The Future for Investors

by Jeremy J Siegel

  The study of history shows us why the communications revolution is such a positive force for worldwide growth.

  THE CREATION AND TRANSMISSION OF DISCOVERIES

  Let’s begin our analysis by going far back in time. Michael Kremer, a Harvard economist, wrote an article in the prestigious Quarterly Journal of Economics with the grandiose title “Population Growth and Technological Change 1,000,000 B.C. to 1990.” Of course, economic output data does not stretch back that far in time, but data on human population do exist.

  Kremer convincingly argues that throughout most of history, the number of humans was a very good indicator of economic progress. Higher population density led to increased communication of ideas, greater specialization, better tools, and increased food production. The ability to communicate from one person to another and from one generation to another was of paramount importance. Greater information led to increased productivity and the ability to support larger populations.

  Until the onset of the Industrial Revolution, productivity and population growth inched ahead extremely slowly. In fact, productivity backtracked as often as it moved forward. Discoveries and inventions were made, but many were lost to the next generation. For example, Rome of AD 100 is said to have had a better infrastructure (roads, sewage systems, and water distribution) than many European cities in the 1800s.1

  Joel Mokyr, a professor of economics and history at Northwestern University, claims “the paradox is that whereas it might have been expected that these losses [in knowledge] would occur in illiterate societies with low geographic mobility, classical civilization was relatively literate and mobile, and ideas of all kinds disseminated through the movements of people and books. Yet many of the classical discoveries did not survive.”2

  Why did this happen? Why did important discoveries occur but then get lost? There is one reason that stands out: The inability to communicate ideas within and across generations.

  THE IMPORTANCE OF COMMUNICATIONS

  Evidence demonstrating the importance of communications shows up repeatedly in the historical data. Kremer found that when populations were isolated from one another, their standard of living not only stopped increasing but actually declined. When the land bridge between ancient Britain and Europe was cut off, around 5500 B.C., Britain fell technologically behind Europe. Similarly, there is evidence that the Paleolithic population in Japan was quite primitive after Japan’s bridge with mainland Asia was lost.

  Kremer believed that population density, which facilitated the communication of ideas and division of labor, was correlated with technological progress. He held that the melting of the polar ice caps at the end of the Ice Age, around 10,000 B.C., and the consequent flooding of land bridges, provide a natural experiment that isolated the Old World (Asia and Europe), the Americas, mainland Australia, Tasmania, and Flinders Island [a small island near Tasmania].

  The course of development confirmed Kremer’s hypothesis:

  As the model predicts, [around 1500] the Old World had the highest technological level. The Americas followed, with the agriculture, cities, and elaborate calendars of the Aztec and Mayan civilizations. Mainland Australia was third, with a population of hunters and gatherers. Tasmania, lacked even such mainland Australian technologies as the boomerang, fire-making, the spear-thrower, [and others].… Flinders Island … last inhabitants died out about 4000 years after they were cut off by the rising seas—suggesting possible technological regress.3

  William Nordhaus, an economics professor at Yale University, provides another example of how crucial knowledge was lost in his fascinating history of man-made light: “As Europe declined into the Dark Ages, there was a clear deterioration in the lighting technology, with lighting returning to the Paleolithic open saucer that performed more poorly than the wicked Roman lamps.” Nordhaus describes the medieval peasant’s practice of burning pine splinters, holding the torn branches in his mouth so as to leave the hands free, a practice that harkened back to prehistoric times.4

  It is astonishing that this knowledge of lighting technology that is so central to one’s life could not be passed on from one generation to the next. Even in relatively modern times, vital information was lost because there was no easy way to record and transmit it. For example, the importance of fresh fruit in the prevention of scurvy had been realized before James Lind published his Treatise on Scurvy in 1746. The Dutch East India Company kept citrus trees on the Cape of Good Hope in the middle of the seventeenth century so that their sailors could partake of food that would prevent the disease. Nevertheless, as Roy Porter noted, the remedy “kept on being rediscovered and lost.”5

  CHINA: THE RISE AND FALL

  The rise and fall of China over the last millennium demonstrates both the power of communication to create new ideas and how the suppression of those ideas by the reigning authorities led to decline.

  China in the thirteenth and fourteenth centuries was generally recognized as the most advanced civilization on earth. Some of the credit for this advance goes all the way back to the first century AD, when China invented paper. In his fascinating book ranking the one hundred most influential persons in history, Michael Hart places Ts’ai Lun, the Chinese inventor of paper, as the seventh most important person in world history, behind Muhammad, Isaac Newton, Jesus Christ, Buddha, Confucius, and St. Paul and just ahead of Johannes Gutenberg. It was not until the middle of the eighth century that papermaking spread to Arabs in the Middle East, and it took another 400 years for Europeans to learn the art. “Prior to the second century A.D.,” Hart writes, “Chinese civilization was consistently less advanced than Western civilization. During the next millennium, China’s accomplishments exceeded those of the West, and for a period of seven or eight centuries, Chinese civilization was by most standards the most advanced on earth.”6 China’s dominance was clearly facilitated by its ability to record and transmit information.

  But this technological superiority did not last. Mokyr, in The Lever of Riches, describes the significant discoveries made by the Chinese that were later lost. The first timepieces were invented by Su Sung in 1086, but the Chinese had to be reintroduced to clocks when the Jesuits came in the sixteenth century. The Chinese developed moveable type in the ninth century, 500 years before Gutenberg’s invention of the printing press, but they never developed an active press. The Chinese used silk reeling machines as early as 1090, but as late as the nineteenth century, raw silk, which accounted for about 25 percent of China’s exports, was entirely hand-reeled. The Chinese invented gunpowder for use in rockets and bombs in the tenth century, but they then had to relearn the use of the cannon from the West in the middle of the fourteenth century.

  Why did this happen? David Hume, a great British economist of the eighteenth century, believed that the despotism of the Ming Dynasty, which ruled China from 1368 to 1644, stymied growth in China: “An unlimited despotism … effectually puts a stop to all improvements, and keeps men from attaining … knowledge.”7 The Ming rulers preferred a stable and controlled environment and therefore squelched invention and discovery. Subsequently China fell into a long period of stagnation.

  The Ming rulers rejected anything that disturbed the status quo. Although China’s naval technology was far superior to the West’s and the Chinese could have easily sailed to America, they did not. Chinese geographic exploration was completely halted after 1433 because the emperor considered naval exploration an “expensive adventure.”8

  Many books of knowledge vanished during the Ming Dynasty. Sung Ying Hsing’s great technical encyclopedia, Exploitation of the Works of Nature, was written in 1637 and provided an excellent summary of advanced Chinese technology, from weaving to hydraulics to jade working. But the work was soon destroyed, most likely because Sung Ying Hsing’s political views differed from those of the rulers.9

  As Mokyr boldly put it, “The Chinese were, so to speak, within reach of world domination, and then shied away.” Echoing this conclusion, Charles Jones, an economics prof
essor at Stanford University, wrote, “China came within a hair’s breadth of industrializing in the 14th century, yet in 1600 their technological backwardness was apparent to most visitors; by the nineteenth century the Chinese themselves found it intolerable.”10

  THE PRECURSOR TO THE INDUSTRIAL REVOLUTION: THE PRINTING PRESS

  Michael Hart may have placed Ts’ai Lun, the inventor of paper, ahead of Johannes Gutenberg, the inventor of the printing press, but most historians would say the printing press was the one invention, more than any other, that fundamentally transformed how information was accessed and transmitted.

  Before Gutenberg invented the printing press in 1455, it took a scribe six months to copy a book. The printing press was fifty times as productive, thereby reducing printing costs by 98 percent.11 Michael Rotschild, in his book Bionomics, discusses how the dissemination of information facilitated by the printing press sparked tremendous growth in the useful stock of knowledge. By the year 1500, just forty-five years after Gutenberg’s first Bibles were printed, more than 1,000 presses had produced about 10 million copies of 35,000 different titles. The written word and the knowledge it conveyed went from being a luxury good, available to a privileged few, to a commodity cheaply available to all.

  [O]ne cannot help but notice that prior to 1500, major discoveries were few and far between. Except for Gutenberg’s invention of movable type printing, scant scientific or technological progress had been made since the decline of Greece 1700 years earlier. But after 1500, once Gutenberg’s technology had become commonplace, a sudden rush of scientific achievement laid the foundations of modern knowledge.

  In 1512, Copernicus first argued that the earth revolves around the sun. In the following 25 years, Anthony Fitzherbert published the first English manual on agriculture, Albert Durer compiled the first German treaty on geometry, Paracelsus published the first book on surgery, George Agricola produced the first treatise on mineralogy, and Andreas Vesalius issued the first anatomical charts of the human body.”12

  But the invention of the printing press had to wait at least two centuries before these discoveries could be turned into the building blocks of the Industrial Revolution. The Industrial Revolution had to be preceded by the Scientific Revolution and the Age of Reason, which marked the beginning of “open science.”

  COMPETING NATION-STATES: EUROPE VERSUS CHINA

  During the Scientific Revolution knowledge about the natural world became increasingly public and scientific advances and discoveries were freely shared between the leading universities and the general population. In the West there was little or no ideological opposition to using rational analysis to explain natural phenomena, a situation that was aided by the spread of the Enlightenment from continental Europe in the late seventeenth century. The ideological intolerance displayed by the Ming Dynasty did not have any counterpart in Europe. In the West, the competing nation-states provided a much more receptive climate for discovery; as David Hume observed in 1777, Europe succeeded while China stagnated because “the divisions into small states are favorable to learning, by stopping the progress of authority as well as that of power.”13

  The total ban on shipbuilding that occurred in China could not have occurred throughout Europe. As Spanish exploration declined, for example, the Dutch, English, or Portuguese would quickly enter to fill the void. Martin Luther’s Protestant Reformation provided competition among religious sects. Although new ideas were sometimes squelched—recall the Catholic attack on Copernicus’s heliocentric theories of the universe—the lack of religious or political hegemony in Europe ensured that new ideas could not be completely suppressed.

  Christopher Columbus’s search for a sponsor for his voyages, reported by Jared Diamond in Guns, Germs, and Steel, aptly illustrates the difference between Europe and China:

  Christopher Columbus, an Italian by birth, switched his allegiance to the duke of Anjou in France, then to the king of Portugal. When the latter refused his request for ships in which to explore westward, Columbus turned to the duke of Medina Sedonia, who also refused, then to the count of Medina Celi, who did likewise, and finally to the king and queen of Spain, who denied his first request but granted his renewed appeal.14

  Had there been only one nation-state, Columbus never would have secured funding and his voyage to the New World would not have been possible. The hegemony in China gave an innovator only one chance, while the competition in Europe gave him many.

  The Industrial Revolution

  Following the Enlightenment and the Scientific Revolution of the eighteenth century, both population and economic growth accelerated sharply. The onset of the Industrial Revolution ushered in the world’s first sustained period of rapid economic growth.

  Charles Jones provides a good analogy to understand how recent this sustained growth has been in the course of human history.15 Jones says to imagine the period from 1 million BC to the present as the length of a football field.

  Humans lived as hunters and gatherers throughout most of history; this period represented 99 of the 100 yards. Humans did not develop agriculture until the one-yard line (10,000 years ago). And the Industrial Revolution, which ushered in the first and only period of sustained economic growth in the entire one million years of human history, was essentially the “width of a golf ball perched at the end of a football field.”

  What happened between 200 and 300 years ago that sparked the revolution in productivity? Two factors came together: a significant leap in the ability to communicate combined with openness on the part of those in power to accept these new ideas.

  Most important, these are the very forces that define today’s true new economy.

  The True New Economy

  Throughout history, communication was the critical factor shaping economic growth and the wealth of nations. That is why the Communications Revolution makes the prospects for our world economy so bright.

  The Internet can play a role today akin to Ts’ai Lun’s discovery of paper in the first century and Johannes Guttenberg’s invention of the printing press in the fifteenth. The global network is the key to unlocking the global solution.

  Soon virtually everything that has ever been written and recorded—on tape or film, in print, or digitally—will be instantly accessible online. Although countries can still censor and direct information, this will become increasingly difficult as the years pass. For the first time in human history, there will be virtually free and unlimited access to the world’s knowledge.

  Isaac Newton is quoted as saying, “If I have seen farther than others, it is because I was standing on the shoulders of giants.”16 Now hundreds of millions of people, if not billions, can stand on the shoulders of giants with a click of their mouse.

  INNOVATION AND THE FUTURE OF THE INTERNET

  Examples of how the Internet has already stimulated invention abound. The Wall Street Journal reported that Professor Manindra Agarwal, a computer scientist at the Indian Institute of Technology in Kanpur, recently discovered a relationship that determines with complete certainty if a number is prime—solving a math problem that had puzzled mathematicians for over two thousand years.17 One of the primary tools Professor Agarwal used to bolster his understanding of complex number theory was the search engine Google. Instead of contacting the top mathematicians around the globe, Professor Agarwal just turned on his computer and typed in a description of what he was looking for. He was able to access up-to-date information on the progress toward a solution and was able to complete his proof.

  Alan Cohen, vice president of marketing and product management at Airespace, a private company specializing in wireless networking platforms, shares his view of Google’s impact:

  If I can operate Google, I can find anything. And with wireless, it means I will be able to find anything, anywhere, anytime. Which is why I say that Google, combined with Wi-Fi, is a little bit like God. God is wireless, God is everywhere and God sees and knows everything. Throughout history, people connected to God with
out wires. Now, for many questions in the world, you ask Google, and increasingly, you can do it without wires, too.18

  Of course, Cohen’s take on Google is sensationalist. But pause a moment and think where technology is leading us. Soon all search engines will be voice-activated and will be designed to answer any question, not just spew forth Web sites with associated words. These engines along with advanced navigational systems and voice and digital transmission will be embedded in devices no larger than today’s cell phones.

  Tiny earpieces will connect to these devices, which will access and process all information and answer all questions. All known information will literally be at your beck and call. All foreign languages will be instantly and idiomatically translated, so language will no longer be a barrier in international communication. Anyone will be able to link with the global stock of knowledge and build on the advances of others.

  These electronic and digital advances not only shrink distances but also save time. This allows individuals to communicate with a worldwide network of individuals working on the same problem. This interaction sets up a self-reinforcing feedback: as more people contribute, more progress is made, which in turn stimulates even more discovery, which accelerates productivity growth.

  CHINA AND INDIA

  Anyone who has any doubt about how fast the world is changing need only go to Shanghai, the largest city in China. I was there in June 2004 as a speaker with the Wharton Global Alumni Forum.