Fishers Or Farmers? What Your Ancestors Did Has A Surprising Influence On Your Wealth.

Why are some countries rich and some poor? And why is wealth distributed so unevenly?

Oded Galor, Brown University professor and my latest guest on the Top Traders Unplugged podcast, believes we must travel back to the beginning of human culture to find the answers.

His findings are good news for the U.S. and potentially unwelcome news for its biggest rival, China.

Galor is the founder of a new field of economics called Unified Growth Theory. It explores how ancient factors like geography, culture and diversity impact today’s wealth inequality. His new book, The Journey Of Humanity: The Origins Of Growth And Inequality, uses simple language and entertaining narratives to explain how this works.

The surprising and deep roots of cultural values

Galor uncovers certain “cultural values” that correlate with economic prosperity. For example, cultures that prize a “future-oriented” mindset tend to be richer because they emphasize saving and planning. But where does this mindset come from?

It turns out to reflect the geographic conditions faced by founders of that culture. Cultures that farmed, and particularly those that grew crops like wheat and rice with long periods between planting and harvesting, had to defer consumption and make complex plans for the future. This emphasis on the importance of the future was then transmitted through generations as a cultural value — even when descendants long-ago stopped farming.

In contrast, fishing communities consumed their catch right away and therefore did not develop the same future orientation. This doesn’t make them ‘worse’ than farming cultures, just different. But they are less likely to prosper economically in the modern world where future-oriented activities like saving and investing generate wealth.

Ancient geography influences gender bias

This “shadow of geography” covers other growth-enhancing cultural values. In places where a heavy plow was required to till fields, cultures evolved that emphasized the importance of men working to provide income — because it was men who had the physical strength necessary to manage a plow.

By contrast, in areas where soil could be tilled with light equipment, men and women worked the fields together, and from this sprang cultures that valued and encouraged both sexes to work. In today’s world that translates into higher female participation in the workforce, which in turn leads to better economic outcomes long after plows have been set aside.

Galor’s book helps us see that the roots of cultural traits are deep, and that they travel with us through time and space. What happens when those travels cause different cultures to mix? Is the diversity this creates good for economic growth?

Economically, is there a diversity “sweet spot”?

Galor uses Detroit to get at the answer.

In the 1920’s Detroit was the “Paris of the West”, its boulevards lined with beautiful buildings and its economy driven by the nascent automobile industry. Work in the auto industry attracted a huge influx of African-Americans migrating from the South. There they mixed with a variety of white European cultures.

Galor writes: From this fusion of peoples and traditions emerged one of the eclectic developments of the twentieth century — rock n’ roll.

But also, prejudice and racial violence, culminating in a three-day long race riot in 1943, where many African-Americans had their lives and property destroyed. In terms of its impact on economic growth, diversity works both ways — it enhances creativity and innovation but reduces trust and cohesiveness.

Globally, this results in a mixed relationship between diversity and wealth. Initially as region becomes more diverse, its economic performance increases, peaking at a “sweet spot” where the opposing forces balance out. Once diversity goes beyond that point, the negative effects dominate, ending in bad outcomes. War. He cites Ethiopia as an example. It is one of the world’s most ethnically and religiously diverse countries and is has been mired in war for years.

Future prosperity will require even more diversity

This diversity sweet spot has changed through time. In the Middle Ages, avoiding conflict – Galor calls this “social cohesiveness” – mattered more than innovation. Now, innovation matters a lot more. Indeed, on Galor’s measures the diversity level of the U.S. is currently close to optimal in terms of economic productivity.

This is bad news for China where the government still places a premium on cohesiveness. The future will demand even more diversity to solve increasingly complex problems and design new technologies. Galor thinks China risks being left behind unless it can develop ways of encouraging a culture that values critical thinking and creative disagreement.

Does history = fate?

The Journey Of Humanity uncovers the ancient the roots of today’s economic circumstances. Does this mean that history is “fate”?

Galor says no.

Instead, he sees his work as creating a template that allows us to move away from a one-size-fits all recipe for economic success. Instead, he believes we can now design approaches to creating wealth that are specific to a region’s history, culture and diversity. Understanding the path of our past journeys will help map out a more prosperous future.