My intellectual research interests largely revolve around corporate strategy and international expansion. My dissertation, in fact, addressed how firms learn from international expansion (i.e., exporting), and how we can quantify such learning benefits. I was therefore extremely interested to read William J. Bernstein’s A Splendid Exchange: How Trade Shaped the World when it was released last year. According to those who have actually read the book, it supposedly provides a fascinating account of the economic history of trade.

Now while I was really looking forward to reading that book, I stumbled across the book that preceded it – The Birth of Plenty: How the Prosperity of the Modern World was Created. As I read through the reviews of The Birth of Plenty, I thought I really ought to read it first. So I started reading The Birth of Plenty several months ago. I just finished it last week (terribly slow, I know).

But now that I have finally read it, I can say that it is, unquestionably, worth the read.

The Birth of Plenty is meant to be an economic history of the world. A tall order, for sure. But it delivers. Bernstein’s basic premise is that healthy institutions promote prosperity. In particular, countries must possess the following basic institutional ingredients in order to prosper:

1. Property Rights
2. The Scientific Method
3. Capital Markets
4. Effective Means of Transportation and Communication

After describing the historical development of each of these institutions, Bernsteim then goes on to describe which countries were able to develop such institutions, which countries were not, and to what effect. He then follows the path of economic development for several of those countries. He concludes that the four institutional factors are not only sufficient, but necessary, for a country to achieve prosperity. For Bernstein, it’s all or nothing. It’s not enough to have any one, two, or three of those institutions. All four must be in place at the same time.

Bernstein then makes what I think is the boldest conjecture of the book (with some, though scant, supporting evidence). He asserts that the aforementioned four institutional characteristics not only lead to prosperity, but that they also precede democracy, but not vice versa. That is, you can’t simply thrust democracy onto an institutionally underdeveloped country and expect prosperity to follow. The path runs from institutional development to prosperity to democracy because, as he argues, an increasingly wealthy population will accept nothing less.

In the interest of full disclosure, this book provided an especially timely and interesting read for me since I’ve been getting into institutions lately. Some of my most recent academic work explores how cultural, political, and economic institutions impact the differential development and performance of firms across countries. So maybe I’m a bit biased. Nevertheless, I thought it was a truly fascinating read. And not fascinating in the interesting, but dry, academic way. The storytelling was superb.

Up next: A Splendid Exchange…

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