1. society
2. work
3. unemployment

A Brief History of Human Progress*
Taken from
Gary M. Walton
President, Foundation for Teaching
Economics
"Poverty is but the worst form
of violence."
-- Mahatma Gandhi



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Poverty is hunger.
Poverty is lack of shelter.
Poverty is being sick and
not being able to see a
doctor.
Poverty is not having access
to school and not knowing
how to read.
Poverty is not having a job,
is fear for the future, living
one day at a time.
Poverty is losing a child to
illness brought about by
unclean water.
Poverty is powerlessness,
lack of representation and
freedom.
Every 3.6 seconds
someone dies of
hunger
What is
poverty?
Cyclical Poverty

Cyclical poverty refers to
poverty that may be
widespread throughout
a population, but the
occurrence itself is of
limited duration.
Absolute Poverty

Poverty as defined in terms of the minimal requirements necessary to afford
minimal standards of food, clothing, health care and shelter.

In the Asian, African and Latin American countries, well over 500 million people are
living in what the World Bank has called "absolute poverty“

Every year 15 million children die of hunger

For the price of one missile, a school full of hungry children could eat lunch every day
for 5 years

Throughout the 1990's more than 100 million children will die from illness and
starvation. Those 100 million deaths could be prevented for the price of ten Stealth
bombers, or what the world spends on its military in two days!

The World Health Organization estimates that one-third of the world is well-fed, onethird is under-fed one-third is starving- Since you've started this power point at least
200 people have died of starvation. Over 4 million will die this year.
Relative Poverty
(Compared to others in a designated region)


In the U.S. hunger and race are related. In 1991 46% of
African-American children were chronically hungry, and
40% of Latino children were chronically hungry compared
to 16% of white children.
The infant mortality rate is closely linked to inadequate
nutrition among pregnant women. The U.S. ranks 23rd
among industrial nations in infant mortality. AfricanAmerican infants die at nearly twice the rate of white
infants.

One out of every eight children under the age of twelve in
the U.S. goes to bed hungry every night.

Half of all children under five years of age in South Asia and
one third of those in sub-Saharan Africa are malnourished.
“Absolute” (v. “Relative”)
Poverty
$$$$$$$
Absolute
poverty is
measured
with
reference to
a standard
A
N
N
U
A
L
I
N
C
Poverty Line $ $ € € £ £ ¥ ¥
O
M
E
$$$
Relative Poverty
The middle family is relatively poorer than the
famous model and relatively richer than the
struggling artist.
All 3 are above the poverty line, so none is
absolutely poor.
Poverty Line $$$
Gross Domestic Product

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It is difficult for those of
us in the United States,
where per capita GDP in
2002 was about $36,000,
to grasp the fact that
about 2.8 billion people, or
nearly half the world
population, live on $2 or
less a day.
And about 1.2 billion live
on less than $1 a day.
Hunger, squalor, and
disease are the norm in
many nations of the world
The Rich and the Poor

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According to the United
Nations, the richest 20
percent of the world’s
population receives more
than 80 percent of the
world’s income;
The poorest 20 percent
receives less than 2
percent.
The poorest 60 percent
receives less than 6
percent of the world’s
income.
History of the Masses


The year 1750 does not
usually evoke images of
great prosperity or of
revolutionary progress, but
in fact the mid-eighteenth
century was an historical
turning point of economic
advance.
Technological changes in
that period allowed
growing numbers of people
to move from mere
subsistence activities to
thoughts and actions that
furthered economic,
political and social
progress.
Almost All of our Ancestors were
Utterly Wretched


Taking a long, broad
view, the lives of
almost all of our
distant ancestors were
utterly wretched.
Consider this time
capsule summary of
humanity from
Douglass C. North’s
1993 Nobel address:
Only for the Last 3 or 4 Minutes on
History’s Clock

Let us represent the human experience
to date as a 24-hour clock in which the
beginning consists of the time
(apparently in Africa between 4 and 5
million years ago) when humans became
separate from other primates.

Then the beginning of so-called
civilization occurs with the development
of agriculture and permanent settlement
in about 8000 B.C. in the Fertile Crescent
– in the last three or four minutes of the
clock

For the other 23 hours and 56 or 57
minutes, humans remained hunters and
gatherers, and while population grew, it
did so at a very slow pace.
Just 35 Minutes
on our New 24-Hour Clock

Now if we make a new 24hour clock for the time of
civilization – the 10,000
years from development of
agriculture to the present –
the pace of change appears
to be very slow for the first
12 hours.…

The pace of change
accelerates in the past
5,000 years with the rise
and then decline of
economies and civilization.
Last 250 Years


Population may have
grown from about 300
million at the time of
Christ to about 800
million by 1750 – a
substantial acceleration
as compared to earlier
rates of growth.
The last 250 years – just
35 minutes on our new
24-hour clock are the
era of modern economic
growth, accompanied by
a population explosion
that now puts world
population in excess of 5
billion (1993).
Restricted to Western Europe and
Extensions of Britain

If we focus on the last
250 years, we see
that growth was
largely restricted to
Western Europe and
the overseas
extensions of Britain
for 200 of those 250
years (North, 1993).
The Decline of Poverty:
Where and When


Figure 1 shows
world population
over the past ten
thousand years,
along with
noteworthy
inventions,
discoveries, and
events.
Shortly before the
United States won its
independence from
Britain, the
geographical line
bolts upward like a
rocket, recently
powering past six
billion humans alive
on Earth.
Advances in Food Production


Advances in food
production from new
technologies, commonly
labeled the second
Agricultural Revolution,
coincide with this
population explosion.
Improvements and
spread of use of the
plow, for example, first
introduced in the
Mesopotamian Valley
around 4000 B.C.,
changed very little over
the next 5000 years.
Competition for Needed Resources


Contrast this with
air travel. The
first successful
motor-driven
flight occurred in
1903 by the
Wright Brothers.
In 1969, a mere
sixty-six years
later, Neil
Armstrong
became the first
man to step foot
on the moon.
Poor Diet is Not a Matter of Bad
Choices!

For most people, poor diet was not a
matter of bad choices, it was the
absence of choices, the fact of
scarcity.

Exceedingly poor diets and chronic
malnutrition were the norm because
food production seldom rose above
basic life-sustaining levels.

Most people were caught in a foodenergy trap, and low food supplies
and inadequate diets were
accompanied by high rates of disease
and low rates of resistance.
Maladies of Malnourishment
Reflected in Historic Height
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The consequences of malnourishment
and widespread disease are revealed
in evidence on height and weight.
In 1750, the average height of adult
males in England, the world’s most
economically advanced nation, was 4
feet, seven inches, and even that
exceeded averages in France and
Norway (Fogel, 1994).
Today, the average American man
stands 15 inches taller.
A typical Englishman in 1750 weighed
around 130 pounds, an average
Frenchman about 110, compared to
the mid-170s for U.S. males today.
It is startling to see the suits of armor
in the Tower of London that were
worn for ancient wars; they vividly
remind us of how small people of long
ago really were.
Second Agricultural Revolution

The second Agricultural
Revolution beginning in the mideighteenth century, soon followed
by the Industrial Revolution,
initiated and sustained the
population explosion, lifting birth
rates and lowering death rates.

Evidence (Preston, 1995) reveals
that for the world as a whole, it
took thousands of years for life
expectancy at birth to rise from
the low 20s to around 30 years in
the mid-18th century.
Table 1:
Years of Life Expectancy at Birth
Place
Middle
Ages
Select
years
19501955
19751980
2002
France
30
66
74
79
United
20-30
Kingdom
36
69
73
78
India
25
39
53
64
China
25-35
41
65
71
38
48
50
46
60
67
Africa
World
20-30
Life Expectancy


From Table 1 we see
that by 1800, life
expectancy in France
was just under 30
years, and in Great
Britain about 36, levels
that China and India
had not reached 100
years later.
By 1950, life
expectancy in England
and France was in the
high 60s, while in
India and China it was
only about 40.
Europe and England’s Colonies
Advanced While the World Slept
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While the rest of the
world slept, and changed
little economically, Europe
and England’s colonies in
America advanced.
By the early 1800’s, the
United States had pushed
ahead of Europe, and by
the mid 1900’s, citizens
of the U.S. enjoyed
incomes well above those
of Europeans and many
multiples above people
living elsewhere.
Impact of Regional Differences
Apparent in Nations Today

The real impact of regional
differences in economic
growth is apparent when we
realize that the poor nations
of today—Zaire, Ethiopia,
Tanzania, Burma, and
Bangladesh—have per capita
income levels surpassed in
Europe 500 to 1000 years ago.

Even now, they have not
attained levels of well-being
experienced by western
peoples at the time of the
American Revolution (see
Table 3).
Classifications
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The World Bank classifies countries into high-income,
medium-income, and low-income countries on the basis of
national income per capita
The high-income nations, are known as the industrially
advanced countries (IACs); they include the United
States, Japan, Canada, Australia, New Zealand, and most
of the nations of western Europe.
Conditions of IACs

In general, these
nations have
• well-developed
market
economies
• based on large
stocks of capital
goods,
• advanced
production
technologies,
• and welleducated
workers.

In 2001 these
economies had a
per capita income
of $26,710.
DVC
Developing Countries

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The remaining nations of the world
are called developing countries
(DVCs).
They have wide variations of income
per capita and are mainly located in
Africa, Asia, and Latin America.
Middle Income Nations

The DVCs are a
diverse group that
can be subdivided
into two groups:
• The middleincome nations,,
include such
countries as Brazil,
Iran, Poland,
Russia, South
Africa, and
Thailand.
• Per capita output
of these middleincome nations
ranged from $745
to $9206 in 2001
and averaged
$1850.
Low Income Nations
• The low-income
nations, had a per
capita income of
$745 or less in
2001 and average
only $430 of
income per
person. India,
Indonesia, and
the sub-Saharan
nations of Africa
dominate this
group.
Economies
Low (tan) – Medium (green) - high (brown)
Table 2
Real Gross Domestic Product Per Capita (1990 $)
Area
1000
1500
1700
1820
1952
1995
2001
Europe
$400
$640
$870
$1,130
$4,370
$13,950
$19,256
USA
600
1,260
10,650
23,380
27,948
India
530
530
610
1570
1957
540
3200
3583
1200
1489
5190
6049
China
450
600
600
600
Africa
400
400
400
400
World
420
550
600
670
2270
Sources: Maddison (1998, 1999).
Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.
GDP Per Capita
Then and Now (1990$)
1820
1870
1900
1913
1950
1973
1992
2001
United
Kingdom
1706
3190
4492
4921
6939
12025
16088
20127
Switzerland
1090
2102
3833
4266
9064
18204
20788
22264
USA
1257
2445
4091
5301
9561
16689
23170
27948
China
600
530
545
552
439
839
2098
3583
Burma
504
504
685
396
928
860
1409
Egypt
475
649
902
902
910
1294
2407
2992
439
781
781
1122
1397
1100
1311
390
626
485
660
Ghana
Ethiopia
Comparisons
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In 2001 U.S. GDP was nearly $10 trillion;
the combined GDPs of the DVCs in that year came to only
$6 trillion.
The United States, with only 5 percent of the world’s
population, produces 31 percent of the world’s output.
Per capita GDP of the United States is 249 times greater
than per capita GDP in Sierra Leone, one of the world’s
poorest nations.

The annual sales of the world’s largest corporations exceed
the GDPs of many of the DVCs.

General Motors’ annual world revenues are greater than the
GDPs of all but 21 nations.

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It is clear that the
road out of poverty is
new.
It has been traveled
by few societies:
Western Europe; the
United States,
Canada, Australia;
and New Zealand
(Britain’s offshoots);
Japan, Hong Kong,
Singapore; and few
others.
What steps did
Western Europe and
its “offshoots” take
to lead humanity
along the road to
plenty?
An
Institutional
Road-Map to
Plenty

In general
•
•
•
•
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Characteristics
•
literacy rates are low,
Unemployment is high,
population growth is rapid, and
exports consist largely of agricultural produce (such as cocoa, bananas, sugar, raw
cotton)
and raw materials (such as copper, iron ore, natural rubber).
•
•
production technologies are simple,
and labor productivity is very low.
Capital equipment is minimal,
About 41 percent of the world’s population lives in these low-income DVCs,
all of which suffer widespread poverty.
Roadmap to a
Life of Plenty?



Why is China, the world’s
most populous country
(almost 1.3 billion), now
far ahead of India (second
with 1 billion), when
merely fifty years ago both
nations were about equal
in per capita income and
more impoverished than
most poor African nations
today?
Is there a roadmap leading
to a life of plenty, a set of
policies and institutional
arrangements that
developing nations can
adopt to replicate the
success of advanced
modern economies?
The heartening news is
that while we cannot map
out a clear highway to
wealth, there are clearly
road signs to point us in
the right direction and
away from cliffs.
Nation’s Output determined by
Input of Factors of Production

Well known is the fact that a
nation’s total output is
determined by its total inputs,
measured in terms of
•
•
•
•

natural resources,
labor force,
stock of capital,
and entrepreneurial talents
Two hundred and fifty years ago,
and for many centuries preceding
that, most people (80-90 percent
of the labor force) everywhere
were engaged in agriculture, with
much of it being subsistence,
self-sufficient, noncommercial
farming.


Today that
proportion is under
5 percent in most
advanced economies
(3% in the U.S.).
During this two-andone-half century
transition, people
grew bigger, ate
more, and worked
fewer hours and
days in greater
safety and comfort.
Percent of
Population
Engaged in
Subsistence
Agriculture
How Nations Apply Their
Resources


To explain why some
nations grow faster than
others, we need to look
closely at the way nations
apply and adapt these
sources of productivity
change.
To use this perspective, we
need to assess the
complex relationships of
the laws, rules, and
customs of a society and
its economic performance.
An Example

For example, in
Afghanistan and Iraq,
we are continually
reminded of both the
difficulty and the
necessity of gaining
popular acceptance of
changes designed to
promote economic
growth.
The Human Realities of Poverty




Let us examine a typical “extended” family in rural Asia.
The Asian household is likely to comprise ten or more people, including
parents, five to seven children, two grandparents,
and some aunts and uncles.
They have a combined annual income, both in money and in “kind” (i.e.,
they consume a share of the food they grow), of $250 to $300.



Together they live in a poorly constructed one-room house as tenant
farmers on a large agricultural estate owned by an absentee landlord who
lives in the nearby city.
The father, mother, uncle, and the older children must work all day on the
land. None of the adults can read or write; of the five school-age children,
only one attends school regularly; and he cannot expect to proceed
beyond three or four years of primary education.
Relief from the Daily Struggle




There is only one meal a day; it
rarely changes and it is rarely
sufficient to alleviate the childrens’
constant hunger pains.
The house has no electricity,
sanitation, or fresh water supply.
There is much sickness, but
qualified doctors and medical
practitioners are far away in the
cities attending to the needs of
wealthier families.
The work is hard, the sun is hot and
aspirations for a better life are
constantly being snuffed out. In this
part of the world the only relief from
the daily struggle for physical
survival lies in the spiritual
traditions of the people.
Sources of
Productivity



Consider just one of the
sources of productivity
change – technological
change—and how it is
intimately tied to the
institutions, the laws,
rules, and customs of a
society.
A new technology can
introduce a whole new
product and service, such
as the airplane and faster
travel, or it can upgrade
and improve an existing
one;
we have come a long way
from the 1930’s Model A
Fords to today’s luxury
BMWs and state-of-theart hybrid fuel
technologies.
New
Technology

A new technology can also affect the cost of
production; the introduction of relatively light but
strong aluminum changed the cost of producing a
whole range of goods and services, from softdrink cans to skyscrapers



In short, technological
changes can be thought of as
advances of knowledge that
raise or improve output or
lower costs.
They often encompass both
invention and/or
modifications of new
discoveries, called innovation.
Both require basic scientific
research, then further trial
and error and study to adapt
and modify the initial
discoveries and put them to
practical use.
Advances of
Knowledge
Risk and Cost


The inventor or
company pursuing
research bears
substantial risk and
cost---including the
possibility of failure and
no commercial gain.
How are scientists,
inventors,
entrepreneurs, and
others encouraged to
pursue high-cost, highrisk research ventures?



Rule
of
Law
This is where laws and rules,
or institutions as they are
called, help us better
understand the causes of
technological change.
Patent laws, first introduced in
1789 in the U.S. Constitution,
provided property rights and
exclusive ownership to
inventors for their patented
inventions.
These patents and copyrights
extended exclusive ownership
rights to ideas including the
right to sell, a market for new,
patented ideas emerged, with
inventors often selling their
patents to people specialized
in finding commercial uses of
new inventions.
Importance of Institutions


The keys here are
the laws and rules –
the institutions
In advanced
economies, laws
provide positive
incentives to spur
enterprise and help
forge markets using
commercial legal and
property right
systems which allow
new scientific
breakthroughs
(technologies) to
realize their full
commercial-social
potential.
What is an Institution?



Established behavior practices and
patterns that form the foundation for
community life.
Institutions evolve in market economies to
help individuals and groups accomplish
their goals
A different kind of institution, clearly
defined and well-enforced property rights,
is essential to a market economy.
Generate Productivity Advances

Properly constructed
institutions generate
productivity advances
through
• specialization and division
of labor,
• allowing universities, other
scientific research
institutions, corporations,
to cooperate through
interrelated markets
(production and exchange)
• hastening the growth and
spread of technological
advances
Create Incentives to Work


Getting the
institutions right and
sustaining
institutional changes
that realize gains for
society as a whole
are fundamental to
the story of growth.
The rule of law:
• protects and set limits
on the use of property,
• and influences
people’s incentives in
work, creativity, and
exchange.
Population
Growth in
Developing
Countries
What do Successful Economies
have?





Examining the successful
economies suggests a partial list
of the institutional determinants
that allow modern economies to
flourish:
the rule of law, coupled with
limited government, and open
political participation;
rights to private property that
are clearly defined and
consistently enforced;
open, competitive markets with
freedom of entry and exit,
widespread access to capital and
to information, low transaction
costs, mobile resource inputs,
and reliable contract
enforcement;
*an atmosphere of individual
freedom in which education and
health are accessible and valued
Poverty Level In US


The 2003 poverty income
level in the United States
(about $8,500), while poor
relative to the U.S.
average ($34,000), is far
higher than average per
capita incomes in most of
the rest of the world
Yet another way to show
how widespread the gains
have been from economic
growth is to show the
availability of things we
take for granted today but
that were special in 1950.
Sources: U.S. Bureau of the Census, American
Housing Survey



Figure 2 lists items owned or used by average households in the United States in 1950
compared to those used by Americans below the poverty threshold today.
Indeed, American households listed below the poverty level today are more likely to
own a color television set than an average household in Italy, France or Germany.
Air-conditioned homes with electricity, a refrigerator, a flush toilet, television and
telephones are common even among poor Americans (as shown in Figure 2).
Conclusions:



Recent declines in the
number of the world’s
poor are primarily a
result of institutional
improvements in Asia,
especially in China and
India.
Since 1980, more than
200 million people
have moved above the
poverty threshold
measure.
Will poorer nations “catch up”?

The faster growth rates
of the those
successfully integrating
into the world market
system is positive
news, holding out the
very real possibility of
poorer nations
“catching up” to the
material comforts
enjoyed by the
advanced/rich nations,
even as the less
globalized fall farther
behind.
Political Systems Must ????

Devising political
systems that divide
power, either by
• (1) checks and balances
among branches or
components of one
level of government; or
• (2) by federalism
creating competition
among layers of
government, holds
promise for the needed
economic institutional
support of enterprise
and markets.
The Corruption
Index
Presence of Corruption Sanctions
Criminality in the Economic System

Such criminality undermines the
growth of output by diverting
scarce resources toward activities
that “transfer” income away from
activities that produce goods and
services. SUCH AS:

Opening economies to
international trade

Controlling population growth
Encouraging foreign direct
investment
Building human capital
Making peace with neighbors
Establishing independent central
banks




Establish Realistic Exchange Rates

Exchange rates that are fixed at unrealistic levels forces a
nation into an abrupt reevaluation of its currency, sending
shock waves throughout its economy.
Privatize State Industries


Many DVCs would benefit
by converting state
enterprises into private
firms. COMPETITION!
State enterprises often are
inefficient, more concerned
with appeasing labor
unions than with
introducing modern
technology and delivering
goods and services at
minimum per-unit cost.
Challenge to
Poor Nations


The daunting
challenge for poor
nations is to craft
better political
institutions, to
promote the rule of
law, rather than the
more arbitrary rule of
men.
This challenging
transition is vital
because “history
offers us no case of a
well-developed
market system that
was not embedded in
a well-developed
political system
Optimism about the future of
mankind


Greater and greater numbers of
humans are living longer, in
greater ease and comfort, and
with more dignity.
Although war, revolutions, and
natural and man-made
catastrophes can imperil regions,
the economic evidence and
historical record provide ample
reason to expect that the global
progress launched by open
markets and individual freedoms
secured by rule of law around
1750 will continue indefinitely.