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The Birth of Plenty
Old 01-19-2005, 05:11 PM   #1
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Join Date: Sep 2002
Location: Silicon Valley
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The Birth of Plenty

I promised that I'd write up something on The Birth of Plenty by William Bernstein after I got back from XMas. *I've been pretty busy so this will have to do. *I'll give the summary first that I think anybody planning to FIRE and be in such a state for 30 or more years (with the kind of asset allocation that implies) should definitely give the book a read. *It covers a lot of the same ground though from a different viewpoint than Culture and Prosperity by Alan Kay (which I would also recommend). *Interestingly, Kay's book is not mentioned (nor the original British edition with a different title) despite the similarities and coming out a number of years earlier. *Bernstein's book is a "popular" version and summarization of the research literature.

The book is divided into three major sections: The Source of Growth; Nations; and Consequences. *The first section (about half the book) is where he goes into his interpretation of the factors that have caused growth in the modern world. *The four factors that he identifies are: property rights; reason / scientific method; capital markets; and speedy transport and communications. *One can quibble with some of the weight given to the factors and whether they are all necessary. *What's also not really given any coverage is whether these four factors are sufficient.

The second section looks at some countries in more depth in relation to the four factors. *He looks at the "winners" (Great Britain and the Netherlands), the runners up (the rest of the 20 or so industrialized countries), and the others.

The third section is a look at some variations in the growths of the industrialized countries and some speculation on the future of economic growth. *Many of the lines drawn in the charts must have some incredibly large error terms because the data often looks more like a cloud than any line.

Some interesting things in the charts/text:
- It appears that the growth rate of industrialized countries in general converges. *
- Democracy up to a point increases productivity of an economy but after that point it decreases.
- The graph on pg 329 which looks whether doubling income will continue to produce doubled amounts of "happiness" (the utility of money) looks fishy to me. *He has a straight line drawn through it but based on the data points shown in the graph it could just as easily be fit to a polynomial. *What difference does that make? *Well the data looks to be showing that there is "threshold" level to the utility of money. *That is, more money beyond that required for a basic standard of living has less utility. *The line that is drawn shows no such threshold.
- He claims that democratization more commonly follows increased economic capability in an economy rather than the other way around. *This, if true, puts aside one of the doubts that people raise about China joining the group of industrialized nations.
- There are questions about whether growth is slowing for industrialized nations. *It took a large leap to get from the pre-industrialized state but after that (perhaps 100 years or so?) it slows.
- Will equity investments continue to bring the returns they have in the past? *At one time these were risky investments that were not well understood. *Now that they are (or at least more so) will the returns fall?
- Commentary (made a few times and scattered throughout the text) about the rising levels of income inequality in the US. *The last time it was this high the US was around the Great Depression. *The precariousness of the government was higher than many people realize. *Also similar in Britain - worth reading some of Orwell's works (e.g. Road to Wigan Pier or Homage to Catalonia) to get a close up view of that. *The rise of communist and nazi sympathies within the working class and the capitalist class at the time probably a symptom of this.

Lots more that could be discussed. *Well worth reading. *It does remind me that I keep meaning to read Barbara Tuchman's book A Distant Mirror - he refers to the book a number of times. *IIRC she FIREd sometime in the '70's or at least sort of FIREd to do work that she loved to do - historical research.
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