Emergence of the U.S. as World Leader

1. Emergence of the U.S. as World Leader Lecture by Robert M. Coen Emeritus Professor of Economics Northwestern University Alumnae Continuing Education November 2, 2010

2. Measuring economic performance GDP = value of final goods and services produced domestically GDP per person -- or per worker, per labor hour, per life Market exchange rates, or purchasing-power-parity rates Comparing commodity bundles across nations Measuring non-market public and private production Real GDP adjusts for changes in general price level Accounting for quality change and new products Other indicators Unemployment Inflation Inequality Extent of business cycles (instability) Health Longevity Environment Freedom

3. Data for 1995 United States Japan GDP $7,415.7 billion 483.22 trillion yen N (population) 267 million 125 million GDP/N $27,774 3,866 thousand yen Use market exchange rate of 94 yen/$1 to compare: GDP/N $27,774 $41,128 Japan 48% above US! _______________________________________________________________ Big Mac $2.00 340 yen PPP exchange rate is 170 yen/$1 (yen is over-valued) GDP/N at PPP $27,774 $22,741 Japan 18% below US Real GDP/N in Big Macs 13,887 11,371

5. Data for 1995 United States Japan GDP/N at PPP $27,774 $22,741 Japan 18% below US GDP/E at PPP $55,334 $42,838 Japan 23% below US CONS/N at PPP $18,800 $11,691 Japan 38% below US Life expectancy (years) 77.2 81.8 Japan 34% below US in lifetime consumption

6. Measuring economic performance GDP = value of final goods and services produced domestically GDP per person -- or per worker, per labor hour, per life Market exchange rates, or purchasing-power-parity rates Comparing commodity bundles across nations Measuring non-market public and private production Real GDP adjusts for changes in general price level Accounting for quality change and new products Other indicators Unemployment Inflation Inequality Extent of business cycles (instability) Health Longevity Environment Freedom

7. Broader Measures of Performance Human Development Index United Nations, Human Development Report HDI is average of three indexes: Life expectancy index Education index = (2/3)*ALI + (1/3)*GEI ALI = Adult literacy rate index GEI = Combined gross enrollment index GDP per capita index

8. Broader Measures of Performance Gallop World Poll Asks people about satisfaction with personal life and nation On a scale of 0-10, from worst to best possible life for you: Where do you feel you stand? Where did you stand 5 years ago? Where do you expect to stand 5 years from now? Same questions for country rather than for self Optimism = outlook for 5 years hence – present See Nestor Gandelman and Ruben Hernandez-Murillo, “The Impact of Inflation and Unemployment on Subjective Personal and Country Evaluations” Federal Reserve Bank of St. Louis Review, May/June 2009

12. Broader Measures of Performance Dashboard Concept Interntional Commission on Measurement of Economic Performance and Social Progress (Joseph Stiglitz, Amartya Sen) Speedometer alone not enough to steer car; need a dozen dials State of the USA Project National Academy of Sciences Multi-faceted, 300 or more indicators arranged by categories Health care legislation calls for new body to administer Key National Indicators System web site Not yet “live”

13. Sources of GDP Growth Growth of factor s of production Land (L), including natural resources Labor (N), adjusted for health, training, experience Capital (K), i.e., equipment, commercial and residential structures More efficient allocation of factors of production Improvements in technology Techniques of production Management methods Marketing and distribution methods New products

14. Sources of Growth in GDP per Capita (GDP/N) N increases through population growth Increases in N alone reduce GDP/N: diminishing returns K increases through saving and investment Increases in K/N increase GDP/N, but less than in proportion Improvements in efficiency through expansion of market (division of labor), competitive pressures, advances in technology Improvements in technology through research, creative activity, entrepreneurial activity Empirically, most GDP/N increase due to improvements in efficiency and technology

16. China’s Leadership in Technology before 1400 • See Joel Mokyr’s The Lever of Riches • Examples of China’s technical advances: • Wet-field techniques for rice cultivation • Advances in other agricultural techniques -- iron plow, fertilizers • Tracts and handbooks to disseminate agricultural methods • Blast furnaces, iron casting • Spinning wheel, driven by central power • Hydraulic power, waterwheel • Accurate water clocks • Maritime technology – compass, large ocean-going junks • Paper (money, wallpaper) • Wheelbarrow • Procelains, lacquers, explosives, pharmaceuticals • Horse collar, crossbow

17. Why Did China Fail to Become Europe? Population pressure required increases in agricultural productivity, not manufacturing Chinese philosophy turned inward looking, stressed harmony with nature, not exploiting nature Chinese failed to develop system of formal, deductive logic – no Galileo, Descartes, Newton, or Leibniz Merchants did not rise to power in China; imperial bureaucracy dominant Imperial court halts geographical exploration after 1430 Growing desire of traditional groups (government, e.g.,) in China to avoid social conflicts associated with technological changes

18. Netherlands Leadership: 17th to late 18th century • Reasons for success: • Modern institutions • Land ownership by small proprietors • Small nobility • No church land • Religious tolerance • Rational approach to problems • Geography - coast; mouths of major European rivers • Mercantilist policies • Blocked Antwerp’s sea access • Captured Asian and Latin American trade from Portugal • Entrepôt trade (transshipment, warehousing) • Reasons Dutch dethroned: • Loss of monopolies in trade in conflicts with France and UK • Currency became overvalued • Entrepôt trade makes banking center

20. United Kingdom: Late 18th to late 19th century Dutch had highest productivity, but little productivity growth Spurs to UK productivity growth: Higher capital investment than Dutch Promotion of free markets, international competition Technical advances in cotton textiles, iron and steel, steam power, railways Application of scientific principles, but why in UK? See Robert C. Allen, The British Industrial Revolution in Global Perspective Property rights more secure in France Italy and Germany develop science of steam engine Dutch were highly urbanized, higher literacy rate Military demands of Royal Navy create demand for technology Development of patent system High wages, cheap coal, consumer society

21. Reasons UK Dethroned Did not explicitly foster education and technology Capital stock grew slowly; savings available, but foreign investment as large as domestic Diffused growth process to follower countries through free trade, foreign investment, export of technology Currency became overvalued

22. US: Late 19th century to ? US advantages Abundant natural resources High rates of investment (twice UK in 1890-1950), including public investment in infrastructure and education Large, free domestic market fosters large companies enjoying scale economies, able to fund research Protectionist trade policies, slavery Position strengthened by two world wars

23. Growth Accounting for Leaders Annual Growth Rates (percent) GDP per Capital per labor per labor Tech Leader Period hour hour progress* Dutch 1700-1785 -0.07 na 0 UK 1785-1820 0.5 0.0 0.5 UK 1820-1890 1.4 0.9 1.1 US 1890-1979 2.3 2.4 1.5 Source: Angus Maddison, Phases of Capitalist Development * Author’s estimate assuming 1 percent increase in capital per labor hour increases GDP per labor hour by 0.33 percent.