The differences living standards around the world are staggering. In 2003, the average American had an income of about $37,500. In the same year, the average Mexican earned $8,50, and the average Nigerian earned $900. Not surprisingly, this large variation in average income is reflected in various measures of the quality of life. Citizens of high-income countries have more TV sets, more care, better nutrition, better healthcare, and a longer life expectancy than citizens of low-income countries. Changes in living standards over time are also large. In the United States, income have historically grown about 2 percent per year (after adjusting for changes in the cost of living). At this rate, average income doubles every 35 years. Over the past century, average income has risen about eightfold. What explains these large differences in living standards among countries and over time? The answer is surprisingly simple. Almost all variation in living standards is a...