Let’s start with some good news this month — the world is wealthier today than it has ever been. Total global wealth now clocks in at almost $500 trillion, or about $60,000 for every man, woman, and child on earth. World GDP per capita, a measure of annual global income, is also at all-time highs – nearly $17,000 per person. Just two centuries ago, we were all a lot poorer; global GDP is estimated to have been only about $1,100 per capita in 1820. The progress we’ve made since then is demonstrated on the chart below:
So how did the world create such vast wealth in a relatively short amount of time, essentially turning almost nothing into something? The answer can be summarized in one word – productivity. Basically, we got a lot more efficient at making things – using far less time, energy, and raw material inputs to produce each new unit of ‘stuff’. Economists are very interested in productivity, and they attempt to measure it carefully, because it is one of the main factors behind economic growth (the other being the size of the working age population). You should be interested in productivity too because it goes hand-in-hand with standard-of-living.
Before the 19th century, world GDP grew very slowly if at all. But after centuries of stagnation, right around 1820, there was a veritable explosion in productivity beginning with the industrial revolution, and a commensurate rise in GDP growth per capita as depicted in the above chart. What set of conditions were in place in the early 1800s that allowed such a sudden burst in innovation, productivity, and growth?
An answer to this question is provided by the three recent winners of the 2025 Nobel Prize in Economics, who received their award “for having explained innovation-driven economic growth”. Mokyr, Aghion and Howitt identified three key drivers that appear fundamental for the kind of growth we’ve enjoyed since 1820:
- A country’s economic system must allow for creative destruction
An innovative economy encourages the creation of new businesses, new products, and new ways of doing things. In some cases, newer products will be superior to older products. Businesses that are unable to adapt to a changing marketplace may fail during this transition from old to new. It is essential for growth that businesses are allowed to succeed or fail on their merits, and that consumers are free to make that choice.
- There must be a scientific explanation for why innovations and productivity enhancements work.
Human society did gain significant knowledge in the centuries leading up to 1820. Although we had figured out how many things worked, we didn’t have a scientific framework in place to explain why they worked, which made it difficult to build on any progress we had achieved. The scientific revolution of the 17th and 18th centuries, with its focus on controlled, repeatable experiments, finally made this possible.
- The population must be open-minded to change and innovation.
Mokyr, Aghion and Howitt also discovered that even with the first two conditions in place, economic growth cannot be taken for granted. Some societies are simply not open to change, and will resist new ideas, even if they may be superior to the old ways of doing things. This attitude can stifle economic growth even in a high-tech world.
The main takeaway is this – although we’ve seen tremendous growth in the past 200 years, this is a pretty recent phenomenon in the full context of world history. Prior to 1820, most people knew only economic stagnation. If we hope to continue improving our standards of living, we should foster the conditions that make it possible.
Sources:
https://ourworldindata.org/grapher/gdp-per-capita-maddison-project-database?tab=line
https://www.nobelprize.org/prizes/economic-sciences/2025/press-release/
