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Barclays' William Hobbs on the investment lessons from the last 1,000 years

The return of the strongman has been gathering pace, with many of the institutions and behaviours built up over the last two centuries to shackle populist authoritarian leadership appearing to wobble. Should we care? And what’s wrong with strong leadership anyway? 

New studies looking at how the world economy has performed over the last millennium provide clues. Take Growing, Shrinking and Long Run Economic Performance by economists Stephen Broadberry, of Oxford University, and John Wallis, of the University of Maryland.

In their 2017 paper, they argue the sustained growth of the last few centuries may not just be a function of a change in the nature of innovation back in the middle of the 18th century. Fewer and less severe recessions have also played a role.

It has long been accepted that economic growth and rising living standards are a relatively new phenomenon. Prior to the 18th century, the world economy flatlined, with living standards from one generation to the next barely changing. From around 1750, output per head suddenly took off and has kept rising ever since (by around 1.5% per year).

Prior to 1700, it took around a millennium for living standards to double. The last few centuries have seen this trick occur every half century. The growth take-off has coincided with other happy trends: infant mortality rates have almost halved since the end of the 18th century and human lifespans have doubled. 

"Prior to 1700, it took around a millennium for living standards to double. The last few centuries have seen this trick occur every half century."

 

What changed in the middle of the 18th century?

Previous answers have pointed out developments in the nature of innovation; for example, that humanity escaped stagnation through an intense period of advancement during the Industrial Revolution. Innovations such as the steam engine finally freed us from our physical and geographical constraints and propelled us towards a path of technologically-driven growth.

But new studies provide other, fascinating explanations. It has been found that, while growth up until the mid 18th century did indeed flatline on average, there were significant swings within it. The reason that average growth was far lower during this period was not so much an absence of growth, but rather because expanding periods were almost exactly offset by contracting periods.

“The reason that average growth was far lower during this period was not so much an absence of growth, but rather because expanding periods were almost exactly offset by contracting periods."

So the revolution in living standards may not be solely down to a surge in ideas and technologies but, rather, from societies finding the means to avoid recessions. While recessions occurred 50% of the time prior to 1700, they have occurred 30% of the time since 1700 and only 17% of the time since 1900.

To better understand the foundations of long-term growth, we need to understand why economies have become less prone to recessions. The most plausible explanation seems to be because of two things: the emergence of institutions that cushioned the damaging effects of recessions (welfare systems, central banks), and those that improved political stability.

17%

The frequency with which recessions have occurred since 1900

The latter is an especially important condition for long-term growth, as it allowed inventors and entrepreneurs the freedom to focus on innovation, rather than worrying about having their livelihoods appropriated by unrestrained monarchs, corrupt bureaucrats or even the unfriendly tribe next door.

More importantly, it paints a more sustainable picture of long run growth. Innovation is not something human-kind discovered in the past few centuries. It is likely a much longer, more durable truth of the world economy. What has changed is that we now have the institutional framework to better harness and protect the gains that arise from such activity.

In terms of a practical application, this again argues for putting as much of your hard-earned money to work for the long–term in capital markets, particularly stocks, as your risk appetite and financial plans will allow. The pronounced de-rating of stocks seen over the course of last year would suggest an inexpensive long-term entry point.

There is, however, a caveat. We still suspect that the current populist spasms will pass at some point. But if they don’t, and the institutions and norms that enabled our prosperity were eroded, then this lesson from the long sweep of history will be a salutary one – recessions could once again become more frequent and severe, and growth not so much the norm.

 

By William Hobbs: Chief Investment Officer of Barclays Investment Solutions, the team focused on the core aspects of the bank’s investment offering. He leads strategic and tactical asset allocation, as well as investment philosophy.

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