It’s easy to think of economics as a dry subject, full of charts and equations that only experts can understand. But the more I learn, the more I realize it’s really about people: their decisions, their struggles, and the way their choices shape the world. That’s what made How Economics Explains the World: A Short History of Humanity by Andrew Leigh such a fascinating read. It doesn’t treat economics like a set of rules; instead, it shows how it’s woven into the very fabric of history.

This book discusses the story of capitalism: how it emerged, grew, and shaped the world we know today. Leigh brings to life the key figures behind the discipline of economics, connecting their ideas to real-world events. He takes you through history, step by step, uncovering how economic forces have driven wars, sparked social change, and even influenced religious movements. Leigh blends macroeconomics and microeconomics effortlessly, showing how the decisions of individuals link to the bigger trends that steer societies.

This book explains how markets work and to help us see history in a new way. By the time I finished, I couldn’t help but noticing the hidden forces shaping everything around us.

Summary

The Journey of Economics Through Time

• It all began with the agricultural revolution, a turning point that transformed scattered hunter-gatherer groups into settled communities, eventually laying the foundation for civilizations like Ancient Egypt, Greece, and Rome.
• The next big leap was the industrial revolution, which marked the birth of large-scale manufacturing and propelled economic growth into overdrive.

The Agricultural Revolution: A Turning Point in Human History

• The shift to farming was a game-changer, enabling communities to store surplus food. This meant people could eat well throughout the year and had a buffer against famine during poor harvests. This stability allowed for “consumption smoothing,” a concept that explains modern practices like saving for retirement, taking out health insurance, or borrowing to buy a home. For prehistoric communities, reduced uncertainty about food must have been a significant relief.
• The invention of the plough revolutionized farming:
  • Breaking up the soil made planting easier, exposed fresh nutrients, and helped control weeds.
  • Animals could now be used to turn the soil, saving human effort.
  • The plough marked the end of a society where everyone’s primary role was to find food, leading to specialization in other trades like crafting and building.
  • However, it also shifted power dynamics. While early forms of farming (like using digging sticks) were relatively gender-equal, the physical strength required to control plough animals made farming more male-dominated.
• Farming’s efficiency could have made life better for everyone. Specialization became possible as not everyone had to focus on food production. But this new way of life came with significant trade-offs:
  • It allowed for the rise of exploitative rulers who used farming surpluses to enrich themselves, fund armies, and control the population.
  • Societies built on agriculture were often unstable.
  • Settled agriculture led to less diverse diets. While hunter-gatherers enjoyed a variety of foods, early farmers relied heavily on a few starchy crops, increasing malnutrition.
  • Crowded farming communities brought people closer together, often in unsanitary conditions, leading to the spread of diseases. Inequality also worsened, creating divides between those with resources and those without.

The Industrial Revolution: A Turning Point for Living Standards

For much of human history, economic growth primarily led to larger populations rather than improved living conditions. However, the Industrial Revolution changed everything. Since its onset, life expectancy at birth has doubled, real incomes have risen by four to ten times, and the average height of people has increased by about 10 centimeters.

Economist Robert Allen views the Industrial Revolution as a series of interlinked transformations:

• Urbanization drove a commercial revolution, with imports and exports booming.
• The rise of private banks supported the expanding shipping trade, making global commerce more efficient.
• Among these interconnected changes, technological innovation stood out as the most transformative, driving unprecedented advances in productivity and economic growth.

The Industrial Revolution: Balancing Technology and Trade

The technological advancements of the Industrial Revolution were closely tied to the expansion of trade. However, not everyone welcomed this growth in commerce. Cheaper imports, while beneficial to many consumers, often threatened domestic producers, sometimes driving them out of business.

Recognizing this threat, producers would often push for laws to restrict imports. This dynamic highlights a persistent truth: a small group facing significant losses is often more politically influential than a large group gaining modest benefits, even when the overall gains far outweigh the losses.

Does Economic Growth Lead to Greater Happiness?

In the 1970s, economist Richard Easterlin proposed the Easterlin Paradox: beyond a certain point, having more money didn’t seem to make people happier. This idea became widely accepted until the 2000s when more extensive surveys challenged it. The new findings revealed that:

• Within countries, people with higher incomes report being happier.
• Across nations, those in wealthier countries also report higher levels of happiness.

But happiness isn’t the only thing tied to income. The data shows that wealthier people and those in wealthier nations are more likely to feel well-rested, respected, and joyful. They also enjoy better-tasting food and suffer less from physical pain, boredom, or sadness.

While money does contribute to happiness, the principle of diminishing marginal utility applies: each additional dollar brings less joy than the one before. Interestingly, the boost in happiness from a 10% income increase feels similar for everyone, whether it’s a homeless person or a socialite. However, the absolute dollar amount differs vastly between the rich and the poor. This disparity makes rising inequality a significant concern.

One of the strongest arguments for redistributive policies and progressive taxation is that a single dollar brings more benefit to someone with fewer resources. The income gaps between nations are even wider than those within them, further underscoring the challenge of inequality.

But inequality isn’t the only issue. Economist George Akerlof’s work on the economics of identity highlights another dimension. Standard economic models assume people work solely to earn income for consumption. However, identity often revolves around what we produce, not just what we consume. When meeting someone new, we’re more likely to ask, “What do you do?” rather than, “What do you buy?”

This perspective shows the struggles faced by the middle class in advanced economies. The twin forces of technology and trade have erased many factory jobs, and telling someone who’s lost their livelihood that TVs are now cheaper offers little solace.

Preparing for Catastrophic Risks: Lessons from Economic Thinking

When it comes to personal risks, economic thinking encourages us to buy insurance for peace of mind. The same principle applies to humanity’s collective risks. Investing a modest amount today in critical areas—like ethical advancements in artificial intelligence, cutting carbon emissions, and mitigating existential threats such as bioterrorism and nuclear conflict—can help safeguard our future. These proactive measures are the insurance policy humanity needs to navigate an uncertain world.

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Author: Andrew Leigh

Publication date: 3 September 2024

Number of pages: 240 pages

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