From the dawn of writing, for thousands of years, most people were not literate. Ancient Egypt and Mesopotamia have the oldest two, true written systems we know of, with Sumer beating Egypt by a couple hundred years, round 3400 BCE. There are older symbol sets that date back to like 5000 BCE, but we have no idea what they say, and they don’t appear to present a full language. We really only know what we’ve found anyway. China comes in a couple thousand years later, around 1200 BCE. Oh boy, have I heard people argue about who started writing first.

While writing was great and all for magic, it really showed its power when applied towards tangible results (not to say that there wasn't also decent profit in a funeral). Generally, those who traded were the “early adopters”. They were trying to figure out a way to stop people from screwing them over in transactions of large quantity over distances of space/time:

You agree to trade with some slick-haired shepard late one wine-filled evening at party, some olive oil for sheep. He says, “Okay, I will trade you 112 sheep for whatever that’s worth in oil. My cousin, he will come sometime in the next month, he will give you the sheep.” Then some random day this dude shows up with a ton of sheep, all mehing and running around, and 112 is a really high number to count much less remember after all that wine. But if you write down in clay, then put a clay envelope around it, you can preserve the deal you made.

In Egypt, you had the scribes, the priestly class, and some nobility. Hieroglyphs were sacred writing. The simplified versions of hieroglyphs were hierotic and demotic, with demotic evolving out of hierotic. Hieroglyphs eventually just end up on monuments, and you see the written form adapted as a tool for scribes, and this doesn’t just happen with hieroglyphs. People start doing a lot of writing, so writing has to work better. The guys who figured out how to put sheep in envelopes need their scribes to work faster. With this proliferation of writing comes a lot more people who can write, or sort of write, or can write a couple words, if not just in hieroglyphs. When more people can write, you see more graffiti and marginalia.

It is easier for the graffiti carved in stone, such as the great pyramid’s “Friends of Khufu Gang”. What doesn’t hang around as well is what you get when you teach children to be scribes, all the random stuff that must have been penned by bored 12-year-olds. Sorry for the link (terribly slow), but here is an interesting text on ancient marginalia (http://dlib.nyu.edu/ancientworld/books/isaw_asp000045/1).

You might want to check out:

Ancient Literacy by William V. Harris

Literacy in Everyday Life, edited by Anne Kolb

Oh man, this is a fun one. Before I start, I'll give a disclaimer: We don't truly know. I can tell you what we have, and I can give you a picture. Perhaps it won't be the most perfect picture, but it'll be a picture.

Second note - most of my post will be about Roman literacy, since Rome...well...is the place that we have the most evidence for and about in the ancient world. Babylon is an interesting case though, and I'm glad you brought it up - I can tell you a bit about what we know there, as well.

So Babylon, and Babylonia by extension, was an absolutely ancient city, and was certainly one of the greats for over 1000 years. It was unbelievably wealthy - if you want to trust Herodotus (questionable at times), it produced up to a third of the wealth of the Achaemenid Persian Empire. So big, influential, wealthy...how much written stuff do we have? Well, luckily for us, what we have of Babylonian writing is often in cuneiform on tablets or cylinders (mostly tablets), many of which are currently filling museum basements around the world. And most of them haven't been translated because the number of people who read cuneiform and want to catalogue all of them...is quite low. The overwhelming majority of these documents are tough to glean any information from, for the most part - they're mostly receipts or bills of sale/trade.

So what can we glean about Babylonian literacy from these? Good news is that we can know a fair bit. See, Babylonian society, at least until the Seleucids (and even then for at least 100-150 years), was entirely based around their temple structure. The temples controlled a good portion of the economy, with priests being both secular and religious powerhouses. They were also the ones you'd go to if you wanted...say...a business contract. Temple scribes wrote cuneiform, and whether it's thanks to the test of time or the genuine focusing of literacy among the temple elites (which is the most likely option), all that currently survives are documents that were written by these temple folks.

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Now, on to my problem child, the Roman empire. It's a juicy thing, and because everyone has an opinion on how literate the Roman world was, I'll do my best to cover both the prevailing theory as well as some of the evidence that we have.

First off, before I even start - be sure to ask yourself this key question: What is literacy?

Now, you're probably wondering why I ask. Isn't literacy just someone being able to read? Well yes, that is the basic definition. But what's the "boundary" for being able to read and not? If I'm able to read or write my own name, does that make me literate? A line of poetry that I've learned by rote? A price tag? Do I have to be able to read a book? If I can write a basic letter home to my mom, does that make me literate? UNESCO's definition is that literacy can be defined by someone who can read and write a short, simple statement on his everyday life. Let's try to use that as a baseline.

So now that I've made you question the meaning of the word, let's start off with a book by William Harris - Roman Literacy. To give you a general idea (quoting a few choice paragraphs from the intro)...

We shall obviously never know in a clear-cut numerical way how many people were literate, semi-literate, or illiterate in the Graeco-Roman world in general, or even in any particular milieu within it. Some scholars, however, have reacted to this fact in a most misguided fashion by avoiding numerical estimates altogether and thereby perpetuating the sort of vagueness exemplified by the historian who wrote that the Roman Empire was "tolerably literate." Not much more meaning can be found in assertions that there was a large or small amount of literacy in some part of the ancient world, and such assertions have seriously vitiated almost all research on the subject. It may be useful to undertake the risky task of estimating the numerical limits within which the literacy of some of the more accessible of ancient populations must have fallen, even if the limits turn out to be very broad ones.

[...]

There was without doubt a vast diffusion of reading and writing ability in the Greek and Roman worlds, and the preconditions and the positive causes of this development can be traced. But there was no mass literacy, and even the level which I have called craftsman's literacy was achieved only in certain limited milieux. The classical world, even at its most advanced, was so lacking in the characteristics which produce extensive literacy that we must suppose that the majority of people were always illiterate. In most places most of the time, there was no incentive for those who controlled the allocation of resources to aim for mass literacy. Hence the institutional lacunae which would have impeded any movement towards mass literacy above all, the shortage of subsidized schools-were confronted to no more than a slight extent.

[...]

The likely overall illiteracy level of the Roman Empire under the principate is almost certain to have been above 90%. Even for the most educated populations - which would mainly have been found, I think, in Greek cities in the fourth to first century B.C. - the range is to be sought, if we include women and countrypeople, far above 50%.

You get the idea. Harris is a prominent scholar, and the book is full of prominent scholars with similar opinions, and there are very good reasons for them. First and foremost, the Roman Empire was a huge, sprawling conglomerate, with many people speaking the same language that they had for thousands of years. Etruscan was still an extant spoken language during the Principate, as were Punic, Iberian, Oscan, Libyan, Lusitanian, South Lusitanian, Celtiberian, Gallic, other different Celtic dialects, different Greek dialects, Getic, etc etc (I didn't even go into the East). These languages thrived, despite the spread of Latin, even if the written versions often withered. Epigraphy - usually gravestones - is often self-selecting for those who can afford it. The point here is that, while the elites of various towns, villages, and cities throughout the provinces were literate, those people represent a tiny fraction of the population as a whole. The colloquial languages died out in inscription in favour of Latin - and that indicates that these common people, often not fluent in Latin, were simply not writing any of it.

Another question is that of urbanization - how many people would have had access to any form of schooling, other than that which they may or may not have gotten from their parents (which is a speculative venture at best)? What would be a short enough distance to make a regular journey for schooling reasonable? Would people consider it worth their while? We don't have these answers, sadly, but the conjecture itself is valuable, if only because it reinforces the fact that most people in the Roman Empire were rural.

Today, when we have to write something (or read something, though I understand the irony of my writing this and your reading this on my computer/phone), we get out a piece of paper (or a bunch of paper, in the form of a notebook/pad). So when people wrote in the ancient world, what materials would they have written on? Papyrus, certainly, but papyrus was reasonably expensive for the time, running ca. 2 obols for a single sheet, or 4 drachmae for a roll.^1 For perspective (and I refuse to try to convert these to USD or another equivalent, see the footnote for my rant), a skilled worker could expect to earn 6 obols per day, while an unskilled worker could expect half that. So let's look at the other options! A very common one (and very commonly found), was for people to write on pottery shards, or ostraka. Dirt cheap, basically everywhere, and quite durable. If you wrote a note on one of these, it'd stick around. Another common one was wax tablets. The Romans would make a wooden tablet with an indentation, fill that with wax, and then use it to write on. Cheap, common materials, each tablet could fit 50 words per side, no ink required, and it's possible to reuse them, erase things quickly and easily, or even store them for use (business documents, letters, official records, birth records, etc). Thin wooden tablets without the wax could also be used for letters, if you wanted to write in ink and make sure your writing wouldn't get accidentally ruined on the journey, as per the Vindolanda letters (more on them later). If you wanted a book though, papyrus or parchment were your best bet - and neither was particularly cheap.

These arguments, combined with the idea that there was no real incentive for most people to learn to read or write are the core of the idea that literacy in the ancient world was minimal.