For most of its existence, humanity neither enjoyed nor understood society’s capacity for creating wealth and economic growth. Prior to the 18th century, incomes generally hovered near the subsistence level. To paraphrase the 17th-century English philosopher Thomas Hobbes, human life was solitary, poor, nasty, brutish, and short. In the late 18th century, the English economist Thomas Robert Malthus warned that the mass of humanity was doomed to a life at the margins of starvation, as surges of population growth would inevitably outstrip the finite sources of food supply.
Things began to change in the 17th and 18th centuries, when people in Holland and Britain began to produce a little more each year. As the gains added up over time, modern economic growth had arrived. We define economic growth as increases in aggregate real income per person, (that is, income adjusted for inflation). For our purposes, economic growth starts with the Industrial Revolution, which began in the British Isles and spread from northwestern Europe to new areas – North America, parts of central and southern Europe, Scandinavia, and, late in the 19th century, to the frontier “European” societies of Australia and New Zealand, to parts of Eastern Europe and Imperial Russia, and finally, to Japan, the only non-western society to develop before the mid-20th century. In the late 20th century, the diffusion of industrialization spread rapidly to the “dragons” of the Pacific Rim: Taiwan, Hong Kong, South Korea, and Singapore, and then to the former communist countries of Eastern Europe.
Today, several important areas, including China, India, and Eastern Europe, seem poised to experience sustained economic growth as well. And yet most of the world’s population remains poor, earning less than the equivalent of $2 per person per day. Vast areas, including much of Africa, Latin America, Central Asia, the Middle East, and Micronesia, remain mired in grinding poverty, as the gap between the richest and poorest societies continues to increase.
What accounts for such differences? Many analysts focus on issues like culture, natural resources, climate, and political systems to explain the vast differences in economic experiences. But we believe the answer lies in the intensely historical origins of economic growth. History shows that over time, healthy, sustainable economies possess four dynamic, human-made factors: (1) political systems geared to enabling economic growth, (2) an effective financial system, (3) vibrant entrepreneurship, and (4) sophisticated managerial capabilities. In our model, each of these critical factors is represented as a corner of “the growth diamond.” As the illustration suggests, each of the factors interacts with the others dynamically (and over time). Proceeding counterclockwise from political systems to managerial capabilities, each of the facets of the diamond depends on the robustness of the preceding factors.