I recently completed reading William Bernstein’s The Birth of Plenty. My new nerdy hobby is reading books on economic history, and The Birth of Plenty is an interesting look at why some countries have become wealthy and others not so wealthy. It’s one of the biggest questions facing humanity. Why has the west developed and much of the rest of the world remained relatively poor.
Bernstein, of course, has a theory. I first learned of Bernstein through the Bogleheads forum. This forum preaches index investing and Bernstein is one of the more prominent authors members of the forum read (he’s also appeared at several Boglehead annual reunions). He’s a smart guy and was a doctor in a previous career. He is now a financial advisor. He’s written other books about investing but this is the first book I’ve read of his.
Why the west is king
Unlike other books which believe the west developed more quickly than other countries because of its geographical location, Bernstein believes geography is only one reason why the west has come out ahead. He believes there are four big reasons for the west’s dominance. They are:
1. Property rights. Advanced countries protect the average person’s property rights and don’t arbitrarily take them away. Laws like the Magna Carta were the first acts of government that gradually gave more
2. Scientific rationalism. There needs to be a separation of church and state. Religion cannot dictate what can be studied by scientists and what cannot.
3. Capital markets. Businessmen and governments need to be able borrow cheaply in order to fund their growth.
4. Transport. A country needs to have waterways for travel, and then build upon that with a decent road and rail network. Waterways are something a country has by sheer chance, i.e. the local environment supplies them.
I believe Bernstein lays out a convincing argument that these elements are needed for the very first countries to have developed free enterprise and modern capitalism. The countries that did that were the Netherlands and England. England surpassed the Netherlands because it more rigorously established regulations on its financial sector and because it simply had a larger population.
Bernstein’s arguments for this progress are convincing because of his clear and articulate writing style. But this book is not an academic treatise. It is well researched, but the research is not original. Only the conclusion is somewhat intriguing. My disagreement with Bernstein is in his analysis of the developing world.
While the lack of strong institutions that are separate from a monolithic government head plague the developing world, I believe they will be established in the near future. Now I don’t believe this will occur overnight, and I believe different countries will develop at different speeds. Bernstein’s book concentrates on the growth of Western Europe because that is where his source material writes about. Other parts of the world may have been overlooked because there hasn’t been a great deal written about them in English yet.
My opinion on why the west is in the lead
I am more convinced by the argument that environment is the key factor rather than institutional foundations being the key. If one country achieves success through its institutions, its neighbors will quickly copy those institutions. France may have marginally been outdone economically by the UK, but in recent decades it has more than caught up and currently has a slightly larger economy. Italy and Germany have caught up as well with the UK, and Germany has far surpassed it. Eastern countries are catching up too, and it won’t be long before South Korea and Taiwan are considered part of the developed world (if they already are). All of this has occurred in the last 50 years, a blink of the eye in the length of human history.
And I think it will continue. If I am still alive in 50 years I’m sure that parts of Latin America (Chile, Costa Rica, Uruguay and Panama) and even Africa will be considered developed (places like Botswana, Mauritius and South Africa). Unless humanity destroys itself we should eventually see all of the world living a developed existence with decent housing, access to clean food and water, and long lifespans. That is the direction everything seems to be heading.
Do I recommend it?
All in all, I think Bernstein has written a good page turner and a good discussion starter. More needs to be written on the subject. The great story of our time will be the emergence of much of the world into developed and wealthy nations. We have seen spectacular growth come from Asia and Eastern Europe. Latin America and Africa are soon to follow. Investing has just become a little bit more exciting.