The Birth of Plenty: How the Prosperity of the Modern World Was Created

William J. Bernstein (McGraw-Hill, New York; 2004; ISBN 0-07-142192-0; 340 pp.) $29.95

Reviewed by John D. Trudel

The Birth of Plenty is a most unusual work. It is both timeless and profound, giving badly needed new insight to economic policy and business strategy. It deserves deep consideration because the data and issues it raises are so crucial to empowering the private sector to enhance prosperity. The book won’t provide a noncontroversial and actionable checklist for “What to do Monday morning” because the subject matter transcends any single enterprise. But it will allow a better focus on what policies are important to allow businesses to succeed at increasing wealth and raising standards of living.

The book is a successful economist’s pragmatic re-look at world history. His viewpoint is that of a “quant,” an investment fund manager who uses modern information technology and mathematics to predict future performance. I know William Bernstein; he is an individual of eclectic skills, a neurologist who became fascinated with the scientific method, statistics, computerized trend analysis, and asking “what if” questions.

The book came out of a journey similar to that which inspired Jared Diamond’s famous Guns, Germs, and Steel. The question Diamond answered was Yali’s question: “Why is it that you white people developed so much cargo?” Bernstein ponders a similar question based on his observation of the startling discontinuity in world economic growth, which prior to 1820 was essentially nonexistent throughout all of recorded history. After that, it was sustained and vigorous, especially in a few Western countries. The question that gnawed at Bernstein was, Why? Why did world economic growth, and the technologic progress underlying it, suddenly explode when it did?

Does he succeed in answering this question? I think so, to the point that I did something unprecedented. Before I finished this review, I purchased and gave copies of The Birth of Plenty to professional friends as holiday presents. I think it’s that good. So did John Bogle, the Founder and Former CEO of The Vangard Group. He said, “Bill Bernstein has given us a compact and immensely readable economic, political, military, and institutional history of our civilization that is a tour de force. . . . Prepare to be amazed.”

Some will indeed be amazed. But others will be dismayed, as Bernstein is not gentle with sacred cows, making some into hamburger. For example, it’s almost religious dogma (splashed daily in headlines about Iraq as I write this) that democracy produces freedom and economic development. Bernstein’s analysis of history puts this differently. “It is economic development that produces democracy, not the other way around.” That’s not too disruptive, just an interchange of cause and effect, but he goes further. “Too much democracy may actually be bad for economic growth.” Why? Because “the rule of law is the essential bulwark of a robust system of property rights. Property rights, in turn, are essential to prosperity” [p. 5]. Basically, he argues that Rights and the Rule of Law must come first: that these enable democracy, not the other way round, and that democratic excesses that weaken personal rights (such as owning property or assets) can reduce prosperity. He applies this to foreign policy, saying, “Thus, optimism about democratic development in a nation whose traditional cultural values are antithetical to the rule of law—such as Iraq or Afghanistan—is likely to prove costly and dangerous.” That view might irritate those on the right.

And there’s more. As an economist with a keen view of history, Bernstein notes that governments most often focus on “rent-seeking behavior”: They first seek to collect “rent” from their citizens for the “privilege” of existing, He plausibly attributes economic decline and even the fall of the Roman Empire to this. Such an aversion to “tax and spend politics” for social good will do more than irritate those on the left; it will likely enrage them. For example, current debates about Social Security, at the core, probably get down to “Who owns the money a worker-citizen has been compelled to set aside for the future—the person or the state?” Suffice it to say that this is not a book that could have come from traditional academia or a Western think tank of any mainstream political bias.

Indeed, Bernstein told me privately that his science and history have been attacked. It’s hardly surprising. After all, Copernicus and Galileo came close to being burned at the stake for challenging the dogma of the time. (Religious dogma, you say? Well, perhaps. Pick another example yourself, from industry or government. Stalin threw the identifier of recurring 60-year economic cycles, Nikolai Kondratieff, into the Gulag. And countless managers in industry have suffered career damage for expressing unpopular views.)

Bernstein identifies four prerequisites for economic growth:

• Secure property rights, not only for physical property, but also for intellectual property and one’s own person.

• A systematic procedure for examining and interpreting the world—the scientific method.

• A widely available and open source of funding for the development and production of new inventions—the modern capital marketplace.

• The ability to rapidly communicate vital information and transport people and goods.

It’s important to note that all of these factors must be present. Removing or wounding even one topples the platform. “This occurred in 18th century Holland with the British naval blockade, in the world’s Communist states with the loss of property rights, and in much of the Middle East with the absence of capital markets and Western (scientific) rationalism” [p. 17]. It’s also important to understand that these simple rules contain paradoxes and require interpretation. “The central paradox of patent law: Too little protection for the inventor saps the incentive to create and produce, while too much stifles competition and strangles commerce” [p. 83].

Also, subtle factors can inadvertently destroy one or more of these factors, perhaps without public awareness. Consider “information asymmetry” and how the current wave of white-collar crime and accounting fraud could undermine the West’s capital markets. “The person running the business—the operation partner—finds it easy to conceal profits (and losses) from the investor, who in turn finds it time-consuming and expensive to monitor the arrangement to ensure that he is not cheated” [p. 135].

The book is successful at explaining persistent anomalies in the world. “The link between individual liberty and scientific inquiry partly explains the paradox of how the United States, with its narcissistic cult of the individual, continues to lead the world in scientific innovation despite a deteriorating (now third rate or worse at the K12 level) educational system” [p. 192].

Section II of the book applies these theories to the history of nations. Bernstein is a pragmatist—he separates the world into winners and losers, and he compellingly explains why.

Section III examines the consequences of policy using statistical analysis, and it merits some deep thought. What factors inspire growth? What factors limit it? And how much? How much law is needed to ensure growth, and can there be too much? What about economic growth versus the size of government?

I was fascinated by the analysis of well-being vs. per capita GDP. (Well-being is, of course, subjective. The research cited [pp. 323–324] asked people to rate themselves on a scale of four factors ranging from “very satisfied” to “not at all satisfied.”) Tiny Iceland and the Scandinavian states fare well. The United States, less well, despite a high GDP. France is not a happy place, and South Africa, once a beacon of scientific and medical progress, is a well-being disaster.

Lest some think this is a love fest in which I can say nothing bad about the book or author, I can find faults. For example, I think the discussion of modern-day jihad terrorism is way off base. Bernstein dismisses its importance, seeing it as the traditional “fanatics with bombs” that have been a nuisance throughout history, but no more than that. My view: It’s World War III, a suicide-based, millennial clash of cultures that aims to replace the nation-state with Islamic caliphate.

Still, I’ll forgive Bernstein for that because his research into past policy errors is good. How can the developed nations most effectively deploy their resources in today’s troubled world? His answer is to quote Paddy Ashdown, the U.N. high representative for Bosnia. “In hindsight, we should have put the establishment of the rule of law first, for everything else depends on it: a functioning society, a free and fair political system, the development of civil society, public confidence in police and the courts” [p. 346].

It’s hard to disagree with such data, theory, and especially a model that so well matches the world, from two millennia of the past to present. Read the book.

BIO

John D. Trudel CMC (jtrudel@trudelgroup.com; www.trudelgroup.com) helps firms with innovation, business creation, planning, and governance.

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