I think one reason some people don’t appreciate free-market capitalism is that they take prosperity for granted. They don’t really notice how prosperity has improved over the decades, so they don’t really think about how it happened.
This is somewhat understandable. The slow unfolding of events over decades and centuries makes it difficult for anyone to notice improvements in prosperity.
But the improvements are real. Humanity has experienced a tremendous leap in prosperity over the past two centuries, especially in those countries that have practiced free-market capitalism, or a semblance of it.
Too bad we don’t have a time machine. We could travel back and do a real comparison of then and now. Since we don’t, let’s do the next best thing. Hop into my literary time machine, and we’ll look at some history.
This topic is too long for one post. In this post, we’ll look at how incomes have changed. Next week we’ll look at products and innovation.
Worldwide average income
If you lived anywhere prior to 1800, you could count on a meager existence by today’s standards, unless you were born into nobility.
The graph below shows the average worldwide income over the past 2,000 years. All amounts are inflation-adjusted Maddison Project data.
As you can see, incomes were stuck at roughly $500 per year for most of the past 2,000 years! In 1820, the average income in the highest-income region, Western Europe, was only $1,500. Miserably low by today’s standards.
Then, starting in the 1800s, incomes shot up dramatically.
Income by region
But incomes did not grow equally fast in all places. The graph below shows average income since 1820 for the larger regions of the world. As you can see, incomes in the US and Western Europe grew much faster than other regions.
The graph below shows another view of the same data. Here, income for each region is shown as a percentage of the world average for that period.
And here are a few observations for each region:
- Western Europe – Europe was the highest-income region in 1820, with average income equal to 215% of the world average. From 1820 to 1870, Europe grew faster than all other regions except the US, and by 1870 European incomes had improved to 242% of the world average. European incomes suffered during the period 1913-1950, dropping to 235% of the world average, as the trauma of two world wars and the Great Depression took their toll on growth. Incomes then recovered sharply from that depressed base, led by Germany and Italy, and by 1980 had risen to 309% of the world average. Europe’s growth rate dropped after 1980, but Europe remains a high-income region with incomes at 279% of the world average in 2010.
- US – US incomes in 1820 were second highest behind Western Europe. The US then went on a growth tear, growing roughly twice as fast as the rest of the world from 1820 to 1950. The US surpassed Western Europe as the highest-income region around 1850. By 1950, US incomes had risen to an almost shocking 454% of the world average. Since 1950, growth has been good, but slower than the rest of the world, due in part to Asia’s emergence as a high-growth region. US incomes were ‘only’ 390% of the world average by 2010, but the US remains the highest-income region.
- Latin America – Latin American incomes have hovered close to the world average throughout the past two centuries. Latin America got a late start, achieving only weak growth prior to 1870. But this was the second-fastest growing region for the period 1870-1980, and incomes grew from 90% of the world average to 131%. Unfortunately, growth since 1980 has been weak, and incomes have dropped back to 99% of world average. Latin America is a medium-income region today.
- Asia – Asian incomes started out as 83% of the world average in 1820, and then plummeted to only 34% by 1950, as incomes flatlined from 1820 to 1950. Growth then accelerated sharply, and Asia has been the fastest-growing region since 1950. Asian incomes swelled from 34% of the world average in 1950 to 81% in 2010. Amazing. But this progress began from a low starting point, and to-date, Asia has only reached medium-income status. However, some individual countries have achieved high-income status.
- Africa – Africa started out as the lowest-income region in 1820, with incomes only 68% of the world average. By 2010, incomes had dropped to only 26% of the world average. For centuries, Africa has been by far the slowest-growing region. Africa has simply not participated in the growth miracle that raised incomes in the other regions, so Africa has remained a low-income region.
Why the differences?
The world has seen significant income differences between regions and across time periods. This is not accidental. There is a pattern.
Why do Americans and Western Europeans have the highest incomes? Because they were the first to follow the prosperity ‘recipe.’ This recipe emphasizes: A) economic freedom, B) the necessary yet limited government structure that protects individual rights (see here for further explanation), and C) a culture that respects and values commerce and innovation.
The philosophical core of the recipe was respect for the common man. This was embodied in acknowledged rights of the individual, notably a right to be free to pursue economic success and a right to participate in self-government. This philosophy first emerged in northwest Europe and then spread to the North American colonies. And prosperity followed.
This does not mean that Europe and the US have followed the recipe perfectly over the years. They have not. But compared to other regions they have followed it more consistently and for a longer time. The US has probably followed the recipe most consistently over the past three centuries, and they have the highest incomes to show for it.
Latin America has not followed the recipe to the same extent as the US or Europe. Today, the Fraser Institute’s Economic Freedom of the World index lists only one Latin American country (Chile) among the world’s top 50 freest countries. Venezuela is now infamous for their economic woes and lack of economic freedom, but they are not the only ones. In fact, most Latin American countries don’t make the cut as one of Fraser’s 100 freest countries.
Asia’s great improvements since 1950 neatly dovetail with expanded economic freedom. Places like Taiwan, South Korea, China, Hong Kong, Singapore, and Japan posted very strong growth. Some have been good role models of economic freedom, while others have not. But even countries that have not followed the recipe perfectly have expanded economic freedom, and therefore benefited.
Then there is Africa. Two centuries ago Africa was the lowest income region, and they still are today. Most of Africa has never followed the recipe. African governments are renowned for corruption, despotism, price controls, unstable currencies, government-owned businesses, and so on. Today, most African countries rank poorly on economic freedom.
There is always hope
The time machine shows us that for much of world history, most people were poor. But it also shows us that many countries have lifted themselves out of poverty over the past two centuries.
The same path to prosperity is still open today. Any country that follows the recipe (economic freedom, limited government, a culture that appreciates commerce and innovation) is very likely to increase wealth and reduce poverty. A poor country can become wealthy. A wealthy country can become even wealthier and reduce poverty even further.
I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.