consumption is less volatile than their incomes, economists say that they are ‘consumption smoothing’. Consumption smoothing explains why many people in modern economies borrow to buy a home, save for retirement and take out health insurance. The uncertainty that plagued people’s lives in prehistoric times must have been extremely stressful for many citizens. Even today, the working poor in advanced countries suffer from large swings in income from month to month, causing considerable anxiety and making it hard to plan for the future.

In a few places, food was plentiful enough that hunter-gatherers could live a fulfilling life. On the western edge of the 15Kalahari Desert live a group of people called the !Kung (the exclamation point is pronounced with a click of the tongue). The area has many mongongo trees, whose nuts are high in protein and fat, and can be stored for long periods. Traditionally, the average !Kung ate around 300 nuts a day, providing about one-third of their energy intake. As one member of the !Kung told a visitor, ‘Why should we plant [crops] when there are so many mongongo nuts in the world?’10 But the !Kung are the exception. In most of the world, farming meant that people could consume more calories and be more certain about where their next meal would come from.

The Levant, an area bordering the eastern edge of the Mediterranean Sea, was especially promising for farmers. Following the end of the last ice age, the Levant experienced several long dry periods, which prompted societies to experiment with farming. From 10,000 to 8000 BCE, farmers bred crops by selecting those with larger seeds and a less bitter taste. The Levant, part of what is sometimes called ‘the fertile crescent’, happened to have several plant species that could be domesticated (adapted for human use). These eight ‘founder crops’ – emmer wheat, einkorn wheat, hulled barley, peas, lentils, bitter vetch, chickpeas and flax – were essential to the development of agriculture.11 Early farmers developed flint knives and grindstones to assist with harvesting and processing. Societies moved from being nomadic communities to having settlements built around agriculture.

The most important invention that enabled agriculture was the plough. Breaking up the earth makes planting easier, 16brings up fresh soil nutrients, and buries weeds. Early farmers did this using sticks and hoes: not all that different from the way you might till the soil in a garden vegetable plot today. But the plough made it possible to use the energy of animals to turn the soil.

Early Egyptian ploughs were scratch ploughs, akin to a stick being pulled through the earth. During the Qin and Han dynasties (221 BCE to 220 CE), Chinese farmers developed the turn plough, which turns the soil upside down, creating furrows.12 Settled agriculture was five or six times more productive than foraging.13 The plough brought the end of a society in which everyone’s occupation was effectively ‘food finder’. Indeed, one historian has argued that the entire modern world is the result of the plough.14

Ploughs changed power dynamics too. Digging stick agriculture is relatively gender-equal, but ploughs require significant upper body strength to pull the plough or control the animal that pulls it. So the plough made farming a more male-dominated activity. The legacy of this technology has echoed down the generations.15 In countries where plough use was uncommon (such as Rwanda and Madagascar), gender norms are more equal than in countries where plough use was common (such as Mauritania and Ethiopia). Even among immigrants who have recently moved to advanced countries, those from countries with a heritage of plough use are less likely to believe that women should have jobs outside the home.

Some regions of the world were more amenable to farming than others. Eurasia happened to have plant and animal 17species that were well suited to domestication. As we have seen, Eurasia’s native plants included variants of barley, wheat and legumes, which could be stored for months. Other regions had bananas and yams, which spoiled in days. With animals, it was a similar story. Eurasia had goats, sheep and cattle, which could be used for meat, milk and hides. By contrast, African zebras and Australian kangaroos are harder to tame.

It was easier to migrate within similar climates (east to west) than varied climates (north to south).

The shape of the continents mattered too. Where Eurasia is wide, Africa and the Americas are long. This means that people could explore (and exploit) Eurasia while staying in the same climatic band. Eurasia’s east–west explorers did not have to develop new ways of surviving in an unfamiliar environment, and their farming innovations could spread across similar climates. But adventurers in Africa and the Americas had the more arduous task of travelling north–south. As geographer Jared Diamond notes, these initial coincidences explain why Eurasia colonised Africa, the Americas and Oceania, 18rather than the other way around. Because wealth ultimately fuelled military might, bigger agricultural revolutions laid the groundwork for empire-building.

In theory, the agricultural revolution could have made everyone better off. Because farming was more efficient than hunting and gathering, it did not require the labour of everyone in the society. For the first time, that opened the possibility for people to specialise as craftspeople and builders. Farming enabled cities, where people invented new tools and traded in flourishing markets. The Indus Valley civilisation might be the best example in history of a community where settled agriculture led to shared prosperity.

Unfortunately, the agricultural revolution also created the potential for less benign rulers to emerge. Hunter-gatherers were mobile, which meant that nobody owned much property. By contrast, farming created surpluses. This made it possible for leaders to enrich themselves and their families, extracting resources from the population to fund a repressive army. In many societies, rulers won power by force, and used fear to keep the population in check.

The societies that emerged from the agricultural revolution were often highly unstable. During its 500-year history, the Roman Empire had seventy-seven emperors. Half were murdered, and still more died in battle or by suicide.16 Just one-third of Roman emperors died from natural causes. In one exceptionally brutal eighteen-month period, Nero died by suicide, Galba was murdered, Otho died by suicide and Vitellius was murdered. On the battlefield, war was 19sometimes fought Bellum Romanum – an all-out approach that involved destroying crops, raping women and enslaving or executing captives. Given the choice, the victims of Rome’s brutal expansion might have preferred to forego the benefits of the agricultural revolution and remain hunter-gatherers.

Another unexpected downside of settled agriculture was that diets tended to be less diverse. Hunter-gatherers consumed a broad range of berries, nuts and animals, while people in farming communities often got most of their calories from just a few starchy plants. One study, based on examining skeletal remains before and after the agricultural revolution, estimates that average heights dropped by about 10 centimetres (4 inches).17 Hobbes was right that life was ‘short’ in the state of nature, but the initial effect of the agricultural revolution was a shorter population.

At first, the agricultural revolution increased rates of malnutrition, crowded people into disease-ridden cities and worsened inequality. Yet it also enabled innovators, who ultimately laid the foundation for people to have longer and more enjoyable lives than those of our stone age ancestors.18 Just as agriculture created the potential for capricious dictators to arise, it also produced an environment in which people could think about improving themselves and the world around them.

An intellectual elite had time to tinker with ideas, build models and develop fresh ways of engaging with the world. Ancient Mesopotamia made breakthroughs in mathematics, maps, writing and sailing boats. Ancient Egypt innovated in 20art, writing and architecture. The Mayan civilisation made discoveries in astronomy and record-keeping. The Ancient Greeks achieved advances in science, technology, literature and democracy. There was even an early welfare state. From 98 to 272 CE, Rome had a program known as the alimenta, which provided food and subsidised education to orphans and poor children. But it helped only a fraction of those in need, and was terminated by Emperor Aurelian.

Where a society put its inventive energies varied enormously. To construct the Great Pyramid of Giza around 2600 BCE required use of trigonometry and Pythagoras’ theorem. It remained the world’s tallest building for the next 3,800 years. Yet Ancient Egyptians did not invent the wheel – they relied instead on tens of thousands of workers, who hauled stone blocks from quarries on sledges. The rulers of Ancient Rome built aqueducts and beautiful high-domed buildings. Yet they did not widely adopt the waterwheel or the windmill, and it was not until after the fall of the Roman Empire that watermills became commonplace across Europe.19

Why didn’t the remarkable thinkers of this era pay more attention to labour-saving devices? Economics provides an answer. When labour costs are low, there is less incentive to invest in technologies that make workers more efficient. In our modern era, European restaurants invested in electronic ordering systems decades before restaurants in the United States. The reason was simple: hiring waiting staff is costlier in Europe, so firms have an incentive to make them as productive as possible.21

The Economics of Religion

The period of classical antiquity saw the start of the three Abrahamic religions: Judaism, Christianity and Islam. One reason for their rise goes back to a key insight from economics: that competition benefits consumers, by encouraging greater innovation. So it is no coincidence that these faiths emerged in an era of intense religious competition.

The same forces shape religion in the modern age. Churchgoing rates are higher in North America (with robust competition between denominations) than in Scandinavian countries (where churches often have a government-granted monopoly). Noting the relationship between diversity and religiosity, US president Thomas Jefferson quipped that in matters of religion, the maxim should be ‘Divided we stand, united, we fall.’20

When it comes to religion, competition boosts participation.

Economists also observe that the strict requirements of many religions – including restrictions on food, clothing and social mixing – have an economic purpose. Without such rules, it would be easy for outsiders to slip into the group and enjoy its benefits without paying the cost. Five out of six people in the world today are religious.21 Over the lifecycle, people tend to become less religious, but because religious parents have more children, the world is projected to become more religious over the coming decades. Theologically moderate religions tend to have more lapsed members, while theologically conservative religions tend to have the highest birthrates. Thus the fastest-growing religions tend to be those with the strictest doctrines.

22Likewise, when the innovators of Ancient Egypt and Ancient Rome were considering the most pressing technology problems, they did so in a society where much of the work was carried out by enslaved people. With so many in bondage, the ruling class didn’t have much interest in raising the output of the enslaved class. Slavery in the Ancient world wasn’t just morally wrong – it also reduced the incentive to make people more productive.

Similar issues arose in Ancient China, where an abundance of workers muted the incentive to exploit new innovations. The Chinese were well ahead of their European counterparts in the manufacture of silk cloth, the production of items made of bronze and steel, and the use of paper for writing. The magnetic compass was invented in China around the fourth to the second century BCE. Yet these inventions did not transform the economy in the ways that might have been expected. In Ancient China, aristocrats dominated the ruling elite, and the prevailing view was one of disdain for merchants and commerce. As a result, innovations in metalwork were largely in weapons and artworks, not practical tools.22 The invention of the compass did not turn China into a leading maritime power. Economic success requires more than inventions. It also takes the right institutions for inventions to change lives.

One invention that emerged in many ancient societies was money. Money has three qualities. First, it is a unit of account, providing a common language to express the value of different items. Rather than saying that two cows are worth one axe, we can say that both are worth one silver coin. 23Second, it is a store of value, allowing wealth to be held in a form that does not rot or die. Third, it is a medium of exchange, simplifying commerce between people who might want to buy two cows, but don’t have an axe to offer in exchange.

Money emerged in different forms. In Ancient Greece, coins were produced between 700 and 600 BCE, and came to be known as drachma, meaning ‘a handful’.23 In the Ancient Olympics, winners received prizes of up to 1,000 drachma to accompany their olive wreaths.24 The Romans were relatively late in producing currency, but when they began making silver coins in 269 BCE near the temple of Juno Moneta, some bore the word ‘Moneta’, which gave us the word money.

Coins provided a straightforward way to pay for daily items. Coins could be carried in a pouch while travelling. They were an essential aspect of the sprawling Roman Empire. Sometimes the first people knew of a new emperor was when they saw his image on a coin.

But coins are not the only possible form of money. On the Yap islands in Micronesia, stone sculptures were used as money. The largest of these stones was 3.6 metres (12 feet) in diameter. It was not moved when it changed ownership – instead the Yapese kept the stone in place and everyone in the community took note of the new owner. This made large stone sculptures inconvenient for commerce, but it is not as unusual as it sounds. In modern times, central banks sometimes hold gold in their vaults. When the gold is sold, it often involves just a change in an electronic ledger, without the physical gold moving at all. The Yapese would appreciate it.24

Yapese stone money made from carved limestone.