7/29/2004

Why has the US been the richest country since 1880?

If you go to this blog site I think you'll find a very interesting article about why the US is so far ahead of other countries in terms of GDP, employment, wealth and productivity.  Many people that commented on this site have different opinions on why we're the richest, but the article I saw and liked said that we're richer for mainly three reasons.
"1.  Institutional structures: political, administrative, legal-and-regulatory, financial, corporate governance, and educational;
2.  Policy differences, especially in the degree of openness to foreign trade and investment, regulations that further or block market competition at home, vividly different levels of taxation and welfare transfers, and social expenditures in general;
3.  Cultural attitudes toward two related things: 1) toward risk-taking and entrepreneurship; and 2) toward radical economic and social change that, if adapted to quickly, allows the Schumpeterian forces of creative destruction to operate freely, for all the dislocations such change entails to the status quo. "

To me this seems like the most logical argument toward the reasons about why the US has been the richest country since 1880.  

3 comments:

Dr. Tufte said...

I agree with all of this.

BTW - Schumpeterian is an adjective formed from the last name of an economist who did most of his work 50-75 years ago. His work wasn't forgotten, but it was neglected until the late 1980's. Schumpeter argued that it is the destruction of less profitable firms (through bankruptcy or liquidation) that creates thriving economies, by opening up opportunities for newer and better ideas. Today, there is a strain of growth theory loosely called Schumpeterian which argues that policies that support firms that would otherwise fail lead to growth rates that are substandard.

derek said...

I agree with those statements as well. Especially the first point. If you think about it, economic growth is based upon having working institutional structures. Otherwise, countries would have been growing and expanding their economies hundreds of years ago. Without the establishment of the United States government and it's revolutionary institutional ideas, substantial growth in economies worldwide might still be stuck in their stagnant state. This relates very much to the discussions we had at the beginning of the class.

Dr. Tufte said...

I just want to bring some of the discussion of freedom and institutions back on track.

With respect to freedom, perhaps the boundaries on what we can't do are also important. For example, you're not free to sell yourself into slavery. This seems pretty straightforward, but it isn't a big step from selling your children into slavery, which is still practiced in many regions of the globe.

With respect to institutions, remember that I didn't often say that it was specific laws (say) that make a growth compatible institution. Rather, it is the predictable enforcement of those laws that is the important institution.

The bottom line is that economists are currently accumulating a lot of evidence about what freedoms and institutions influence growth the most, but we don't have a solid footing in this area yet.