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Prologue: The Economy of a Village of 8 Billion

“It is my cherished ambition that the world produces many people with ‘cool heads and warm hearts’ who are willing to devote even a part of their abilities to confronting the suffering of society.”
~ Alfred Marshall

Though there are still people in the world who are cold and hungry, we live in an era of material abundance. The economic development of our global village is a relatively recent phenomenon. Around 10,000 years ago, humanity transitioned from a hunting and gathering economy to a settled, agrarian society. Douglas C. North, the 1993 Nobel Laureate in Economics, described this Agricultural Revolution as a monumental transformation comparable to the Industrial Revolution, terming it the “First Economic Revolution.” However, as land is finite and not all resources can be produced from it, economic growth driven by agriculture faced limitations.

The Industrial Revolution, fueled by technological advancements, brought material wealth to the world. North referred to the rapid changes resulting from scientific and technological progress as the “Second Economic Revolution.” These two revolutions significantly improved humanity’s standard of living. Alvin Toffler, building on North’s framework, labeled these revolutions as “waves” and added a “Third Wave,” the Information Revolution.

Through such transformations, the global economy generated approximately $95 trillion in 2022. Dividing this by the global population provides an average annual income per person, which measures the value created through participation in economic activities.

Globally, the average annual income per person in 2022 was just over $12,000. This figure reflects the exponential growth made possible by the mass production enabled by the Industrial Revolution.

The Roots of Economic Growth

According to Bradford DeLong at UC Berkeley, the global economy grew very little until 1500, and only by 1750 did per capita income reach $190. Yoon Yoon-ha of the Korea Development Institute (KDI) described in his paper Institutions and Economic Growth that just as the life of a lion roaming the African plains in the 1800s wasn’t vastly better than it was 2,000 years prior, human living standards also saw little improvement. It was only after 1800 that explosive economic growth brought humanity to where it is today.

What triggered this explosive growth? While there are many factors and explanations, it boils down to technological advancements and the innovations in production methods brought about by the division of labor. However, such innovations would not have been possible without markets. If there were no buyers, who would produce more than they could consume themselves? As markets expanded, the division of labor became even more effective. For instance, less than 2% of the global population now provides the food for our tables—a striking contrast to Thomas Malthus’s assertion that “population growth always tends to outstrip food supply.”

Global Economic Dynamics

The United Nations Population Fund (UNFPA) reports that, as of 2007, 40% of the global workforce was engaged in agriculture, 21% in manufacturing, and 39% in services. However, the income distribution was 4%, 32%, and 64%, respectively. In developed countries, less than 2% of workers are in agriculture, and in South Korea, it’s only 7.4%. Even in the agricultural powerhouse of the United States, only 1.4% of workers are in agriculture. In a village of 100 people, only about 2 individuals would produce food for the entire community.

Meanwhile, the service sector is growing rapidly, giving rise to jobs unimaginable in the past, such as party planners, doll fashion designers, laughter therapists, weather consultants, and sommeliers. New professions continue to emerge, driving future economic growth.

Inequality and Economic Systems

As the global economy grows, so does inequality. In 2009, the average income in wealthy countries was $40,000 annually, while in poor countries, it was less than $400—just 1% of the wealthier nations. Today, 53% of global income comes from labor, while 47% comes from capital—returns from bonds, stocks, or rental properties. This means those with sufficient capital can live without working, supported by those who borrow money or invest in the future.

Developed countries tend to have a higher proportion of wage earners, with 90% of workers in the UK and the US employed by organizations. In South Korea, only 68% of workers are employed in this way, and half of them are in non-permanent or part-time positions. However, a society’s value lies not in the number of corporate jobs but in the stability and diversity of its job market.

The disparity in wealth is even more stark than income inequality. Globally, the wealthiest 2% hold 50% of the world’s assets. Within countries, the top 1% in the US owns 33% of its wealth, while the top 10% holds 70%. In South Korea, the top 1% holds 14%, and the top 10% holds 43%. Globally, the average person owns $20,000 in assets, but 30% of people have no assets or are in debt.

Lessons from Growth and Inequality

Since 1800, some have become rich, but many remain trapped in poverty. Despite several economic revolutions, the benefits have not been evenly distributed. Today’s macroeconomic policy goals revolve around two key objectives: growing the economic “pie” and ensuring fair distribution. While humanity has succeeded in growing the pie, the free-market system still struggles with fair distribution.

The growth of global markets and technology has driven unprecedented economic growth but has also exacerbated inequality. While some believe planned economies could solve wealth inequality, history shows that centralized power leads to other forms of inequality. In communist regimes, concentrated power often created dictatorships, where wealth became the domain of a select few.

The market economy, while imperfect, offers a better path forward. Though inequality persists in today’s village of 8 billion, it’s undeniable that economic growth has lifted many from absolute poverty.

The pursuit of a better society and economy must continue. As Alfred Marshall said, the world needs more people with “cool heads and warm hearts” willing to dedicate their abilities to alleviating societal suffering.