Oded Galor - Ideas Lab Series - September 14th, 2022

[00:00:00] Oded

We have to have a better understanding of how initial conditions formed this group, how initial conditions affected the emergence of cultural characteristics that are growth enhancing in some parts of the world, and cultural characteristics that are growth retarding in other parts of the world. We can build policies that are country specific, region specific, and history specific, so as to mitigate inequality across the globe. 

[00:00:40] Introduction

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more, welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world So you can take your manager due diligence or investment career to the next level.

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Here’s your host, veteran hedge fund manager Niels Kaastrup-Larsen.

[00:01:36] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series I have invited one of them, namely Kevin Coldiron, to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor. 

In the series Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. And with that, please welcome Kevin Coldiron.

[00:02:13] Kevin

All right, thank you, Neils and welcome everyone. Well, you’re in for a treat today. We chose the name Ideas Lab for this podcast series because we wanted to emphasize that the goal is to uncover and explore new ideas for thinking about the economy. We’re going to do that today in a very unusual way, a way that takes us all the way back, really to the origins of human civilization.

What we’re going to see is that the conditions faced in ancient civilizations, and the reactions to those conditions, explain a surprising amount of the differences in levels and distribution of wealth that we still see in society today. The person who’s going to guide us in that journey is Oded Galore, who’s a professor of economics at Brown University, and he’s also the founder of Unified Growth Theory, which is a kind of revolutionary new take on economics – the goal being to explain the full process of human economic development, going all the way back through history. His book that he’s going to talk to us about today is called The Journey of Humanity: The Origins of Wealth and Inequality.

Oded Galore, welcome to the Ideas Lab podcast. It’s a true honor to have you. 

[00:03:38] Oded

Well, it’s a great pleasure to be part of your mission to educate the public about deeper roots of inequality and wealth across the globe. 

[00:03:49] Kevin

I’m really excited to roll up our sleeves and dig into it. The book is called The Journey of Humanity, so I thought maybe we could start with your journey a little bit. Maybe, if you wouldn’t mind just giving us a little bit about your own personal background and how you got interested in these kinds of longer-term undercurrents that drove economic development.

[00:04:10] Oded

I was born and raised in Jerusalem and perhaps, unavoidably, given the historical aspects of daily life in the city. I gravitated towards the understanding of the roots of human behavior, the roots of ethnicity, religiosity, and, to a large extent, human prosperity. Over my academic career I gradually gravitated towards the exploration of the deep roots of comparative development, namely, why some countries are rich and others poor, and what is the role of deep-rooted factors in understanding this vast inequality across the globe? 

[00:04:55] Kevin

Was there something about the existing theory that you found unsatisfying that made you want to look deeper? 

[00:05:03] Oded

Yeah, so to a large extent, when we consider inequality across the globe, and we contemplate what are the sources of this inequality in the context of conventional neuro classical growth models, it is quite apparent that these models are not well designed to address these issues.

These models, to a large extent, are predicated on being in the modern growth regime. As a result of it they cannot shed light on the origins of inequality due to the fact that part of this inequality (in fact a large part of it) has to do with the fact that some societies across the globe move into the modern growth regime much earlier than other societies.

Consequently, we would like to understand the roots of inequality across the globe. We have to understand how factors that operated in the distant past affected the process of development in its entirety, how they affected the differential timing of the transition from stagnation to growth, and ultimately how they contributed to the inequality as we see it across the globe today.

So, to a large extent, the development of Unified Growth Theory was based on the conviction, and based on empirical evidence, that much of the inequality that we see today has roots that can be traced to events and forces that operated in the distant past. Therefore, a unified theory of economic growth is needed in order to link the present and the past.

[00:06:41] Kevin

Yeah, that’s a really clear explanation that traditionally we’re looking at the world after it’s industrialized and trying to understand why it looks the way it does. What you’re saying is, actually, there’s path dependency; the path to that industrialization, and through it, make a difference.

So, when you think about your book, what do you consider to be the most fundamental insights that it has generated? 

[00:07:08] Oded

The book, broadly speaking, explored the evolution of human societies since the emergence of homo sapiens, in Africa, nearly 300,000 years ago. It is designed, as I said earlier, to resolve perhaps two of the most fundamental mysteries that surround the journey of humanity: what I will define is the mystery of growth, namely, the origins of the vast transformation in living standards that occurred in the past 200 years after literally hundreds of thousands of years of stagnation; and a mystery of inequality, namely the origins of the vast inequality in living standards across the globe.

Perhaps the most important contribution of the book is the realization and the advancement of this revolutionary idea that much of the inequality across the globe today can be traced to events that operated in the distant past; forces that operated hundreds of years ago, thousands of years ago, and tens of thousands of years ago. This is incredibly important because it implies that if we wish to design policies that will mitigate inequality across nations, we will have to understand, better, the forces that operated in the distant past in the context of each individual country and we will have to design a policy that is country specific, geography specific, culture specific, and institution specific, so as to resolve much of the inequality, as we see it, across the globe, 

[00:08:51] Kevin

Yeah, I thought that came across quite loud and clear that we’ve attempted to impose various regimes on countries where we’re trying to develop growth and it’s really been done based on what you said originally, this view of how the world has looked in the last 200 years as opposed to how we got to this space.

I want to spend most of the time talking about those two things: The forces that led to this (I think you call it) phase transition, like the phase transition from stagnation to growth; and then also the resulting inequality. I think we need to be fair to femininity. Humanity spent most of its time in this period of stagnation (what you call the poverty trap). Could you just explain why we were stuck in poverty so long? It wasn’t as if the population didn’t grow. It wasn’t as if there were no technological breakthroughs. There were in both cases, yet there are these dynamics operating that kept living standards (at least over a couple of generations), basically, mean reverting.

Can you explain that dynamic to us? 

[00:09:56] Oded

Absolutely. In fact, over 99.9% of human existence, humanity is residing in a phase that can be defined as the Malthusian Epoch. This Malthusian Epoch is characterized by interesting dualism. On the one hand, it is characterized by stagnation in living standards, but on the other hand it is characterized by certain dynamism in the context of technological progress, human adaptation, and population growth.

So, consider, for instance [the example of] humanity in Africa 300,000 years ago. There is a modest population that is operating in Africa at the time. But this modest population is equipped with a very powerful human brain that allows this population to innovate, but not at the pace that we see today. Naturally, this is a time period in which one stone tool is replacing another stone tool and the progress is rather rudimentary and slow. Nevertheless, every progress permits more people to be supported. 

So, when societies, or tribes, or families have a greater amount of resources, more of their children will survive – more children will be born. As a result of it this surplus will be divided over a larger number of people. In the long run this surplus will vanish and resources per person will revert back to the previous equilibrium position. So, over a nearly 300,000-year period we see this cycle that is operating in human societies.

Humanity is innovating. Innovation leads into greater population growth, and as a result of it resources, per person, are reverting back to the previous equilibrium position. So, as I said before, to a large extent over this time period income per capita is stable, life expectancy is stable, but nevertheless there are great forces that are percolating below the surface, if you wish. Population is growing gradually. The pace of technological progress is getting larger and larger, and humans are adapting to their geographical environment. 

Now, why is it so important? It is important because it implies that over the course of human history (over this 300,000-year period), despite the fact that it appears as if humanity is in a state of stagnation, this stagnation is only in the context of the material well-being of the population. Technology is advancing and the size of the human population is getting larger and larger, namely the potential of innovators is getting larger and larger. 

So, if we calibrate it for a moment, naturally, over this 300,000-year period we are moving from stone tool technologies that existed in Africa 300,000 years ago, to steam engine technology that exists on the eve of industrialization. If we think about the period from the eve of the agricultural revolution, 12,000 years ago, to the eve of the industrial revolution, the population on planet earth increases from about two and a half million to about 1 billion people in the midst of industrialization – a 400-fold increase.

So, there is great stagnation in living standards, but at the same time, great dynamism in the context of technology and population. This dynamism, as we will discuss further, is critical for the understanding of the mystery of growth. Namely it’s critical for the transition of humanity from stagnation to growth.

[00:13:56] Kevin

I want to then talk about this movement from stagnation to growth. I wondered if you could give us, perhaps, just another specific example of a Malthusian trap. I know this is kind of a simple one, but you talk about the Irish potato famine and how the potato is not native to Ireland. It was imported, and it turns out it grows really well. That, for a period of time, leads to income growth, population growth, and a seeming increase in living standards, but then, ultimately, a mean reversion. Could you talk us through… Sometimes I think just the specifics of an example, that’s quite salient to everyone, would bring that through more clearly.

[00:14:36] Oded

Indeed. So, I think that, as you suggested, the Irish example is quite striking in exemplifying the forces that operated during this Malthusian Epoch. What do we see at this point in time? So, the potato that is native to South America was imported during the Columbian exchange into Europe. This occurs roughly in the middle of the 16th century.

It turns out that the soil in Ireland was particularly suitable for the use of the potato. Starting from the middle of the 17th century we see great replacement of native crops in Ireland with the potato. So, fields that were previously cultivated using wheat are being replaced with the potato.

Now the population of Ireland in 1600 is about 1.4 million people. Over this time period in which, in fact, the potato is being utilized and being cultivated in Ireland, between 1600 and 1840, we see a massive growth (more than fivefold increase) in the Irish population. The Irish population is growing from about 1.4 million people to more than 8 million people.

Living standards are hardly changing. Namely, this new technology, these new crops, are committing more resources but these resources are ultimately divided over a larger and larger number of people. So, resources per person remain largely unchanged. 

Interestingly enough, at a certain point potato blight, that is arriving into Europe and into Ireland by ships that are sailing from North America, is generating a massive destruction of the potato yield in Ireland and is generating, in the middle of the 19th century, the so-called Irish famine. Namely, potato crops are being destroyed. Again, what they generate is precisely the opposite phenomena. Namely this destruction of resources is generating a massive decline in the Irish population – a decline of about 2 million people. 1 million died during the Irish famine from starvation, and another 1 million migrated partly into England and mostly into North America. So, this is a typical Malthusian fluctuation in which better technology permits more resources to be generated but these resources are converted into more people rather than richer people. 

[00:17:20] Kevin

It seems to me, in reading that section of the book and in reading other examples, that the key to escaping that poverty trap was getting to a situation where an increase in income did not lead to an increase in population. Instead, it led to an increasing investment in a smaller number of children – basically an increased investment in human capital formation. Is that the kind of key step, or one of the key steps, for moving out of this poverty trap? 

[00:17:54] Oded

Indeed. It is the key step. So, what we see in the course of human history is that what I define as “the wheels of change,” namely technological progress, population growth, and human adaptation, are rotating and are reinforcing one another. As I said, initially, the pace of technological progress is very, very slow. The pace of population growth is very low. But nevertheless, over this 300,000-year period this reinforcement between technology and the size of the population and the impact of the size of the population on technological progress is bringing about a very rapid pace of technological progress.

So, to a large extent, humanity is reaching a tipping point in which the technological environment in which people are operating is changing so rapidly as to require human capital (broadly speaking education, if you wish), so it’s to cope with this rapidly changing technological environment. At this point in time, responsible parents realize that in fact, rather than opting for a large number of uneducated children, it is time to educate their children.

Naturally education is costly. Their living standards are very close to subsistence so they cannot economize on their own living standards to support investment in the education of their children. This forces them to bear fewer children. This is critical because, for the first time in human history population growth is no longer counterbalancing the growth of technology and the growth in income per capita.

We reach this phase transition in which the Malthusian forces simply vanish. Namely, we do not have, any longer, the counterbalancing effect of population on technology. Consequently, technological progress, as we see in today’s world, is converted into more prosperous people rather than into more people.

[00:20:02] Kevin

What I found interesting about your description of education, and this may be taking us a little bit off piece here, but the provision of universal education was not a kind of a policy that evolved purely for the public good. It was really a reaction to economic necessity. 

Capitalists were saying, “Hey we need an educated workforce, but if we educate them privately, they can just take their capital and go elsewhere.” So, they start lobbying (to use a modern term) politicians to provide universal education. So, a policy that we might, with our modernized look-back, say, “Hey, that’s a progressive policy.” In some sense it was reactive to the underlying economic forces. 

I feel like that’s a theme that shows up in your book a lot, that cultural aspects end up being reactions to initial environmental conditions. So, anyways, would you agree with that characterization of education and how it developed?

[00:21:05] Oded

Absolutely so, naturally there are different dimensions of education. Certain aspects of education were progressive and operated and were advanced because of the ideas of enlightenment and other ideas that can be associated with the progressive movements. But the particular aspect of education that I’m referring to, namely skills that will complement the production process, are entirely reactive.

In fact, the movement from education that is the privilege of the very few into education that is, basically, the privilege of the masses, as whole, is occurring precisely in a reactive way. So, you suggested it correctly. If you think about England in the 19th century, we see massive lobbying of industrialists in the British parliament with a very clear outcry about the fact that the competitiveness of England, with respect to continental Europe, depends to a large extent on the skill of the labor force.

 As a result of this there is a need for a massive investment in education of the masses. But this education cannot be done at the level of the firm, at the level of the factory, because if you educate your workers, the next day they can move to the nearby factory and your investment will be lost. Consequently, the industrialists are lobbying for free public education that will be financed by the government, as a whole, and will ultimately benefit workers as well as industrialists. 

[00:22:53] Kevin

Since we’re talking about Britain, and Britain being the kicking off point of the industrial revolution and, in some sense, a surprise kicking off point because for much of its history you might not have picked Britain to be the starting point. It was a relative economic backwater. 

You have an interesting section where you talk about the institutional origins of British ascent. I think it would be nice to talk about that. A lot of our listeners are British, and we’re taught about the importance of institutions in economic development. You tell a nice story almost that some of these institutions developed not necessarily by chance, but through somewhat random political events. Maybe if you could outline that for us.

[00:23:39] Oded

Absolutely. As you said before, to a large extent when we think about education policies, or we think about the emergence of institutions, or the emergence of growth enhancing cultural traits, many of these traits are reactive. Many of these traits are emerging due to local circumstances. This is true largely in the context of institutions, but there are some very interesting anecdotes in which institutions can be viewed as a random event that occurred in critical junctures in human history. This is particularly relevant in the context of the emergence of Britain, and the fact the industrial revolution occurred in England rather than in other places in continental Europe or perhaps in China.

So, as you know, the black death decimated the European population in the middle of the 14th century. 40% of the British population and 40% of the European population is decimated during this time period. This naturally generates an enormous scarcity of labor in the aftermath of this event. 

So, the black death arrived in Europe in 1347. It ends around 1352. As I said, when it ends there is an enormous amount of land that is, at the moment, requiring labor; and in the cities themselves, there are an enormous amount of occupations that require labor that is missing from these occupations. So, competition is emerging, particularly in Britain, over labor in the sense that it’s a time period in which in fact people in the urban sector are competing with people in the agricultural sector. As a result of it, feudalism is, in some sense, under attack. 

The landed aristocracy understand that in order to compete over labor, over this time period, they have to make concessions. These concessions are ultimately leading into the decline of feudalism, into the emergence of property rights for labor in general, and ultimately one can argue that this is leading into a sequence of events that are generating larger property rights and into the emergence of industrialization in England, rather than in other places across the continent. 

Now, the same forces are not operating, for instance, in Eastern Europe. And the reason is that in Eastern Europe the urban sector is not very developed. As a result of it, when labor becomes scarce, in fact feudalism becomes even more entrenched because it doesn’t face the competition from the urban sector that existed in the West. 

So, this is one classical example about how a random event, that occurred hundreds of years earlier than the industrial revolution, generated a sequence of events that potentially led into the emergence of broad property rights that were critical for the industrial revolution.

But [I have] a few more if you wish me to elaborate. 

[00:26:58] Kevin

I remember reading those examples. You went through and you talked about how James II basically emerged as the Catholic King – not a particular popular one. So, they brought over William of Orange to get rid of him, and he did get rid of him. But he didn’t have a power base. So, he had to rely on parliament. And parliament, being a representative (not necessarily) of the people in the same way that we think of it today, but more broadly speaking a representative of the people enacted laws; that, again, further diffused power. 

So, when Britain gets to the point where we start seeing globalization and you start getting these unequal terms of trade between Britain and its colonies, the wealth that Britain’s extracting from its colonies isn’t just being funneled back to the monarchy (like it might be in Spain and Portugal). It’s getting more diffused within society, leading to development of more human capital and kind of reinforcing that, development of industrialization. 

So, I’m speeding through, a couple hundred years there, but I really liked that example. 

I wonder if we could pivot a little bit and talk about two of the longer-term structural forces that still have their imprints on wealth and inequality today: geography and diversity. You talk a lot about geography. What I found most interesting was that (and I may get this wrong, so please tell me if I haven’t got this right), but my sense was that you’re saying that geographical differences amongst societies led to different paces of switching from being hunter/gatherers to agricultural and that created advantages for certain areas for a time, but those advantages largely flattened out.

What was left were the cultural remnants of those geographic differences and those cultural remnants continue to proliferate through time. It’s those key aspects of culture that end up having an important influence on the level of wealth we see. So, for instance, the level of kind of future thinking is, in your book you trace that back to geographic circumstances. The role of women in the workforce, you trace that back to geographic circumstances and even loss aversion.

I was wondering (if I’ve got that reasonably correct), if you could maybe explain, say for instance, how geography might lead to a particular culture having a future mindset; or geography or climate might lead to women having a broader role in the workforce. 

[00:29:49] Oded

Yeah. So, this was a very accurate description, both in the context of the transition to agriculture, that had a short-lived effect on inequality and human prosperity, and the fact that geography (to a large extent) had a fundamental effect on the emergence of differential cultural traits across the globe. Some of these traits are growth enhancing and others are growth retarding. So, let’s focus on the two examples that you illustrated. 

The first one is a future oriented mindset. So, when we think about the world today it is quite apparent that there are great variations in what one can define as future oriented mindsets. Some societies are more future oriented; have the ability to plan for the future more than others, and we can see that there are geographical variations in this standard.

In fact, to a large extent, the variations that we see across the globe today can be traced to initial geographical endowments across the globe. Let me give you a very simple example: suppose that we focus on two societies. One society is a society of farmers that can cultivate certain types of crops (say wheat), and the other society is the society of fishermen that in fact do not have the ability, given the type of land that they have, to have access to wheat. As a result, they specialize in fishing. 

Now the society that is engaged in wheat cultivation is engaged daily in decisions that (to a large extent) are future oriented. They’re engaged in planting and (with some delay, perhaps half a year) harvesting, and ultimately, they’re engaged even in the development of storage technology that will allow them to store grains for the next season or simply into periods of scarcity.

On the other end of the spectrum, we see the society of fishermen, their engagement is in fact very different. They’re engaged in daily activity, they are fishing and, at the end of the day, typically they will take the harvest and probably consume it or sell it immediately. There is no planning, certainly [there is no] future oriented mindset that is associated with this activity. 

What empirical evidence is showing us is that if we look at individuals whose ancestors originated from a place in the world where the incentive to be engaged in agricultural investment was larger. Namely the type of crops that were native to their location induced them to be engaged in planting and ultimately harvesting. These societies developed over time the ability to plan for the future that was transmitted intergenerationally and became part of the culture and part of the cultural heritage of these particular societies. 

As I said (to a large extent) when we look at the world today if we think about second generation migrants in Germany today; people that arrive from different locations across the globe, but nevertheless, they were born in Germany. They face the same incentives as any other. They face the same education system, the same institutions. Nevertheless, we see that those who originated from places where crop cultivation was less beneficial have shorter long-term orientation. Namely these events are, in fact, culturally embodied and it is persisting over literally hundreds of years, perhaps even thousands of years.

So, this is one example. The second example is about gender biases in society. As we know, we see different levels of gender biases across societies that are reflected, for instance, in different labor force participation of women across the globe. And one can show that a significant portion of these variations in female labor force participation today can be traced to the adoption of the plow across the globe.

And why is that so? Before the adoption of the plow agricultural work was equally shared between men and women. Men did not have a comparative advantage in agriculture. But at the moment the plow was invented, and the plow was adopted in some places where the land was suitable for the use of the plow, then the use of the plow implied the use of greater upper body strengths. It gave a comparative advantage in agriculture to men. As a result, it generated the division of labor between men and women. Men were confined to work in the agricultural field and women were confined to work in the context of the household. This ultimately persisted and it is correlated with the degree of labor force participation of women across the globe. 

[00:35:16] Kevin

Yeah. That’s just striking. I think you were saying that even applies to… If we look at what might be considered to be a single society, say for Italy right now, if you look at Southern and Northern Italy, there’s vast difference in economic performance, vast differences in wealth between the north and south of Italy. You’re saying that some of that, in any case, can be explained by women participating less in the labor force and that being traced back to the nature of agriculture for hundreds, maybe even thousands of years ago in that part of the Italian peninsula, is that correct?

[00:35:52] Oded

It is largely correct. So, when we think about the differences within Italy, naturally, these differences cannot be attributed to institutions. There is a single institution over the entire territory of Italy that is applicable for the north and the south. Nevertheless, we see that income per capita in the southern part of Italy is about two thirds of income per capita in the north.

This led researchers, over the past many decades, to ask what is the source of these differences between the north and the south? Many suggested that these differences can be traced to different cultural traits that emerge in the north and in the south. And to a large extent the emphasis was on the fact that in the south we see the emergence of what one may define as stronger family ties that are causing transactions to be within their family rather than within the community as a whole. Namely the suppression of trust in strangers and increases trust within the family.

Whereas in the north, we see the emergence of what one might define as social capital in the sense that there is an emergence of trust and civic participation that is ultimately conducive for economic development. Naturally one can add to this precisely what you suggested, namely initial geographical conditions that led to greater suitability of land for the use of the plow in the south, and ultimately lower labor force participation historically in the south in comparison to the north.

[00:37:36] Kevin

Given the stickiness of these initial conditions and the stubbornness of culture, the culture just wants to reproduce itself, what does that mean for a country like the U.S. which is a real melting pot of cultures? Does it mean we’re likely just to have pockets of culture that are very different, or can a new culture emerge through the mixing, or is culture too sticky and too persistent to allow that to happen?

[00:38:07] Oded

So, when we focus on a society like the United States, we conduct analysis that is based on second generation migrants, namely individuals that were born in the United States, but their parents originated elsewhere. We do see the persistence of culture that emerges in the parental Homeland. We see it in the context of long-term orientation, we see it in the context of loss aversion. We see it in the context of labor force participation of women. So, to a large extent culture persists, and it would persist as societies or individuals are moving into a place like the United States. Nevertheless, since people are residing in a particular place for a long period of time, in any society that is some sort of a melting pot, we will ultimately see some convergence of these cultural traits over time.

So, certainly convergence is taking place but at the same time we will see the emergence of diversity. That to a large extent can be very beneficial for society. Namely it leads to cross fertilization of ideas that can be very beneficial in the context of innovations, in the context of technological progress, and in the context of productivity. 

At the same time, as we know, it is not one dimensional in the sense that this mixing of cultures that are entrenched into their views, beliefs, and their desire for different types of public goods is at the same time a source of conflict. Different people have different political ideas; different people have different desires for public goods and, consequently, this is a source of conflict. So, the diversity that is created is created in this process of migration. And otherwise, it is basically generating two conflicting effects that are operating at any point in time and can be beneficial to economic development provided they are balanced properly.

[00:40:10] Kevin

Yeah, that’s a great segue into the last section I wanted to talk about, which is diversity. So, just to summarize, you’ve talked about how geography creates these initial conditions that lead to development of cultural traits and these cultural traits, such as future thinking, and women’s involvement in the workforce, those are sticky and have long term impacts on economic performance.

You also talk about the level of diversity and its impact on economic performance. Ultimately you have quite a surprising, almost shocking measure of diversity which I want to get to. But you use Detroit as a great, I guess, setup for what you just referred to as the kind of conflicting benefits and costs of diversity.

Since I just spent a weekend in Detroit, that resonated with me because I saw both those things. So, maybe you could just explain, using Detroit as our lens, just elaborate a little bit more on the cost and benefits of diversity within a society. 

[00:41:10] Oded

So, as I said earlier, when we think about diversity, diversity is associated with conflicting implications for economic development. On the one hand diversity is associated with cross fertilization of ideas. If a city or region of the United States is relatively diverse, I would expect this diversity to lead into the emergence of new ideas. 

In that book I discussed, for instance, the migration of African Americans from the American south, in from the rural area of the American south, into cities in the south, into the cities, in the north, and the west and the northeast.

I basically illustrate how this migration is creating a neighbor interaction between African Americans and Americans of European descent that is ultimately leading into the emergence of rock and roll, which is basically a hybrid between the cultural traditions of African Americans and the cultural traditions of Americans of European descent.

So, this is an illustration of the beneficial effects of diversity. Around the same time period we see conflicts that are emerging between African Americans and Americans of European descent in the streets of Detroit. Namely, we do not see an unambiguous beneficial effect of diversity. We see the conflicting effects of diversity in any city, in any region of the United States over this time period.

But interestingly enough, when we think about diversity more broadly, and when we think about diversity in the course of human history, it appears that the level of diversity that is prevalent at the moment in the United States is the level of diversity that is most conducive to productivity. Namely, in the Middle Ages societies that had the sweet spot level of diversity, societies that had the level of diversity that balanced between the positive effect of diversity and innovativeness and adverse effect on social cohesiveness, were societies in Southeast Asia: societies like China, Korea, and Japan.

Naturally these are not societies that strike us as diverse or optimally diverse, but at the time, the name of the game was very different. Social cohesiveness was much more important than innovativeness and therefore they had the sweet spot level of diversity. As humanity marched forward, and as technological progress became much more rapid than before, the benefits of cultural fluidity, the benefits of cultural diversity became larger and larger. 

As a result of it, societies like the United States appear in empirical work as societies that are optimally diverse. Namely, they have the sweet spot level of diversity that balances between the two effects. And interestingly enough, as we move forward into an era in which technological progress may be even more challenging, it appears that societies that will be even more diverse may have the upper hand in the sense that again, diversity will provide this cultural fluidity that will permit individuals and societies to cope with a rapidly changing technological environment. 

[00:44:43] Kevin

Yeah. That’s an interesting message of optimism, right? Maybe (and I might be taking what you’ve just said too far), but perhaps what we observe now as less social cohesiveness, maybe that’s just the flip side of what we actually need in order to prosper in an environment that’s more technologically demanding. So, it’s that we’re going to see more of that if we want more growth because we need more diversity to generate more complex solutions. 

[00:45:12] Oded

Absolutely. And it suggests that the idea of the melting pot should be reevaluated in the sense that we do want to maintain a certain degree of diversity so as to benefit from this diversity in the context of innovativeness. We do want people to have a common language, to have basically common rules of behavior so as to generate social cohesiveness. But we don’t want this melting pot to crash. [We want] healthy diversity that can be beneficial for innovations and productivity.

[00:45:46] Kevin

From a social policy or whatever perspective, we need more diversity, we need more (in some sense) more constructive disagreement, and let’s make sure that doesn’t spill over into anything worse. What, in your view, does that say about a country like China which has exploded in economic development but doesn’t strike me as particularly diverse? It still seems to value this kind of cohesiveness. Is it maybe falling further away from the sweet spot as we go forward? 

[00:46:18] Oded

Indeed. So, the case of China is very interesting because China was dominating the world technologically in the Middle Ages, but nevertheless, it is Europe that is taking off in the context of industrialization and is ultimately dominating the world in the 19th and the 20th century.

Now, at a certain point China is transitioning into the modern growth regime. At the moment that they transitioned they operated very well because the transition took place, and cohesiveness is very important in order to generate, within technological regime, a greater amount of productivity than otherwise.

But again, at the moment there will be some perturbation in the technological frontier. At the moment, greater creativity will be needed. Greater cultural fluidity will be needed. Again, China will be left behind in the sense that at the moment they grow very, very rapidly because they made a switch. They, to a large extent, rely on Western technologies. Within this regime they’re very effective because they’re very disciplined, they’re very cohesive. But at the moment there will be a need for a new breakthrough – technological breakthroughs, again, they’re likely to remain behind because they do not have the cultural fluidity that will allow them to adapt very easily to the new regime.

[00:47:45] Kevin

In some sense, the ugliness of diverse societies, there’s a beauty in it that comes out eventually. Given that diversity is so important to your conclusion, tell us a little bit about how you measure it. To me the fascinating thing is how it actually maps back into, really, the origins of the human migration out of Africa.

[00:48:08] Oded

So, one can measure diversity in different ways, but in fact the measures that we have at the moment, or that we had in the past, were rather imperfect. To a large extent these measures were measures that were looking at the degree of fractionalization in the society, the degree of polarization in societies, but it did not capture what I defined as interpersonal diversity, namely the degree of diversity within a given group.

The way that I measure diversity is a very different one. So, I rely on the idea that during the migration of anatomically modern humans from Africa, 60,000 to 90,000 years ago, individuals that migrated from Africa did not carry with them the entire spectrum of diversity that existed in the original African population.

And why is it so? The original population was modest in size. The departing population was even smaller. And as a result of it the departing population was not a representative sample of the original population. That’s a simple statistical theory. So, people are moving away from Africa. They reside, say, in the fertile Crescent and they don’t carry with them the entire spectrum of diversity that existed initially. They reside in the fertile Crescent for a while and they start to grow till the point in which the carrying capacity of the environment is insufficient to support a population, and then a new group is departing from the fertile Crescent population.

Some people are moving west into Europe, around 45,000 years ago. Some people are moving east, moving into central Asia, Southeast Asia, and ultimately crossing the Bering Strait, around 25,000 years ago, and into South America, nearly 14,000 years ago. The further they depart from Africa, the less diverse they are.

As a result of it, in order to get a measure of diversity that is immune from potential reverse causality, in order to basically assess the impact of diversity on productivity, I measure migratory distance from Africa as a proxy for the level of diversity in each indigenous population across the globe. Ultimately, I adjust this measure to take into account that the population started to migrate quite massively in the past 1500 period. 

 So, the measure is basically capturing this idea that during the migratory process that was sequential from Africa, the degree of diversity across human populations became smaller and smaller and smaller. Therefore, to a large extent there was, if you wish, an optimal level of migration from Africa that was conducive for development although this level of migration changed in the course of development, as I suggested earlier. Initially it was associated with China today and ultimately once we adjust the composition of the human population to their ancestral origin, it is associated with the level of diversity in the United States. 

[00:51:35] Kevin

So that’s fascinating. You talk about this hump shaped impact of diversity on development. And we’ve talked about the sweet spot being moderate levels of diversity, and that at exceptional levels of diversity you get lack of cohesiveness, and at very low levels of diversity [you get] lack of creativity. Is your measure of diversity something that the man on the street would recognize as diversity? There’s so much talk about diversity in everything nowadays. Is there much correlation there between what we tend to think about as diversity, which are like physical features and, I suppose, cultural features as well, and what you might consider your diversity proxy?

[00:52:19] Oded

I think, yes. So, to a large extent, there will be a very strong correlation. Again, my measure is based on migratory distances. These migratory distances will be mapped into some historical diversity that existed in each location. Ultimately this historical diversity is interacting with the geographical environment of each society to generate the diversity that we see today.

So, it’ll be partly observed diversity in the context of scientific expression. It can be diversity in the context of cultural traits that are possessed by different elements in society. But as I said, it’s a deep measure of diversity that is in fact correlated with ethnic fractionalization, with linguistic fractionalization, with polarization in society, et cetera.

So, it is correlated with many of the measures that are prevalent at the moment, but in fact, it’s deeper than that. It is immune, as I said earlier, from reverse causality, which is very important, but in addition it is a deeper measure because it allows us to understand the diversity within a given ethnic group.

Namely, I can look at the Irish population in the United States and compare it to the population of Swedes in the United States – so people that originated from Sweden. Nevertheless [ I can] suggest something about the inherent differences in the Swedish population relative to the Irish population.

So, this will not be observed by the naked eye, but it is just another dimension. It’s a complex measure that is capturing different dimensions and ultimately captures the complexity of diversity in human societies. 

[00:54:10] Kevin

So, we can expect Brown University’s admissions policy to look for a spread of migratory time distances for their incoming freshman class in the future.

I wanted to just end because we’re getting close to one hour. So, based on everything you’ve described to us, and you’ve thought about, you were brought to… I was originally going to ask about a particular country, but what about just an area within a country, say the Appalachian region within the U.S. and you were brought in and said, okay, it’s been lagging economically for centuries. How do we go about designing a program to see if we can do better going forward? How would you think about that process? I’m not asking necessarily for specifics, but just what would be your mental model for saying, okay, this is how we should think about it.

[00:54:58] Oded

There are two important points that I would like to raise. The first one is that given the fact that we see the legacy of conditions that operated in the distant past, as I said, hundreds of years ago, thousands of years ago and in the context of the migration of humans out of Africa, tens of thousands of years ago, the question that emerges is whether initial conditions or history is [determines] fate?

Is it the case that, in fact, history condemned some of us to live in poverty and permitted some of us to live in great prosperity? The important element, or the important contribution of my book, The Journey of Humanity, is to suggest that history [does not determine] fate. Namely by recognizing the initial conditions of each individual group, regardless of whether this group at the moment is residing in the Appalachian Mountains, or whether it is residing in Bolivia or Kenya or Germany. We have to have a better understanding of how initial conditions form this group; how initial conditions affected emergence of cultural characteristics that are growth enhancing in some parts of the world, and cultural characteristics that are growth retarding in other parts of the world. We can build policies that are country specific, region specific, history specific, so as to mitigate inequality across the globe. 

Let me be very specific here. So, let’s think about it in the context of education policies. So, consider for a moment two societies, say the Chinese society and the Ethiopian society. So Ethiopian society is largely diverse. It has a great amount of ethnic religious fractionalization; one of the greatest ones on planet earth. As we know the Ethiopian population at the moment is mired in civil conflicts. Now, what type of policies would I advocate for this type of society?

So, if we think about diversity, in this type of society what I would like to do is to assure that the cost of diversity will be smaller than otherwise. I want to create social cohesiveness. So I would like to take the limited resources that I have in the context of education and design a curriculum that in this society will foster tolerance, respect for difference, and respect for other ethnic groups. This could mitigate the cost of diversity and will allow the Ethiopian population to benefit from diversity in the context of cross fertilization of ideas. 

But if I focus on China, the curriculum that I would advocate in China will be precisely the opposite one. Namely in China the problem is the lack of diversity is due to over social cohesiveness that is preventing innovations from being created at the pace that they should be. And in this society, I would like the educational curriculum to foster critical thinking, thinking outside of the box, challenging the status quo and consequently to generate diversity through the educational system in a place that is missing. So again, with the same budget towards education, the curriculum in a place that is very diverse would be very different from the curriculum in which the society is relatively homogeneous. 

Alternatively, if I look at a society that is suffering from the lack of elements in geography that train the society how to plan for the future due to the fact that, as I said before, they are a society of fishermen rather than a society of farmers, the educational system will have to be geared towards instilling the ability to delay gratification among pupils towards instilling the ability to plan for the future. This will be redundant in other societies, in which nature already trained the population. Again, given limited resources, we should prioritize these education resources so as to target the specific problem in each individual country based on the history and the geography of each location. 

[00:59:45] Kevin

And it sounds like for a country like the United States, that is a melting pot, maybe you need different educational emphasis depending on that particular population and its underlying conditions as you just discussed. 

[00:59:58] Oded

Absolutely. 

[01:00:00] Kevin

Okay, well listen, I really want to thank you for taking the time to introduce your ideas to us. We’ve really scratched the surface. For those listening, the book is called The Journey of Humanity and it’s an excellent book. It’s a very easy book to read. It’s written in a really accessible narrative style with lots of good stories. So I highly recommend it and I just wanted to thank you one last time for joining us.

[01:00:27] Oded

Thank you very much. It was a great pleasure. 

[01:00:30] Niels

Thank you so much, Kevin and Oded for a very insightful conversation on the topic of inequality. Oded truly has a fascinating perspective of what has been the forces behind the inequality we see today, and the difference is in terms of the levels of wealth and where it’s distributed around the world can, according to his work, be traced all the way back to some really ancient features of human society: the geography in which the culture emerged and the level of diversity that a particular country or region ended up with. Which, interestingly enough, also relates to the distance that they migrated. [This was] perhaps an episode more on the geek side of what we do. But it is our aim to challenge you, as investors, to think outside the box. And I’m sure we managed to do that today. 

Make sure you go and follow Oded’s and Kevin’s work as well as getting a copy of their books. Because, as you can tell from today’s conversation, some of these ideas and topics are not being discussed enough in mainstream media. 

From Kevin and me, thanks ever so much for listening. We look forward to being back with you on the next episode. In the meantime, take care of yourself and take care of each other. 

[01:01:46] Ending

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