Andrew Leigh serves as an MP in the Australian House of Representatives, where he is Assistant Minister for Competition, Charities and Treasury. He was formerly a professor of economics at the Australian National University. His papers have appeared in the American Economic Review, Journal of Public Economics, and Economic Journal.
What’s the big idea?
Economics shapes what people dedicate their lives to, how they are perceived culturally, what life opportunities they can expect, and the accessibility of health and happiness. In return, people shape economics through their ingenuity, desperation, creativity, and mastery. The dance between economics shaping us and us shaping economics is timeless and telling.
Below, Andrew shares five key insights from his new book, How Economics Explains the World: A Short History of Humanity. Listen to the audio version—read by Andrew himself—in the Next Big Idea App.
1. Specialization.
Most of us couldn’t provide a great haircut, replace a broken car window, turn grapes into wine, or write a smartphone app. Sure, given a few months, many of us could become passable at any of these tasks, but we choose not to because we understand that it is better to focus on our strengths rather than build up our weaknesses. If you went through life aiming to be reasonably good at everything, you’d probably end up as the human equivalent of a Swiss army knife with a finicky blade, annoyingly tiny scissors, and an impractical screwdriver.
Job specialization is one of the keys to prosperity in the modern economy. Some Chinese cities are known for specializing in a single kind of product. Yiwu produces most of the world’s Christmas decorations. Huludao makes a quarter of the world’s swimwear. There are entire nations that specialize in an industry like agriculture, mining, or pharmaceuticals. Products can benefit from specialization. If you look at the Boeing 787 Dreamliner, you’ll see batteries from Japan, wing tips from South Korea, floor beams from India, horizontal stabilizers from Italy, landing gear from France, cargo doors from Sweden, and thrust reverses from Mexico. A typical 787 would most accurately be labeled “Made in the World.” Economics recognizes that just as specialization allows for more earnings in the labor market, so too does specialization by countries boost their prosperity.
The power of specialization guided the economists who set up the Bretton Woods institutions at the end of World War II, including The General Agreement on Tariffs and Trade, which caused trade barriers to fall across the world in the decades after the war. With trade came prosperity for many countries. Exports were a path to prosperity and countries such as the Four Asian Tigers (Singapore, Hong Kong, South Korea, and Taiwan) traveled that path when they focused on what they could do best.
Trade can create disruptions. If you’re a worker employed in an industry suddenly flooded by imports, you can find yourself struggling to keep a job. The best answer is not to establish tariff walls that leave a country trying to do everything, but to protect those workers most affected by trade and encourage nations to acquire the best from one another.
2. Innovation.
In the dawn of human history, producing an hour’s worth of light took 58 hours of foraging for timber. Fast forward through lamps, incandescent bulbs, and the LED light, and now the typical worker needs to work for less than one second to produce enough money to pay for an hour of light. Light has become so cheap that many of us don’t even think about turning off the lights when we leave a room. Innovation improves living standards.
For much of human history, the experience of burying a child was painfully common, but improvements in birthing technologies (the advent of forceps and modern sterilization techniques) drove down rates of infant mortality. Innovation can save lives.
“Innovation improves living standards.”
At the start of the 20th century, humans had no planes, no radios, and hardly any cars. By the end of the 20th century, we surfed the internet on Wi-Fi-enabled laptops, flew to international meetings on jet planes, and filled cities with skyscrapers. The air conditioner transformed nations, leading to a population migration in the United States from the north down to the Sun Belt, and in countries like Australia in the reverse direction toward the equator. Antibiotics have meant that once fatal injuries could now be dealt with by a simple tablet. Barbed wire allowed farmers to fence in cattle and expand. If you want a single driver of prosperity, economists would tell you it’s the advent of technologies.
3. Inequality.
Economic growth is a key result of innovation, but then there’s inequality. Gaps between countries are startlingly wide. In a month, the typical American worker earns as much as the typical Nigerian worker earns in a full year. Within the United States, inequality has grown substantially. Over the course of the last half-century, income gaps have risen, wealth gaps have grown, and the top one percent has a higher and higher share of national income.
As countries become more unequal, mobility tends to fall. You can think of this as a ladder in which income mobility is the propensity of someone to climb up or down the ladder in their lifetime. As the gap between rungs grows, it becomes harder for people to move along the ladder. Scandinavian countries tend to be more egalitarian and, therefore, have more income mobility because the circumstances of your birth are less likely to determine where you end up. In countries such as Brazil, where the gap is very large, there is very little social mobility. Unequal societies tend to be static societies.
When the most affluent have a large share of resources, it’s easier for them to influence elections by providing campaign contributions. Candidates like to promise to look after the middle but then back their donors instead. Reducing inequality is a challenge for economists, but not an impossible one. In the decades after World War II, most advanced countries became more equal. There’s nothing about economics that says growth must come with unfairness.
4. Markets can create value.
It was 1978 in the Chinese village of Xiaogang when 18 villages met to sign a secret contract that could have cost them their lives. Like other parts of China, Xiaogang had suffered terribly during the Great Leap Forward. Under Mao Zedong, more than half the population of the village had died in just two years. People were desperately hungry, but everything was owned by the collective. As one person who signed the secret contract said, “Work hard, don’t work hard, everyone gets the same, so people don’t want to work.” The secret contract went against the dictates of communist authorities. It said that each family would have their own plot of land and be able to keep part of their output. In effect, it said that Xiaogang would work like a capitalist economy.
“The growth of markets around the world has been a key source of prosperity.”
The villagers were found out because the output from Xiaogang during that harvest was equal to the output of their five previous harvests combined. They were discovered because they were so remarkably productive. Thankfully, the Chinese leader at the time, Deng Xiaoping, permitted the experiment in Xiaogang to be tried in other provinces. Agricultural output quickly grew, and the experiments in Xiaogang became a key part of bringing hundreds of millions of Chinese out of poverty.
Markets don’t always bring resources to those who need them, but they’re an extremely powerful tool for producing output. As Adam Smith, one of the founders of economics, put it in his 1776 book, The Wealth of Nations, “It is not from the benevolence of the butcher or the baker that you receive your dinner, but from their self-interest.” Markets can encourage people to produce what consumers need, with prices signaling what is needed most. The growth of markets around the world has been a key source of prosperity and a critical gateway to improved living standards.
5. Gender.
Worldwide hourly wages are 20 percent lower for women than for men. This is a significant gender gap, but it has narrowed over time. It was twice as large in the 1960s and even larger in the period from 1300 to 1800 when women earned only half as much as men. What explains the gender pay gap? Well, it was once said that women had less formal education than men, but that has flipped in most countries, with educational attainment now being higher on average for women than for men.
One key factor is sexual harassment. In occupations where sexual harassment runs rampant, talented women are discouraged from choosing that occupation, which can widen the gender pay gap if that’s an occupation with high earnings. Another factor is discrimination. Women report higher levels of discrimination at work, and although that has diminished over the past century, it remains the case that discrimination exists in many workplaces. But perhaps the biggest contributor to the gender pay gap today is the so-called motherhood penalty. In many nations, earnings trajectories for childless men and childless women aren’t dramatically different. But once children come along, women generally spend more time out of the labor force than men, and during that period, their earnings typically fall or flatline. Mothers often find themselves on a less attractive career trajectory—sometimes dubbed the “mommy track”—because with less experience in the labor market, women end up being paid lower wages than men.
This is a phenomenon that Claudia Goldin, who won the 2023 Nobel Prize in Economics, has called greedy jobs in which time-intensive roles like chief executives, law firm partners, and surgeons make it hard to combine caring duties with work. A consequence of the motherhood penalty is that so long as greedy jobs are rampant and childcare is difficult to obtain, the gender pay gap will remain large. Narrowing gender gaps comes down to restructuring the workforce and ensuring that more jobs allow the combination of work and caregiving.
To listen to the audio version read by author Andrew Leigh, download the Next Big Idea App today:
