CONSUELO MACK: This week on WealthTrack, renowned financial historian Niall Ferguson examines the fault lines of 500 years of Western dominance to see where it is failing and where it needs shoring up. Professor, columnist and best selling author Niall Ferguson on the earthshaking shift of economic power from west to east is next on Consuelo Mack WealthTrack.
Full video and transcript below:
Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. We believe in having a long term perspective on WealthTrack and keeping our eye on the ultimate financial goal, which is to build financial security to last our viewers and ourselves a lifetime. But sometimes it is necessary to step back even further and think beyond a lifetime in terms of centuries, to really grasp the era we are living in. And that is what this week’s WealthTrack guest does. He is British historian Niall Ferguson and according to him, we are living through one of those seismic epochal shifts that require rethinking the old rules, including our investment ones.
Ferguson is one of those rare individuals who has the intellectual and educational fire power to tackle such a broad sweep of history. And as you will see in a moment, he also has the gift of gab to bring it alive. A professor of history at Harvard, a professor at the Harvard Business School, senior research fellow at Oxford and a senior fellow at the Hoover Institution at Stanford University, Ferguson is the author of numerous articles and columns, a recent one became the cover story of Newsweek. He has also authored several books, including The Ascent of Money, which was turned into a PBS special, and his soon to be published Civilization: The West and the Rest.
Over the past 500 plus years the west- Europe and later the United States- have come to dominate the world stage, economically, politically and militarily. As these charts illustrate, as of 1500, the so called motherlands of Europe- Austria, Belgium, France, Germany, Italy, Netherlands, Portugal, Spain, Russia and the United Kingdom- had a mere 10% of the world’s territory, only 16% of the world’s population, but even then contributed 43% of world GDP. By 1913, the dominance of the west was overwhelming. The motherlands, which now included the United States, had expanded their economic and political might to 58% of the globe’s territory, 57% of its population and a stunning 79% of the world’s economic output, or GDP.
Fast forward to today and you will see how much this is changing. According to the IMF, the contribution of the U.S. and the Eurozone as a share of world GDP has been declining; remember it was nearly 80% in 1913, to less than 45% currently and falling, while the contribution of China is soaring- China recently passed Japan as the world’s second largest economy- and India’s share is slowly rising.
Is this shift inevitable and unstoppable? And what does it mean for us as investors? I asked Ferguson to start from the beginning- how the West achieved its position of dominance in the first place.
NIALL FERGUSON: Well, it is an amazing story, actually, because if you’d gone on a world tour, say, back in 1411- you know, let’s turn the clock back 600 years- you would not have predicted that tiny, nasty little warring kingdoms in Western Europe would take over the world. I mean, you’d have been much more impressed by Ming China, or by the rising Ottoman Empire. And if you’d gone to London, you’d have thought, ugh- a sort of small, smelly, plague-ridden, and constantly fighting with one another. I mean, the West Europeans did not look like the future world leaders.
And the story of pretty much 500 years, from the mid-15th century until our time was the story of Western ascendance. The great Oriental empires languished. Per capita GDP in China basically didn’t grow throughout the entire Ming period, essentially flat lined. And then it actually declined in the Ching era. Whereas, Europe had a series of extraordinary revolutions that propelled it into a position of world dominance, and then its most successful colony in North America, which became the United States, then became the biggest economy in the world. Why? That is a really interesting question.
CONSUELO MACK: That is a very interesting question. And you have some really interesting answers, and you have this neat little device, you call them the killer apps. But talk about the killer apps that the West developed, and then we’ll find out why we are now losing those killer apps.
NIALL FERGUSON: Well, I wanted to try and explain this great divergence that means, just to give you an illustration, by the 1970s, the average American is roughly 30 times richer than the average Chinese was, whereas, you know, in 1600, there was no real difference. And the answer is that there were these killer applications, these institutional innovations that only the West had. Let me rattle them off, just because six is a lot. Number one: competition. The idea that, in the political and economic sphere, there shouldn’t be monopolies on power. There shouldn’t be just one emperor who controls the whole of Europe, economically and politically. Europe’s very fragmented, and not only is it fragmented between multiple states, within these states, there are lots of competing institutions. The very first modern corporation is the corporation of the City of London. And the king of England really doesn’t control it. So that’s number one. Competition. And out of that, you get capitalism, and ultimately, democracy.
Number two is the scientific revolution. Everything that we associate with the great breakthroughs of the 17th century, Newton’s laws of motion, is a Western discovery. There is absolutely no contribution to the scientific revolution from outside the Western world. So that’s the second pretty crucial killer application.
CONSUELO MACK: Why, Niall? Why? I mean, why was that the case?
NIALL FERGUSON: Well, the printing press is banned in the Ottoman Empire. You can’t actually ask questions in a Muslim empire about the will of God, because that’s inscrutable, and it’s sacrilegious to try to work out the laws of motion that govern the movements of the planets. In Europe, the church tried to restrain Galileo when he observed, for example, that the planets are not ordered as the church had taught, and the world is not at the center of the universe, but the church wasn’t powerful enough; where it actually was possible for the clergy to silence those who wanted to explore optics and the laws of astronomy in the Eastern world. So, the scientific revolution’s a really crucial killer application. It’s a killer application literally, because once you understand the laws of motion, your artillery becomes accurate. Simple as that. Benjamin Robbins writes a book about gunnery. From then on, Western guns basically hit the target. And, if you don’t know the laws of motion, it’s just luck if you hit the target. So that’s number two.