The fundamental causes of growth

Per capita output grows when the quantities of the factors of production, land, labour and capital, expand and when the productivity of those factors increases, chiefly because of improvements in technology and organisation. Micro- and macroeconomic policies may also buttress the growth process. But sizes of factors of production, technological progress, organisation, and government policies are endogenously determined, and constitute proximate causes of growth. The fundamental causes of growth determine the incentives of individuals to produce and trade, and of governments to choose policies that assist market trades.Footnote ⁴ Acemoglu et al. (Reference Acemoglu, Johnson, Robinson, Aghion and Durlauf2005) distinguish between three fundamental causes: institutions, culture and geography.

The supremacy of institutions thesis argues that the power structure in society is the main determinant of income growth. Political and economic institutions, which protect investors against predatory taxation, hold the government to account, secure property rights, offer equal access to resources, and protect freedom of contracts and the rule of law encourage investment in human capital and spur technological innovation. In this account, the landmark event was the 1688 Glorious Revolution when the English parliament won against King James II (Acemoglu et al., Reference Acemoglu, Johnson, Robinson, Aghion and Durlauf2005; North et al., Reference North, Wallis and Weingast2009). However, even though the king became more dependent on the parliament than before, recent research shows a number of weaknesses in the role of institutions on economic growth (Ogilvi and Carus, Reference Ogilvi, Carus, Aghion and Durlauf2014, offer a survey). For example, Hodgson (Reference Hodgson2017) demonstrates that the Industrial Revolution followed a post-1688 financial transformation precipitated by Britain's expanding trade and the need to finance its war efforts.

Cultural causes of development and especially the Industrial Revolution propose a number of disparate mechanisms. Clark (Reference Clark2007) focused on the transmission of cultural values by a biological–demographic chain, where in 16^th- and 17^th-century England, the economically successful sired more children than the less successful, forming a social environment dominated by middle-class values. Mokyr (Reference Mokyr2010) argued that an ‘industrial Enlightenment’ took place, a scientific revolution, which placed observation and experimentation as the bases of knowledge and changed attitudes in politics, including tolerance for intellectual innovation. McCloskey (Reference McCloskey2010), emphasised ‘talk and ideas’, especially liberty and equality, resulting in public acceptance of the rise of market traders and manufacturers, previously despised as vulgar by the landed elite.Footnote ⁵

Geography shapes agricultural and mineral production; it influences the quality of human capital as it determines the climate, natural resources, the disease environment and transport costs, and by determining physical barriers, the ability of a country to defend itself against foreign invaders. Geographical factors may affect productivity and income per capita directly, and indirectly by the choice of economic policies (Gallup et al., Reference Gallup, Sachs and Mellinger1999). Geographical and biological conditions also explain why in Neolithic times agricultural societies settled earlier in some locations than others. Such early sedentary societies were able to develop a critical level of technology, human capital and organisational structures breaking out of the Malthusian trap ahead of the rest, which explains their current level of development (Olsson and Hibbs, Reference Olsson and Hibbs2005). Further, according to the unified growth theory (Galor, Reference Galor2011) bio-geographical factors changed the size and composition of the population, which then drove human capital formation and growth. The transition from stagnation to growth became an inevitable by-product of the process of development.Footnote ⁶ In this view, changes in institutions are neither necessary nor sufficient to explain sustained growth after the Industrial Revolution.

The fundamental causes of ancient Greek efflorescence

The scholarship on ancient Greek growth offers institutions and culture as the fundamental drivers of the efflorescence. Geography, natural resources and the Mediterranean climate, are set aside because they are the same before and after the onset of growth (Ober, Reference Ober2008: 12–13). The ‘polis’ or city-state as a distinct geographical, political and economic unit was the standard form of political organisation in the Archaic and Classical periods. In truth, geography and military technology explain the emergence of the multitude of city-states, 1,100 of them according to Ober (Reference Ober2015). Mountains, a highly indented coastline and islands fragment the landscape of southern Greece providing natural barriers to small territories that are easily defended by their people. Further, with iron more abundant than copper, the invention of cheaper iron weapons facilitated the emergence of a large class of free farmers who were rich enough to own their armour. They comprised the principal defence force fighting on foot in tight formation. Akin to a part-time militia rather than professional soldiers, their military importance translated into political power and underpinned the emergence of democracy (Lyttkens, Reference Lyttkens2013). Unlike the Eastern Empires or Rome, the Greek city-states did not consolidate into a single centralised state; they developed a variety of governance structures from democratic Athens to oligarchic Sparta and included aristocratic Corinth and the kingdom of Macedon.

How did the institutions and culture of the polis become the engines of growth? Morris (Reference Morris2004) considers citizenship as the most important institutional development. Citizenship comprised the recognition that within a polis all locally born free men had equal rights, regardless of birth or wealth, and rejected the divine right of rulers prevalent in the Eastern empires. Citizenship defined and secured property rights from the predation of autocrats. Economou and Kyriazis (Reference Economou and Kyriazis2017) trace a gradual development of the definition and enforcement of property rights from the Archaic period onwards through the emergence of a powerful middle class of landowners and the concurrent establishment of functioning courts to resolve property disputes. Secure property rights lowered transaction costs encouraging large-scale international trade. Bitros and Karayiannis (Reference Bitros and Karayiannis2010: 71) attribute the success of Athens to ‘an environment where, the state guaranteed that property rights would not be expropriated . . . and in turn individuals exercised responsibility in their pursuits by balancing their own interests with those of the community in which they lived’. On the contrary, Sparta with an oligarchic government and lacking clear definition and protection of private property discouraged both political and economic innovation. Examining the social norms and legal provisions in forensic speeches, Karayiannis and Hatzis (Reference Karayiannis and Hatzis2012: 635) write ‘[4^th-century] Athenian laws were mainly geared towards the enforcement of contracts and the limitation to the arbitrary economic and political power held by the elites . . . They offered the institutional framework that was conducive to the economic and social development of Athens’. In a similar vein, Engen (Reference Engen2005) offers the law of Nikophon (375/4) on money purity and circulation of silver coins as proof of rules deliberately designed to facilitate market transactions and promote Athenian exports.

For Ober (Reference Ober2015: 16):

He suggests two principal causes of Greek growth. First, the establishment of fair rules where many people in the society have an equal standing with respect to personal security and property law. Second, much like politically fragmented Europe in the sixteenth century, the intense competition among individuals and city-states, which led to further institutional and technological innovation and motivated welfare-improving cooperation between rational actors. Further, instead of uniquely modern notions of GDP growth, liberal democracy and a centralised government, Carugati et al. (Reference Carugati, Ober and Weingast2015) define development ‘as the ability of a state to provide security, stability, and predictability via the establishment of reasonably fair rules, and their consistent application and enforcement’ (p. 28). Accordingly, by establishing the rule of law for elite and masses alike, and control over the sources of violence through impersonal and perpetual democratic institutions, ancient Athens transited away from the unproductive ‘limited access’ equilibrium of the natural state towards a stable, open access order that secured a high standard of living.Footnote ⁷

Bergh and Lyttkens (Reference Bergh and Lyttkens2014) examine the quality of the economic institutions of Athens in the 340s (a period sufficiently covered in the sources) by applying the Economic Freedom Index.Footnote ⁸ Athens scores an impressive 8.8 out of 10 in the 2013 international league, second to Hong Kong with a score of 9.02 (while modern Greece, with a score of 6.87, was in the 68^th position). Although, as the authors acknowledge, this type of comparison has limits, it indicates a strong link between the institutional quality of Athens and its material success.

Bresson (Reference Bresson and Rendall2016: 95) adds that ‘institutional and technological innovations went hand in hand . . . both . . . are a fundamental factor in the process of growth in the Mediterranean area from the Archaic to Hellenistic period’.

However, the ancient Greek economy was unable to start a ‘grand transition’ to sustained long-run growth. Even though precise quantitative figures are not available, it is clear that ancient Greek growth displays a humped shape. In Hellenistic times (322–331 ce, following the 322 victory of the kingdom of Macedon against Athens), the polis efflorescence entered a phase of long-term decay. After 250 bce population in the Aegean fell. Greek political independence and prosperity finished with the Roman conquest of Macedon (168), the last remnants of the Greek city-states (146) and Asia Minor (129). Bresson (Reference Bresson and Rendall2016) argues that a fragmented Greek world was no match for Rome. However, war defeat is neither necessary nor sufficient to explain the development failure of ancient Greece. The city-states had been able to stand against the Persian Empire and fought against each other almost incessantly before and during the efflorescence period.Footnote ⁹ Importantly, they did not rebound after the defeat by Macedon. We proceed by examining whether the fundamental factors of institutions and culture also contained seeds of economic regression.

Ancient polis economy

Economic activity in the ancient polis was organised around the household (oikos), comprising the house as a building, its equipment, associated land holdings, the persons living in the house and their belongings. The Athenian legal system did not recognise businesses as autonomous entities for juridical purposes. Business activity was part of the oikos.Footnote ¹¹ This does not imply that all economic activity was household-scale; forensic speeches attest to the existence of profitable large farms and manufacturing units. For the vast majority of Greek males, ownership of land and related capital installations remained the most critical economic resource for generating income and the basis of citizenship and political rights. However, the combination of poor soil (with a few exceptions like Thessaly and Laconia, which never developed democratic politics), and Mediterranean climate of warm dry summers followed by wet and mildly cold winters, constrained the types of agricultural activity undertaken and made the risk of harvest failure endemic. Farmers had few options but to diversify into a variety of crops grown in different patches of land of unequal agricultural productivity, and hoard surpluses. This resulted in small fragmented landholdings. Rich households too held diversified assets including houses, farms in different territories, animal stocks, workshops and money deposits. Partible inheritance, where sons receive equal shares of property, not only satisfied horizontal equality but also by dividing property over different locations it served as insurance against harvest failure. Consequently, the economies of the city-states were small and unable to exploit economies of scale, and unit costs of production remained high.

Furthermore, uncertain agricultural yields and the risk of harvest failure led city-states to impose strict regulations on exporting commodities that were vital necessities for the population, distorting prices and the allocation of production activities (Bresson, Reference Bresson and Rendall2016). Additionally, trading costs were high because of the different taxes imposed by the city-states and the different currencies used.

Since citizenship conferred important political, legal and economic rights, city-states guarded it jealously.Footnote ¹² As a result, it was impossible to develop business organisations that would cover the Greek world and overcome the small size problem. Different city-states achieved different levels of economic and legal sophistication, while traditional friendships and rivalries between them further complicated the possibility of establishing a common economic space. The multitude of city-states, and the strict land ownership criteria that was used to define citizenship, restricted labour mobility; mercenaries were probably the most mobile part of the labour force. Even though Harris and Lewis (Reference Harris, Lewis, Harris, Lewis and Woolmer2015) paint a picture of mobile labour, especially skilled workers for construction and physicians, leaving one's birthplace to find work in a different polis was tantamount to disenfranchisement and giving up on owning land.Footnote ¹³ Moreover, although property rights were well defined and secure and contracts were enforced, the ancient Greek city-states lacked fully inclusive economic institutions (considered as essential by Acemoglu and Robinson, Reference Acemoglu and Robinson2012) because women, metics and slaves had fewer rights and economic opportunities.

Intra-polis tension

Inside the city-state, maintaining strict democratic egalitarianism ultimately leads to rejection of ‘creative destruction’, the hallmark of capitalist development. Income equality and income growth are incompatible with each other, for the former requires extensive ex-post redistribution that may destroy investment incentives. Even in a society starting with complete equality, some talented or lucky individuals may innovate and grow richer than their peers. Total output increases but is no longer distributed equally. Such income divisions raise the risk that the poor may revolt and confiscate the assets of the economically successful. Similarly, growth may be at risk not only from the poor going against the rich, but by existing elites resisting their loss of privileges when new successful entrepreneurs emerge, and/or opposing redistribution for egalitarian purposes. Over time, successful groups may transform into rent-seeking distributional coalitions, setting barriers against new entrants. Resistance to social change and realignment accompanying growth eventually precipitate economic decline. At the extreme, the rich elite unwilling to pay the taxes required for redistribution may decide to overthrow the democracy and repress the majority. Arming for civil conflict and fighting diverts productive capacity and destroys resources reducing the growth potential. ‘Destructive’ envy discourages potential entrepreneurs from searching for new products, markets and cost savings (Gersham, Reference Gersham2014).

Athens bears witness to such tensions. During the 5th century, Athenian adult males numbered 60,000 (Hansen, Reference Hansen1999). Two factors relieved tensions from population pressure, employment of the poor as rowers in the Athenian navy, and the establishment of cleruchies, land allotments, in territories controlled by Athens. Nevertheless, the Athenian democracy was overthrown twice. In 411 bce, a coup installed an oligarchic dispensation with only 5,000 Athenians retaining full citizenship rights, but the navy restored the democracy four months later in 410. In 404 after losing the Peloponnesian War, a cruel oligarchic commission known as the ‘Thirty Tyrants’ governed Athens. The demos however re-established control in 403 following a civil war. In the 4th century, because of casualties in the Peloponnesian War, the plague that struck Athens in 430–426 and the famine during the Spartan siege of 405/404, the number of adult males fell to 30,000. The implied increase in the average land per citizen explains why land redistribution ‘is never heard as a problem at Athens’ (ibid.: 54). In the 4th century, increased trade and commercialisation created a new class of rich Athenians, whose wealth was not exclusively based on land holdings. As noted, opposing the redistribution necessary to preserve egalitarianism may lead the rich to stasis, a violent attempt to bring down the democratic constitution. Indeed, the oligarchic regime established after the 322 defeat by Macedon and overthrow of the Athenian democracy restricted the franchise by introducing a tight property qualification, and rolled back the fiscal obligations of the rich.

However, conflicts over income distribution have been ubiquitous without preventing modern societies from developing; they cannot be a sufficient reason for the failure of the ancient Greek city-states. Tridimas (Reference Tridimas2015) suggests that the direct democracy of Athens was vulnerable to attacks from anti-democrats because immobile land was the main component of wealth, and it lacked the protection that political party competition offers in contemporary representative democracies. Specifically, dissatisfied voters vote the incumbent party out of office but keep the system of democratic governance; thus, party competition stabilises the regime. However, in the direct democracy the losers from the policy decisions of the demos had few alternatives but to act against the rule of the demos. Thus, egalitarianism, which underpinned the direct participatory democracy of the polis, may have undermined its long-run growth.

Inter-polis conflict

A multiplicity of fiercely independent and competitive city-states fought almost incessantly against each other as well as external enemies like Persia, Scythia and Rome. After the success against the invading Persians (490–480), in a 141-year span (479–338), classical Athens had no more than ten consecutive years of peace and was at war for two out of three years on average. War and the threat of war not only bring the destruction of existing assets but also discourage investment in human and non-human capital.Footnote ¹⁴ Since invaders may loot or destroy physical assets, a high risk of war deters capital owners from investing in physical assets, especially those characterised by large sunk costs. This leads to a smaller capital–labour ratio than otherwise, tending to make labour cheap and diminish the incentive to introduce capital-intensive techniques. In addition to destruction, continuous wars diverted resources from productive activities towards military spending and exhausted the public treasuries weakening the city-states against later stronger enemies. Although war is inefficient (because of the diversion and destruction of resources), rational actors may choose war when it is more profitable to seize assets than to produce them. Analytically, while the outcome of violent fighting is uncertain, the expected payoff may be higher than that of peace because the conquest of new agricultural lands and mines offers material wealth and glory (Boix, Reference Boix2015; Tridimas, Reference Tridimas2015).

Since the economy underpins military might, the fundamental cause of the defeat of the city-states and their subjugation to monarchical powers is the relative economic rise of powers in the period preceding the military confrontation, and the political and economic factors driving their relative performance. Specifically, the Athenian economy performed well during the 4th century, but the Macedonian economy performed even better. Macedon proved to be a superior power possessing fertile lands, gold mines and advanced military techniques. It imitated, learned and adapted the military knowledge and public finance expertise first developed by the city-states to surpass them eventually. Examining the rise of Macedon during the reign of King Philip, 359–336, Ober (Reference Ober2015: 289) writes:

The hoplites, part-time soldiers, of the city-states could not match the professional and better-resourced Macedonian army.

After the 322 defeat of Athens democracy faded and the independence of the city-states gradually disappeared. The end was not a linear process. Macedon did not fully subjugate the Greek city-states, which retained some aspects of democratic self-governance (Ober, Reference Ober2015). Athens became a bone of contention between different Macedonian generals; it was able to fight the Chreamonidean war (267–261) and even win independence in 229, but was no longer able to play any significant role in Greece or the conflicts between Macedon and Rome. In a late flourish in the middle of the 3^rd century, the Achaean League brought together up to 50 city-states from the northern and central Peloponnese, becoming a significant political and military power in Greek affairs. The neighbouring Aetolian League in all probability also consisted of a number of cities comparable to the Achaean League. Nevertheless, the fragmented Hellenistic poleis and kingdoms eventually succumbed to the more populous, prosperous and militarily superior Rome.

We may then conclude that city-state institutions framed political and economic transactions. They were suitable to initiate growth, but they changed and adapted only slowly, so effectively they were the ‘fixed factor of production’. As a result, development based on the city-state format reached diminishing returns.

The ideal of self-sufficiency

As already mentioned, Finley (Reference Finley1973) claimed that households and communities aimed at self-sufficiency instead of relying on markets. Autarkeia had also moral overtones implying independence from others and freedom (Sallares, Reference Sallares1991). An ideology of self-sufficiency inhibited growth. However, recent scholarship rejects, at least partly, such sbstantivist views. Foxhall (Reference Foxhall2007) suggests that, while poor households were subsistence farmers, wealthy households strived to generate surpluses for buying luxuries to enhance their status. As already said, the ancient Greeks were able to innovate by improving existing products and inventing new technologies, while urban areas were also manufacturing centres for metallurgy, ceramics, leather, textiles and luxury items. Bitros and Karayiannis (Reference Bitros and Karayiannis2008) conclude that the Athenians honoured successful entrepreneurs and espoused the values of economic freedom, fairness in exchange, obedience to laws and hard work, which encouraged entrepreneurship. Harris and Lewis (Reference Harris, Lewis, Harris, Lewis and Woolmer2015), and Bresson (Reference Bresson and Rendall2016) also debunk the view that the ideal was self-sufficiency; the average citizen was neither oblivious to profit-making opportunities nor detached from the market.

Attitudes towards work and wealth accumulation

For the majority of the population agriculture was the main occupation and source of wealth. Millet (Reference Millet and Osborne2000) surmises that in the Aegean world, perhaps half the total population depended directly on farming for its livelihood. A landholding elite scorned wealth from commercial and industrial activities and disdained dependent work. ‘The condition of the free man is that he not live under the constraint of another’ (Aristotle Rhetoric 1367a32Footnote ¹⁵). According to Cohen (Reference Cohen, Cartledge, Cohen and Foxhall2002), Athenian men espoused an ideal of masculinity (andreia), whose fundamental element was to maintain self-employment and not to work in the paid employment of others.

Self-employed, free Athenian artisans and traders offered their services as independent operators rather than employees for limited tasks and times, and for different clients. Artisans who earned their living from manual labour were held in low social esteem, because they performed vulgar or brutal (banausic) work.Footnote ¹⁶ However, Bitros and Karayiannis (Reference Bitros and Karayiannis2010) maintain that the ancient Greeks disdained working for another man, rather than manual work, because it circumcised one's freedom. Bresson (Reference Bresson and Rendall2016) contends that rejection of salaried work probably prevented men from obtaining business skills and work experience outside those offered by the family occupation. Slaves and women filled the ensuing gap. As a result, many slaves owning their own tools (and sometimes their own slaves) and operating their own business were able to prosper. Idealisation of land ownership and agriculture as the noblest economic activity meant that there was little social approval for enrichment through artisanship and trade.Footnote ¹⁷

However, Burke (Reference Burke1992) argued that with the onset of commercialism of the 4th century, ordinary Athenian citizens as well as some members of the elite, approved and participated in the commercial and financial ventures:

Wealth accumulation is a necessary condition for economic growth. On the other hand, ‘conspicuous consumption’ to enhance one's prestige may not serve any productive purpose, while it may sharpen social tensions. Ancient thinkers considered material wealth as freeing man from deprivation and providing the means to pursue freedom of action. However, they saw it as a means rather than an objective. Seeking to acquire ‘man's goods’ without developing a ‘good man’ was denounced as vanity (eloquently presented in Sisyphus’ tale) that would lead to the creation of artificial needs and conspicuous consumption.Footnote ¹⁸ Nevertheless, ‘enjoyment of luxuries was part and parcel of the ideology of democracy in Athens’ (Millet, Reference Millet and Osborne2000: 40).

Another anti-development cultural trait was the prevailing ideology of reciprocal assistance between citizens in the sense of gift exchange, emphasised by Finley (Reference Finley1973) and Millet (Reference Millet and Osborne2000), and most interestingly in the so-called eranos loans. An individual in need of funds borrowed small or large sums free of interest from family and friends to finance, for example, a liturgy (public service) or a daughter's dowry. The loan was secured on property, and was repaid when practical. Reciprocity meant that as a matter of gratitude lenders expected to receive an equivalent favour when the need arose. Nevertheless, such loans coexisted with commercial loans for financing investment in farms or mines as well as sea-borne international trade, and they could carry interest and lead to litigation like other types of lending in the market (Cohen, Reference Cohen1992).

Attitudes to individual rights and obligations to the collectivity

Liberal ideas that humans are self-interested individuals with inviolable rights and that the individual takes precedence over the state were absent. In the ancient Greek polis, a citizen's rights and obligations followed from being a member of the citizenry; they were public rights and duties (Cartledge, Reference Cartledge2016; Held, Reference Held2006):

In this sense, the notion of protecting the individual against the might of the state did not exist. To put it another way, there was no liberal Lockean ‘social contract’, where men free, equal and independent in the state of nature unite into community to live peacefully and pursue the enjoyment of their properties. The idea of freedom related to ‘the political freedom for a community to run itself, rather than the freedom of individuals to act as they wished in private life’ (Thomas, Reference Thomas and Osborne2000: 70) and ‘the citizens were subordinated to the common good of the community’ (ibid.: 72); ‘the peculiar division between a narrow public and a broad private realm characteristic of bourgeois regimes was alien to the Greek experience. The claim of the civic community was . . . total’ (Rahe, Reference Rahe1984: 269). Further, in judging a defendant the Athenian jury often considered whether a verdict of guilt or innocence was good for Athens, rather than for the individual.Footnote ¹⁹ The trial of Socrates for ‘corrupting the youth’ and ‘not believing in the gods’ and his subsequent condemnation to death in 399 is probably the most famous example of the state's command over the individual. An additional illiberal practice was ostracism – voting to banish a political leader for a period of ten years but without additional sanctions – but it was sparingly used (see Tridimas, Reference Tridimas2016, and the literature therein). The dominance of the ancient state stands in sharp contrast to the liberal ideology of the 19th century, which accepted bourgeois values (including an active economic role for the state to bring in market-expanding reforms, public education and infrastructure), and contributed to both democratisation and industrialisation.

A distinct line of the modern economics literature on culture focuses on the effect of individualism versus collectivism on economic growth (Gorodnichenko and Roland, Reference Gorodnichenko and Roland2017 and the references therein). Individualism underlines personal freedom and achievement, and confers social status on personal achievements including innovations and actions that make an individual stand out. Collectivism emphasises the embeddedness of individuals in a larger group; it promotes conformity and loyalty to the group and respect for one's superiors, and discourages individuals from dissenting and standing out.Footnote ²⁰ Individualism rewards innovation, which can lead to higher growth. Collectivism encourages cooperation leading to greater coordination in society. Therefore, individualism has a comparative dynamic advantage, while collectivism has a comparative static advantage, which may run into diminishing returns. Gorodnichenko and Roland (ibid.) present evidence in support of the hypothesis that more individualistic countries are more affluent. If the ancient Greek culture had embraced collectivism, as the embedded economy view argues, neither an industrial revolution nor sustained growth could have taken place.

Against the above anti-development slant stands the inquisitive attitude of the ancient Greeks. Ober (Reference Ober2008) emphasises their civic culture of developing innovative solutions for aggregating, organising and distributing the knowledge required to run successfully complex political decision-making. Further, Ober (Reference Ober2015) attributes the success of the polis to democratic institutions along with a public discourse culture of ‘making good policy (innovative, but not excessively risky) and reducing the level of discord and dissonance between elites . . . and the masses of ordinary citizens’ (p. 236). Finally, Bresson (Reference Bresson and Rendall2016: 218) writes, ‘In fact, ancient Greece saw the beginning of an “enlightened” culture’. He argues that ancient Greece espoused a culture that associated systematic enquiry with technological progress to improve economic outcomes. He submits that ancient Greece set in motion the process of accepting beliefs associated with the Enlightenment, which then drove the Industrial Revolution, but Rome interrupted it: