How the Industrial Revolution happened remains a major question. Robert Fogel’s End of Hunger and Greg Clark’s Farewell to Alms try to explain the dramatic change.

Beginning around 1700-1750, there were a series of major economic changes. A “Consumer Revolution” in Britain and the American Colonies happened as the Middle Class grew. At the same time, the Second Agricultural Revolution began, which massively expanded food production. A health care revolution, beginning with Germ Theory rapidly improved medical care. The Industrial Revolution began at the start of the 19th century with the invention of the coal-powered steam engine.

The population skyrocketed, as did the pace of technological inventions. There was a cultural revolution too, as 10,000 years of agricultural lifestyles and traditions were replaced.

After World War II, the US slashed its average tariffs from 40% to 4% and created the GATT world trade system. Most industrial countries followed the American lead. International Trade boomed.

How much did trade benefit the US economy? About $1.3 trillion more per year. Household incomes rose $10,000 larger per year. This does not unilaterally benefit the US either. Mexico has greatly benefited from NAFTA, particularly Northern Mexico.

I could wax prosaic about the productivity benefits of comparative advantage and faster technological growth. This is possibly an underestimate. The US economy as a whole is built around foreign trade.

Microfinance is a way of bringing small-scale banking to the poor. The poor, especially in the third world, normally lack access to capital and usually have no formal property rights. This structural problem limits their options in life. Microfinance gives the promise of finance to those without sufficient collateral or income to participate in normal banking or market activities.

In the third world, many earn less than $2 a day. Microbanks offers them loans of less than $100, which can help them start small businesses. And it offers microsavings for others.

Tyler Cowen reviews Charles Karelis’ Persistence of Poverty which describes why economic ideas from wealthier individuals and societies do not help the poor. The problem is not the amount of money or lack of effort.

The poor, due to their position, have different marginal preferences than the rest of us.

China is running out of skilled workers and wages are rising, which means the prices of manufactured goods will rise too. This is starting to happen in India as well. China and India are undergoing the same process Japan did in the past.

Marginalism is one of the more important concepts in economics. It answers the question: why do people pay more for diamonds than water, when the total value of water is higher?

Pure rationalism fails to describe economic behavior. Consumerism is determined by subjective incremental preferences. The marginal value per unit of water decreases once our basic needs are met. Marginalism describes how consumers decide how much of something they will buy.

I believe the problem with healthcare spending is that healthcare has a Pareto Distribution. 1% of the population uses 30% of healthcare spending, 10% uses 72% of healthcare. The bottom 50% of the population only costs 3% of total healthcare. Those percentages are from an this study.

The maximum costs increase exponentially over time even though most people are not using health care. The average cost per individual does not increase much. The problem is at the extreme – it’s a powerlaw curve without an upper limit. Epidemics spread according to a power-law distribution, as do hospital stay lengths and medical costs. The most anyone can do is try to slow the inflation rate of maximum costs.

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