Dollars and Jens
Friday, August 31, 2007
the no-profit condition
Before the Industrial Revolution all societies were caught in the same Malthusian Trap that imprisons Africa today. Living standards stagnated because any improvement caused births to exceed deaths. The resulting population growth, pressing on fixed land resources, inevitably pushed incomes back down to subsistence.What I find particularly interesting about this argument is how familiar it looks. In equilibrium economics, one is always left to ask of any given industry, why do more companies not join the industry, or existing ones leave it (by going out of business, for example)? Sometimes there are government-enforced monopolies or social barriers, but in a clean, efficient, competitive equilibrium, the answer one generally looks for is that the marginal economic profit of a new firm, and the most tenuous firm that is in the industry, must be zero; if it were higher more firms would enter until it dropped, and if it were lower weak firms would go out of business until the remaining ones were able to get by.
The African environment has always created high disease mortality. This was a blessing for Africa's living standards. Before the Industrial Revolution, Africa was rich, with material consumption probably double or triple that of China, Japan, or India, and as good as that of Europe. For example, when the British were looking for cheap labor in East Africa in the 1840s they had to turn to India for low-wage workers. Asian living standards were low because of high standards of personal and public hygiene in preindustrial China and Japan. This condemned Asia to subsistence on a minimal diet. Europeans in contrast were lucky to be a filthy people who bathed rarely and squatted happily above their own feces, stored in basement cesspits. Filth engendered wealth.
The Malthusian trap looks similar; economic growth simply leads people to enter or leave until equilibrium is reestablished with life at just a high enough quality to sustain the population. The author argues that industrialization allowed us to escape the Malthusian trap — he seems, though I'm not clear on this, to mean because it produced economic growth at a rate faster than the population could keep up. Labor, today in industrialized countries, is the primary factor of production of most of our economic product, and we tend to think of new people bringing in labor in proportion to their numbers and not really changing the economic product per person. The birth rate, though, has gone down in industrialized societies; we have clearly not kept up with the amount of population growth the economy could have sustained; this at least suggests something else is getting in the way of the Malthusian trap. Perhaps he meant to include this in his argument — that industrialization leads to the cultural changes that prevent population growth from eating all our profit, as it were.