Erik S.

Reinart, Emulation: How Rich Countries Got Rich

Initially, wealth and poverty were viewed by people as a zero-sum game.

 St. Jerome: “One man’s benefit is another man’s loss.”

 Sir Thomas Browne: “All cannot be happy at once because the glory of one state depends upon
the ruins of another.”

During the Renaissance, the zero-sum game gradually disappeared as the dominant world view as people
started to see that new wealth could be created- not only conquered- through innovation and creativity.

 Francis Bacon: Innovations are carriers of increased human wealth and happiness.
o Bacon describes a Utopian state where innovation holds the seat of honor and people
have invented self-propelling vehicles, submarines, microphones and medicines to
prolong life.

Concept of “Increasing Returns:” As production expands- even without technical change- the cost of
production per unit falls.

 Under conditions of falling costs with increasing output- what is also called economies of scale- a
large population was no longer seen as a problem for seventeenth century economists.
o On the contrary, large and growing population became a necessary precondition for
wealth and economic growth.

Thomas Malthus reconstructed an economic theory built on diminishing returns in agriculture (not on
innovation or economies of scale) that made growing population a problem- with emphasis on diminishing
returns.

Before Adam Smith, it was often understood that economic development was based on collective rent-
seeking, originating in synergies of increasing returns, innovations and division of labor that were found
clustered only in the cities.

Henry VII created an extensive economic toolbox wherein he imposed export duties on England’s raw
materials, ensuring that foreign textile producers had to process more expensive raw materials than their
English counterparts.

 Newly established wool manufacturers in England were granted tax exemption for a period and
were even given monopolies in certain areas, until England has sufficient production capacity to
process all the wool they produced.
  England would even buy Spanish wool, only to burn them since they did not have sufficient
capacity to process this wool, just to remove the raw material from the market and strengthening
their market power.

US Treasury Secretary Alexander Hamilton recreated an economic policy very similar to that of Henry VII

 A larger division of labor and a larger manufacturing sector

 Conscious supporting and protection of targeted activities
 Attracting foreigners to work I targeted activities
 Relative suppression of landed nobility and other groups with vested interest based in the
production of raw materials
 Tax breaks and cheap credit for targeted activities
 Emphasis on learning and education
 Patent protection for valuable knowledge
 Frequent export tax/ export ban on raw materials to make raw materials more expensive to
competing nations

Poor countries are those who have not employed this economic toolbox, or have employed it for too short
a period and/or in a static way that has prevented the competitive dynamics from taking root.

As time passed, the fundamental idea that a finished product cost ten to hundred times the price of the
raw material needed would recur in European literature on economic policy.

 Between raw material and the finished product lies a multiplier.

 Hence, when a country exported raw materials and imported industrial goods, it was considered
bad trade. But when the same country imported raw materials and exported industrial goods, it
is considered good trade.