Why economists should heed the lessons of history

Historians tend to stress the particularities in history. Each event is unique, caused by a set of conditions that will never collide again. Each event causes new events to take place, equally unique and equally unrepeatable. It’s only through painstaking research into the details of these conditions that historians can hope to understand the course of history.

Jared Diamond’s superb book, Guns, Germs and Steel, leaves its readers with exactly the opposite impression. The reader is surprised not by the particularities of each episode, but by the regularities. At a certain level, human history becomes predictable. Diamond’s book opens with the encounter, in Cajamarco in 1532, between the Spanish soldier, Pizarro, and the Inca emperor Atahuallpa. The Spaniards’ stunning victory over the Inca empire was the conclusion of the biggest natural experiment in human history. Some 11,000 years ago, bands of hunter-gatherers crossed the Bering Strait from Siberia to Alaska. The subsequent rise of the sea level separated these bands from the evolution in Eurasia. Some 10,000 years later, Spain sent Columbus to rediscover America.

Surprisingly, the societies discovered by the Spaniards were not that different from those known in Eurasia. These societies had agriculture, religion, armies and cities with monumental buildings. They also had huge income inequality, similar to that of Ancient Egypt. However, Aztec and Inca empires lagged behind the most developed Eurasian societies by some 2,000 years. On meeting, the difference turned out to be fatal.

Explaining the divergence

Diamond goes to great lengths to explain the cause of this Eurasian lead. In his writing, he discusses many more examples of societies that developed largely in isolation from the rest of the world for a long time – often with far more dramatic time lags than the Eurasian social and technological frontier (Easter Island, Hawaii, the aboriginals in Australia and New Guinea, the uncontacted tribes in the Amazon rainforest or the African savannah). The regularities are striking. The level of development is roughly determined by three factors: geography, scale and time.

First, geography: some types of environment offer better opportunities than others. For example, the ice-covered landmass of Greenland offers less prospect for development than the Fertile Crescent in the Middle East – the first location where agriculture was practised. This aspect is reflected in economics.

Scale allows for a higher degree of specialization, and hence innovation, and a larger scale allows a larger army. This is reflected in economics in the effect of population size on technological progress.

Thirdly, time, because both social and technological evolution take time.

The search for a unifying theory

Diamond combines insights from many sciences to obtain a broad picture of the evolution of mankind: geology, archaeology, genealogy, biology, history, anthropology, epidemiology, demography and economics. He weighs the evidence, points out the gaps in our understanding, reports unresolved disputes, and then combines all the pieces of evidence in a unified analysis. Undoubtedly, specialists will disagree with parts of this analysis, and even worse, they will prove Diamond to be wrong in some cases. But the general project – combining insights from different disciplines to a make story about the general evolution of human societies – has turned out to be fruitful.

Diamond is not the only author adhering to this research programme. There are many others – all with their own points of departure, but with the same ultimate goal, and more or less similar conclusions. Edward Wilson (1998) is probably most explicit in his quest for a single unifying theory of everything. For him, two theories on one topic are just a sign of inconsistency. They offer a challenge – find the unifying theory that encapsulates both, just like Einstein’s general relativity has to be squared with Heisenberg’s uncertainty. Darwin’s theory of evolution is an indispensable tool for this project of unification.

This research programme has an interesting feature – its outcome looks familiar to economists. Most authors in this line of research do not like economics at all – it remains the dismal science – but the unifying theory they come up with looks very much like economics, or evolutionary biology for that matter. These two disciplines are close relatives anyway. Evolutionary game theory is similar to the game theory (with rational, self-interested agents) that is applied in economics.

Daron Acemoglu and James Robinson’s book, Why Nations Fail, fits in this same project. Acemoglu and Robinson have suggested a contradiction exists between their theory, which explains history from the evolution of institutions, and Jared Diamond’s theory starting from geography. This distinction might be somewhat artificial. Institutions like religion, politics, war, the state monopoly of violence, and the rule of law do play an important role in Diamond’s analysis. Diamond’s research programme offers a broad understanding of these institutions. If the evolution of human societies provides so much flesh and blood to economic analysis, why don’t we use this evolution more routinely as an aid when teaching economics?

Broad-brush history as a teaching device

What I propose is different from economic history as it is usually taught. Economic history is practised as history, stressing the particularities at each stage. That is great and very informative, but the use of history that I propose is more broad-brushed. It deals with the general laws of the evolution of human societies, ignoring many subtle details. I propose to use history as a device for teaching both the logic and the empirical relevance of economics.

Which historical phenomena should be covered in such an economics programme? First of all, I would go into great depth on the consequences of the neolithic revolution, the transition from hunter-gatherer societies to agriculture. It has occurred several times, at different times, in human history. Each time, what happened was more or less the same: a huge increase in population density, the emergence of cities, a transformation of politics, and a rise in income inequality. In his splendid 1988 book, Cities and Economic Development, Paul Bairoch provides a simple physical analysis showing why hunter-gatherer societies cannot sustain cities. The low population density in hunter-gatherer societies means that the amount of time it takes people to travel makes it almost impossible for more than 100 people to convene in one place. The hundred-fold increase in population density due to agriculture is equivalent to a fall in transportation costs between two neighbours by a factor of 10.

Azar Gat’s 2006 book, War in Civilization, provides an analysis of the implications of this increase in density for warfare. Larger groups of people can meet more easily and coordinate their violence to subdue single individuals, families or groups. An economist would say that the use of violence and the exercise of power exhibit strong economies of scale. If we could start teaching economics from history it would probably cure a main defect in current economic education – the lack of attention we pay to the economics of robbery and theft.

Another important thing to be taught is the rule of law. In his seminal books, History of Government, SE Finer locates this transition in Moses’ descent from Mount Sinai carrying the 10 commandments. The Egyptian pharaoh was god, king, law-maker and judge all at the same time. The commandments gave people direct access to the law, independent from the king’s judgement. All this is reflected in Daron Acemoglu’s great insight that politicians have limited ability to sign credible contracts since there is no superior power that can enforce them.

Finally, I would teach the Industrial Revolution and its demography. Bairoch explains how the industrial revolution goes hand-in-hand with a rapid increase in urbanization. First Belgium in the 15th century, and afterwards the Netherlands, in the 17th century, were the first countries where more than 30% of the population lived in cities. In that sense, the Netherlands pre-empted the Industrial Revolution. For about 150 years, wages in The Netherlands were twice as high as anywhere else in Europe – a clear example of the economics of agglomeration.

Using history as a guide for theory

Currently, much of the thinking on how to change teaching in economics is motivated by the failure of the discipline to forecast – or even better, prevent – the financial crisis of 2008. There too, history is a useful laboratory, as shown by Carmen Reinhart and Kenneth Rogoff’s 2009 book, This Time Is Different – this time wasn’t that different after all. My claim is that history can be used in a much broader context as a frame of reference for our teaching in economics, well beyond the perils of the financial crisis.

History is important in the teaching of economics, not as a replacement of the careful work of economic historians, but as an aid to explaining how a broad-brushed economic history can help us understand the context of economic theory. Introducing those parts of economic theory that are most useful in understanding real-life institutions will change the way we teach. I suspect it will produce better economists, too.

Published in collaboration with Vox. 

Author: Coen Teulings, Professor of Economics, University of Cambridge; and CEPR Research Fellow.

Image: A student studies in Doe Library at the University of California at Berkeley in Berkeley, California May 12, 2014. REUTERS/Noah Berger