[Previous] [Main Index] [Next]

Monday, October 11, 2004

THE CAUSES OF THE AMERICAN ECONOMIC LEAD: 11th Article In An Ongoing Series

The buggy series on the US economy, comparatively viewed --- in particular, an ongoing effort to pin down the reasons why it has been the richest and the most innovative national economy for over 125 years --- resumes its lengthy, strung-out argument here. The series, you might recall, began in early July and then broke off in early August after its 10th installment . . . the buggy prof deciding to take a mental rest for a while; very much welcome. The current article, the 11th in the series, has a double aim. Mostly, it rehearses the main themes that the earlier articles dealt with. For some of you, this review might not be necessary. Others, whether old or new visitors, will likely profit from it.

And the second aim?

Well, it's far more ambitious, even if the current article does little more than do some scene-setting for what will follow next in the series: the role of political ideologies in influencing how a national economy like the US's --- or Japan's or West Europe's or any other country's --- operates, particularly in shaping the interaction between the public and private spheres. That interaction, in turn, will heavily influence the flexibility and innovative prowess of a capitalist economy.

As you'll see, the two aims in this article hook together. With a sort of English spin on the analysis, let's begin with the second of them.


Part One:
THE SECOND AIM CLARIFIED: POLITICAL IDEOLOGIES AND DIVERSE ECONOMIC MODELS


State-Market Linkages

Consider the following diagram.

Oversimplified as it is, it's a good jump-off point to resume this series on the US economy. What it does is situate various real-world economies on an institutional spectrum running between two poles: total free market economies and total statist dominance. In turn, as we'll see in a moment or two, where any one national economy is found on that spectrum reflects the clash of dominant ideologies, historically and at present, that have influenced a particular country's economic and political development. If the US economy is unique in certain key respects --- especially the lack of historical hostility to capitalism here and an entrenched suspicion of big government --- it's because it has also had a far different history of state-and-society relations than Japan or West Europe, to take the two other major countries or regions of highly developed economies, and a far different ideological heritage that emerged out of those relations.

Britain, Australia, New Zealand, and Canada, as it happens, are the closest to the US on these scores, but there are still differences between those four and this country that this and the next few articles will try to explain even if it's possible once again, since the Margaret Thatcher era in Britain of the 1980s, to speak of a common Anglo-American form of capitalism.



 

Untitled Document
Statist
Dominance
Communism / Asian Capitalism / EU Welfare State / US & UK
Free
Markets
 




Some Clarifying Remarks

Start with the right side of the spectrum. A totally laissez faire market economy doesn't exist these days, at any rate since Hong Kong was taken over by mainland China in the late 1990s; probably only Britain in the 19th century --- especially after shifting to free trade in the late 1840s --- approximated it among all major economies. That said, the dominant Anglo-American model --- which includes not just Britain and the US, but Australia and New Zealand --- is found close to that pole. Canada, as we'll see, historically hewed to that model until the 1960s. Since then, thanks to the almost unbroken dominance of the Liberal Party --- its bastion in French-speaking Canada --- the state sector has mushroomed to the point that overall government spending is almost indistinguishable from the levels in the EU. By contrast, Britain, Australia, and New Zealand --- all three of which were moving in the advanced EU welfare-state direction until the start of the 1980s --- have markedly reversed direction: cut taxes, cut regulations, and severely prune transfer payments and subsidies. The result? As we'll see in the next article, overall government spending in the three countries is closer to the US level these days than to the EU's.

Jump now to the opposite end of the spectrum, an economy totally dominated by statism . . . to the point that private property doesn't exist and the state seeks to plan and control everything in the economy and for that matter in society and politics. Think of Stalinist Russia or Maoist China in the past or North Korea today, the only Stalinist-Maoist communism around: all brutal, mass-murdering totalitarian systems. By contrast, despite their CP rule, Castro's Cuba and Vietnam these days are actively seeking multinational corporations to install and operate in their countries.

In between the two poles, moving leftward from the US-UK model of free markets, you'll find the dominant EU Continental welfare-and-regulatory state. It reflects a pattern of state-economy interaction that entails far higher levels of taxation, government spending, transfer payments, and regulations of business and labor activities. Support for the model is heavily entrenched in Social Democratic, Green, and Communist parties on the left, as well as among mass trade unions in the public and private sectors. On the right, the dominant form of conservatism is Christian Democracy by whatever name in the Latin Countries, or statist Gaullism in France, or paternalist conservatism of the sort that prevails in Scandinavia. For reasons of both social peace and stability, this European conservatism has done little when in power to reduce government spending, taxes, or welfare transfers; and on top of that, almost everywhere except in Holland and Scandinavia, conservative political parties have been wary of free trade with developing countries in manufacturing or agriculture.

 

The Asian Model

Closer to the statist pole is the remaining system of economic organization --- the state-led developmental model pioneered by Japan in the 20th century, and subsequently copied to a large degree by South Korea and to an extent other Pacific Asian capitalisms.

In this model, almost all businesses, especially the giant corporations, remains in private hands. To that extent, the system is capitalist. But though taxes and transfer payments are lower than in the EU welfare-state system, there is a much greater suspicion of free markets and free trade; and bureaucratic regulations, subsidies, and industrial targeting are lavishly used by the state despite some reforms of a market-oriented sort, introduced recently, that aim at reigniting dynamic economic growth. Simultaneously, the central bank in this Asian model has been much more involved in allocating savings for investment purposes and restraining mass consumption. In both the private and public sectors, all sorts of limits exist on import competition, and there abound all sorts of incentives to encourage exports and export-led economic growth.

Nor is that all. All over Pacific Asia, including Japan, various forms of cronyism have existed between politicians and bureaucrats on one side and big business and finance on the other --- the entire system riddled, historically, with massive corruption and clientelism that has favored authoritarian or one-party democratic rule. There are some changes here, especially in the democratic openings in Taiwan, South Korea, the Philippines, and Thailand since 1997 --- all to the great credit of the Asians themselves. Still, cronyism is built into the institutional structures of such a model, and major reforms that open up financial and business firms to public scrutiny have generally failed everywhere. Even in politics, transparency and accountability are far from what they should be if these countries are to regain economic dynamism of the sort they enjoyed from the 1950s through the mid-1990s.



 

The Asian Model At An End?

On all these scores, the Asian model amounts to a statist form of neo-mercantilism. . . . a policy of preference for exports over imports, production over consumption, and government encouragement of technological advance either directly or indirectly, with crony contacts and various degrees of corruption part of the accepted ways of doing business. Whether industrial targeting of this sort has ever worked effectively is another matter. Even if it did so in the early stages of industrial development, it's clear that in Japan since 1980 or so and South Korea since 1997, such industrial targeting --- along with the lavish use of subsidies, regulations, import restraints, and bank-dominated investment for industry --- has created a tiny Mt. Everest of market inefficiencies and dislocations that have smothered economic growth and dynamism, with no clear end in sight to the problems that afflict both economies.

 

The Chinese Model

Communist China's epochal transformation since 1979, it seems, aims developing over time a form of South Korean statist capitalism, at any rate of the sort that prevailed during the 40-45 year rule of the military and its political allies: corporatist and authoritarian, with the state role withdrawn from day-to-day running of the economy that will be left largely in private hands, but with a privileged role of access to the centers of political and bureaucratic and power for a few hundred giant corporations and their owners and managers. The hope, apparently, is that despite market-oriented reforms, the dominant Communist leadership will still be able to control the commanding heights of the Chinese economy that such a corporatist form of institutional organization would entail.

In particular, as in South Korea during the days of military rule, there would be massive industrial targeting and a heavily skewed form of capital investment that the Central Bank and a handful of large private banks would allocate for preferred corporate clients. The rest of the economy will be largely left to fend for itself, whether small or mid-sized firms or the labor force. Politics will remain authoritarian, even if degrees of free expression and elections to a rubber-stamp parliament are eventually introduced.

Whether China's CP rulers can make such an economy function with dynamic growth potential is another matter.

At some point, even South Korea's massive mountains of market distortions and inefficiencies brought the economy to a grinding halt in the late 1990s, since which time the economy has struggled to regain renewed vigor . . . this, mind you, in a democratic era and in a country of 45 million. China has 1.3 billion people, and a huge sprawling bureaucracy and tens of thousands of state-owned enterprises still. These are huge obstacles. Another barrier looms no less large. South Korea's authoritarian capitalism was dominated by a few generals and politicians, with wider links to a few hundred corporate heads. China, by contrast, has a Communist Party of 60 million people, with nearly two million full-time CP bureaucrats running the party and the government. All are privileged --- not just the CP apparatus-members; corruption and wealth-making are rampant; and at the top huge power and opportunities for family members becoming multi-millionaires on a vast scale.

Enter the biggest barrier of all to the CP's ambitions: the built-in conflict between such authoritarian control and the freedom needed, political and economic, that underpins a flexible, innovative economy of the sort that the US-UK model incoporates and the more reform-minded Scandinavia, Dutch, and Irish economies in West Europe. The more a modern rich economy is a knowledge-based one, the more freedom and decentralization --- with a big support for entrepreneurs, invention, and innovation --- are essential to economic success. If Japan and South Korea with their impressive technological talents, hard-work ethos, and high levels of savings and investment have been unable to move beyond their statist systems, how much more unlikely will it be that China's CP-dominated polity and bureaucracy will be able to transform China into a rich, innovative economy of a nimble sort that can adapt effectively to constant technological change and shifts in globalizing dynamism?

All these matters --- where countries economies are located on the spectrum --- reflect the impact of politics, both institutions and above all ideologies. And that brings us smack up against the theme that will dominate the next article in this series, and probably several others: the unique ideological heritage of the US, compared even with Britain, Canada, Australia, and New Zealand.



Part Two:
THE SECOND AIM FURTHER CLARIFIED: AMERICAN EXCEPTIONALISM


US Ideological Uniqueness

Recall what the 10th article in the series, back in August, dealt with and established. It showed that intellectuals almost everywhere, whether on the left or right, have been traditionally hostile to capitalism. It also showed something unique to the US, even compared to Britain, Australia, New Zealand, and probably Canada historically: that intellectual hostility has been far more muted here than elsewhere, and not just among intellectuals but in political parties and among the broad public.

Even to talk of hostility is probably to overdo the muted nature of American ideological disputes over economic matters, at any rate since the end of slavery and the destruction of the antebellum South by 1865.

 

Consider the Historical Record: No Notable Exceptions

Remember the populist attacks on financial and corporate firms, which flared off and on in the late 19th century in the southern and mid-western rural states? Not once did the populists, with millions of supporters in those regions, ever renounce capitalism or espouse socialism . . . or even a form of statist capitalism that emerged in West Europe after 1945.

Instead, populism amounted to a mass-based protest against the changes wrought by rapid urban growth and immigration, even more rapid industrialization, and the emergence of giant financial and manufacturing corporations as the dominant form of economic organization in the US economy. At bottom, these protests reflected the growing awareness of small family farmers and small business firms in towns and small cities that their days were numbered . . . whether fin agriculture or commerce. They were right to worry. In 1900, about 40% of Americans were still farming. Most Americans also lived still in small towns and cities. Today, a century later, the less than 3% of Americans are in agriculture, and yet food production has grown by quantum leaps, as have giant cities and urban suburbs.

The populists --- almost all white Protestants --- were also worried by the tremendous influx of Catholic, Orthodox, and Jewish immigrants from East and Southern Europe and to an extent from Pacific Asia. That unease, you'll remember, led to the strict immigration quotas favoring North Europe, first by limiting Japanese and Chinese immigrants in the first decade of the 20th century, then from the rest of Europe starting in the 1920s. These laws prevailed until the mid-1960s. Since then, a surge of immigration from Asia, the Caribbean, and Latin America has occurred, equaling the numbers of immigrants who flowed into the US after the 1870s. Concretely put, 50 million immigrants --- 80% of them legal --- have settled here in the US since 1965. As in the earlier era, the recent influx has coincided with a huge increase in the supply of labor and especially slowed down or led to a decrease in the wage level of unskilled labor. The next article in this series will document the connections here.

Note that a populism still exists in American life, mainly aimed at suspicion of elites --- not just financial and economic, but intellectual and political and bureaucratic.

That's why --- given the pace of cultural and social changes in American life since the 1950s's, upheavals one after another --- the Republicans have been able to tap such sentiments at the grass roots and redirect them at the liberal elites, in universities and the media --- or in mainstream Protestant churches --- whom the disabused "little guy" holds responsible for all the upheavals around him . . . much to the dismay of the politically correct radicals in universities, who have no understanding of how this happened except by use of various outmoded Marxist terms or conspiratorial theories: above all, varieties of false consciousness, cultural hegemony, media dominance)

 

The New Deal Era

The same is true he disputes that flared during the 1930s' era of the New Deal now look far tamer in retrospect than at the time.

For all the hostility of the Republican right, the fate of capitalism wasn't at stake in the Roosevelt era. In in militarist Japan or almost all of Europe in those days, it was --- whether the ideological hostility, usually triumphant, was fascist, Nazi, clerical corporatist, or Communist as in the Soviet Union. Whatever radicalism of a statist capitalism the New Deal flirted with initially, it died out after 1936, and at most a moderate welfare state and Keynesian macroeconomic policies to stabilize capitalism emerged in this country after WWII.

By contrast, by the 1950s all of West Europe --- now democratic --- opted for a system of growing welfare transfers, growing regulations, and growing taxation. If the British have retreated markedly from that model starting with the Thatcher era in the 1980s, the other EU countries tend still to hew to the same model . . . Ireland something of another exception. The same is true of Australia and New Zealand, both markedly in retreat from their welfare-state days since the late 1980s. And like the British, regaining economic vigor in consequence. Canada, by contrast --- thanks to nearly 4 decades of unbroken Liberal Party rule, dominated by French-speaking Quebec --- now has a level of government spending and transfers about 40% higher than the US's. For that matter --- as we'll see in the next article --- even Tony Blair's Britain spends about 50% more than the US currently on welfare-state programs: roughly 15% of GDP vs. 10% in the USA . . . minus in both cases social security, an insurance scheme.

 



American Ideologies, American Politics, and American Economic Success

In short, historically and at present, the ideological spectrum in American politics has been uniquely narrow, compressed around centrist politics: moderate reform liberalism, embraced by the Democratic party in the 20th century, and moderate if increasingly influential conservatism that echoes mainly in the Republican party. Even so, despite the emergence of a more full-throated conservative ideology in Republican rank since the Goldwater era of the 1960s, the ideological differences in US politics remain fairly muted. That's because the conservative upsurge has pulled the Democratic party rightward, starting with de-regulation in the Carter era, then the huge reform of welfare in the second Clinton administration. Whatever else separates George Bush and John Kerry, clear ideology isn't at the forefront. It's even hard to detect except in general abstract ways in the background: the left favoring more governmental intervention in the economy, the right favoring less.

Essentially, viewed up close, the current campaign revolves much more around questions of personal character and charges that the Bush administration has been arrogant and untruthful in especially foreign and security policies . . . above all, in Iraq. Substantively, it's even hard to distinguish what a Kerry-Edward Administration would actually do in Iraq now, despite the claims they have a plan for both victory and a time-line in withdrawing US troops from the country. Differences over health care, the nature of tax reductions --- particularly who should benefit from them or not --- and environmental matters also exist, as they have for decades. Even so, it's hard to detect any ideological differences of note here --- much more matters of approach and cost-benefit considerations. Presumably, for instance, when the US Senate voted 95-0 in the mid-late 1990s to reject the Kyoto Treaty as it stood, Senator Kerry either absented himself from the vote or joined with the other 94 senators to reject it. That doesn't mean the policy differences are insignificant. It does mean that ideological differences hardly equal the strife over the personalities and character of the two main characters.

No Exceptions in the Current Campaign?

Possibly in foreign policy, not elsewhere. The ideological differences here, though, shouldn't be exaggerated.

Last winter, it's true, two visions of conducting US foreign policy seemed to be pitted against one another in the Democratic primaries: (1) a liberal preference for multilateralism as an end in itself, plus aversion to the use of military force as largely unnecessary in the war on terrorism, (2) as opposed to the mixture of realist and neo-conservative policies being practiced by the Bush administration in Iraq . . . with its preference for carrying the struggle against Islamist terrorism to the heart of Islam itself and a belief in the efficacy of military force to bring about desirable political changes that, in the past, made Nazi Germany and military Japan into solid democratic allies and helped force Communism to collapse in the Soviet Union and empire. In those days, not just Howard Dean but to an extent John Kerry voiced that position with vigor. Only Joseph Lieberman, a non-starter as a candidate from the outset, dissented openly from this liberal preference.

Since then, as the presidential race has swung into vigor, all this has changed.

Senator Kerry has carefully moved his own policy positions far closer to the dominant thrust in US foreign policy since the days of FDR and Harry Truman, reaffirmed by Ronald Reagan in the 1980s: he won't give any other country or organization a veto over US foreign and defense policies, he will increase the size of US forces, and he has a strategy for winning the war in Iraq, withdrawal from which would before victory, he avows, be a disaster. That doesn't mean he has endorsed the Bush policies. He couldn't and keep Democratic support among the party activists and that part of the electorate that has been repelled by the war in Iraq. What he has done is articulate differences that are concrete and critical of Bush missteps or blunders there, and many of us --- the buggy prof --- could agree with his criticisms while, at the same time, being reassured that his foreign policy will, in practice, not reflect an empty multilateralism or utopian vision of a world ruled by the UN Security Council and a world criminal court whose judges and laws are fraught with uncertainty for a country like the US. At most, there are degrees of multilateral or unilateral preferences; nothing else.

As for the ballyhooed conference that a Kerry administration would call over Iraq, no one --- even Kerry himself --- expects large troop commitments to follow from Germany, France, Spain, or what have you. If there were ever any doubts on this score, Chancellor Schroeder --- his popularity at an all-time low in Germany as he seeks to push through economic reforms --- reaffirmed that under no circumstances will German troops be in that country. For that matter, in Afghanistan right now --- the intervention in which was approved both by the UN Security Council and NATO in 2001 --- there is a total of 5000 NATO troops besides American forces. Anyone think there will be 5000 from France or Germany or Spain --- or all three --- in Iraq during a Kerry presidency?

 

Any other differences of note between Bush and Kerry in foreign policy?

Possibly, a Kerry administration wouldn't show the same level of enthusiasm for promoting democracy where the cultural and ethnic obstacles are as great as they are in Iraq or Afghanistan. Even so, since the US is now highly entangled in their domestic affairs, what sort of political system could we promote other than the kinds that we are nurturing in those two countries?

In the end, prune away the campaign rhetoric, and the clash of foreign policies reduces to a clash of personalities and promises of openness, flexibility, and diplomatic niceties to be directed at reluctant allies in Europe. No clear clash of ideology or vision is at stake.

For liberal visionaries, never mind radicals, it can't be reassuring to find that John Kerry has turned out not to be one of them . . . rather, a more charismatic Joe Lieberman. What's more, given the kinds of experienced advisers he has around him, like Richard Holbrooke or General Wesley Clark, there's no reason to think that his avowed positions amount to subterfuges to win votes, and nothing else.

 

The USA's Ideological Center Is To The Right of the EU's

The US ideological spectrum isn't only limited in scope, now and historically; its center point also lies to the right of the prevailing points of democratic consensus in West Europe and Japan . . . at any rate, if left-leaning means strong support for governmental regulations and redistributive programs, on one side, and on the other side, there are large conservative political parties that see a strong governmental role as essential to social peace and the ability to compete with left-wing parties and win political elections.



That said, as we've noted before and will discuss later on in this series, both Japan and the Continental EU countries are under relentless pressure --- radical shifts in technology and globalizing forces --- to reduce taxes, regulations, and welfare benefits. Just today, the Dutch economics minister urged the EU countries to move toward the US economic and social model as a means of restoring economic vigor. See this link.

It's hardly the only indicator of such concern there or in Japan. Does that mean in two decades or so, the EU welfare-state system and the highly statist Japanese economy will be indistinguishable from the US's current system? That seems most unlikely. The EU Continental countries will always likely need a more developed welfare state system, for reasons of social peace if nothing else; and Japan's population --- rapidly aging as it is --- seems increasingly risk-averse and reluctant to accept much change in the way of freewheeling market reforms. If anything, the average Japanese appears to prefer stability and predictability . . . even at the cost of the country's regaining economic vigor.

We'll return to the US political spectrum in the next article, already written out --- simply needing html formatting to be published. In the meantime, shift your attention to recall what our other aim in this article happens to be: a rehearsing of the earlier series' themes and conclusions.

 

Part Three:
WHAT THE BUGGY SERIES ON THE US ECONOMY'S INNOVATIVE PROWESS AND WEALTH HAS ESTABLISHED SO FAR


The two aims of our current article now hook up. In particular, the discussion up to now of political ideologies and how they help shape different economic systems brings us smack back to the overall argument in our series on the US economy: a Schumpeterian and institutional approach to explaining why, contrary to mainstream economics, the US lead in per capita income has now persisted for over 120 years . . . half the time since the industrial revolution of the 18th century.

The US's Lead A Puzzle For Mainstream Economics and Also Foreign Observers

That US lead began in the 1880s, the decade when US per capita income overtook that of Britain --- the pioneer industrial country. By 1914, on the eve of WWII, the US wage rate was 54% higher than that in Britain, and about 70% higher than in all of Europe . . . all this, mind you, despite the immigration out of Britain and the rest of Europe of 60 million workers from 1870 until 1914, many to Australia, New Zealand, Canada, or Argentina, but most to the US. Even now, near the end of 2004, US per capita income remains about 30-35% higher than in West Europe or Japan. What's more, the gap is liable to increase over the next few years, not narrow. Essentially, to put it differently, the US lead over the West Europeans and Japanese is roughly what it was in the mid-1960s. So much for all the loose, misleading talk about US economic decline, relative or otherwise. [Note: The article link to the Dutch economics minister's views indicates that he thinks the US per capita income lead is 55% more than the EU's. That's not wrong, only misleading. The EU average is around 63%, and that makes it 37% lower than the US's. Logarithms avoid the problem of percentage differences viewed differently when it comes to gauging the same numerical gap.]

The big US lead, according to mainstream economic growth theory --- pioneered by Robert Solow back in the mid-1950s --- shouldn't persist this way. On the contrary, standard convergence theory --- which earlier articles in this series explained carefully --- predicts that the leader country will, in time, find that the growth of its per capita income will slow down as technological innovation slows down and its capital stock rises so that the return on further capital investments entails diminishing returns. In effect, to put it simply but not misleadingly, when there is only one steel mill in a country, then investing $100 million to develop a second steel mill might double steel output. By the time you've created 10 such mills, it will still cost $100 million to create the 11th. At that point, though, steel output might rise only 10% more. Unless new technological innovations will occur, the national economy of the lead country at the technological frontier --- where innovation is always risky and costly --- will find the growth of its GDP, productivity, and per capita income will invariably slow down.

 

Why Follower Countries Should Grow Faster

By contrast, vigorously growing follower countries --- those national economies with sufficiently good business, financial, legal, political, and bureaucratic institutions, plus enough educated people to work with modern technologies, that they can sustain long-term economic growth --- should continue to grow faster than the leader after the latest round of radically restructuring technological innovations has become standardized. These follower countries can benefit here from all sorts of convergence catch-up processes. They can import the leader's technologies at cut-rate prices, either by licensing them, or inviting the leader's firms to implant multinational links, or simply working around patents; if that doesn't suffice, they can outrightly ignore patents and copyrights and exploit the technologies this way . . . a Chinese specialty, with the government claiming it can't really control it. They can also count on investment capital flowing from the rich leader --- or richer follower countries --- and they can also count on export-led growth to the wealthy economies of the more advanced countries, at any rate if the leaders (Britain in most of the 19th century, the US since then) generally adhere to free trade.

On top of that, as the follower countries import the lead countries' technologies and managerial techniques --- often improving on them in standardized industries (a Japanese specialty in cars and consumer electronics, leading to lower costs of production and initially higher levels of quality incrementally achieved ) they face abundant investment opportunities that will allow them to accumulate capital stock for years or decades before diminishing returns set in as they will, in principle, in the leader country at an earlier date.

And yet here we are, 125 years or so after the US surpassed Britain in per capita income, and the US lead is not only intact, it seems to be increasing for the time being. That is the problem that the series has set itself to solve.

 

Part Four:
THE BUGGY SOLUTION TO THE PUZZLE


What then explains this huge US lead in per capita income, which extends back in time to the 1880s?, in defiance of convergence theory? And with all the repercussions that follow, not least --- of immediate interest to political scientists --- for the distribution of global power across countries? The answer requires . . .

A Schumpeterian Viewpoint

The explanation of the US lead, complex as it is, boils down in the end to a far more flexible and vigorous system of national innovation, a Schumpeterian concept explain in earlier articles set out in August on this site.

Joseph Schumpeter, you might recall, was a seminal economist in the first part of the 20th century, an Austrian who fled growing fascism in Europe in 1930 and ended up a professor at Harvard until his death in the 1950s. His key concepts ---

1) technological innovation as the key to economic growth,

2) a theory of revolutionary technological breakthroughs that dislocate the existing economic and social status quo of countries every 50-60 years since the industrial revolution,

3) an institutional view of the innovative capabilities of each country's innovative capabilities


--- have gained more and more attention the last decade or so, thanks mainly to the latest wave of radically restructuring technologies, especially in computers, telecommunications, and information areas, plus nanotechnology (working with materials at their molecular level) looming just on the horizon.



To these three key theoretical concepts add two other key Schumpeterian theoretical insights:

4) Creative Destruction. By that, Schumpeter and his followers have meant that revolutionary innovations won't work their growth-magic until they are assimilated and diffused throughout a national economy; and for that diffusion to occur, it's essential to disrupt the existing economic status quo --- surrounded as it is by powerful private and governmental vested interests --- and transfer large quantities of investment capital, R&D capabilities, managerial talent, scientific and engineering talent too, and other skilled workers from the old, increasingly outmoded industries and into the new, more promising ones.

Naturally, old established firms will resist the changes. What's more, these days well-entrenched firms and industries --- whether competitive or not --- can count on the powerful support of governmental bureaucracies and political parties --- to try staving off new challenges to their dominance, whether those challenges emerge from new, more dynamic young firms and industries at home or abroad. Hence the need, if the forces of creative destruction are to work their impact, for

5) Dynamic Entrepreneurial Risk-Taking. If established firms and industries have vested interests in the status quo, reinforced by political and bureaucratic ties, then it will take mold-breaking entrepreneurs --- motivated by dreams of wealth, glory, and influence --- to pioneer the new radically restructuring technologies: Andrew Carnegie, John D. Rockefeller, Henry Ford, the pioneer heads of Pan American and other airplane companies, Bill Gates, Intel, Amazon, Yahoo, Walmart's family, the initial heads of investment banks and more recently venture capital to finance such risky undertaking, and so on. Over time, of course, if these firms succeed in getting a toe-hold in a national economy and are well-managed --- which is not always the case: witness the marketing fiascoes of Apple Computer --- they will rapidly grow into giant corporations with multinational links.

Note that the heads of these firms just mentioned all started out as outsiders or marginal men. Bill Gates, for instance --- the richest man in the world --- was a drop-out from Harvard as a freshman, moving west to Seattle in the late 1970s to start Microsoft. Walmart started out in the late 1960s as a small town challenger in Arkansas to Sears and other giant retailers. Nobody outside of those one-horse towns in Arkansas had heard of them until a decade or so later. Today Walmart is the largest retailer in the world by far, and it has revolutionized the entire wholesale-retail ways of doing business, reinforced these days by e-commerce through the Internet.

 

Part Five:
AN INSTITUTIONAL APPROACH AND POLITICAL ECONOMY


Such an institutional view of the economy's innovative capabilities is inherently attractive to political economists and political scientists That's understandable, no? It requires an analyst to move beyond narrow economic influences --- particularly, the rate of capital investments and the growth and quality of the labor force (the basic ingredients in standard neo-classical growth theory) --- and probe wider institutional influences that, taken together, explain long-term economic growth as an outcome of any country's national system of innovation.

Institutions Count

More concretely put, what is the prevailing institutional order in the business sphere: corporate governance and corporate accountability (a matter of pressing concern in the US economy, but also everywhere), but also the ability of new start-ups to enter existing industries or pioneer new ones? What, additionally, is the nature of financial institutions and their willingness to support entrepreneurial risk-taking --- whether banks, brokerage firms, insurance companies, stock and bond markets, or venture capital? What are the links between the private and governmental spheres in the economy, a matter of pivotal importance these days given the role of governments everywhere in economic life through taxes, subsidies, tariffs and quotas, regulations, and redistributive policies . . . not to mention state-owned industries in Europe and Japan and elsewhere? What, it follows then, are the quality and nature of the political and bureaucratic institutions within a country; and for that matter, the quality and nature of the legal system . . . particularly when it comes to generating transparency and accountability on the part of politicians, bureaucrats, bankers, brokers, and corporate heads?

 

Predatory Leadership, Political and Otherwise

Put bluntly, countries where legal systems are seriously deficient, then the leaders in all these sectors will likely be predatory, corrupt, and nepotistic, holding power and enjoying exploitative wealth thanks to Mafioso-like client-patron networks. Outsiders will usually only elbow in by means of coups or, from time to time, the ballot box, but nothing really changes, only the names of these Mafioso-heads in the public and private spheres. Such countries will seldom, if ever, develop economically. Pouring foreign aid into them --- or forgiving debts --- will very likely perpetuate the institutional failures that keep their countries backward and indebted.

Even a talented, democratic country like Japan --- dominated by a one-party system and the immense patronage power that flows from this in an economy dominated until recently by outright or semi-cartelized giant firms and industries --- has faltered blatantly the last 14 years. Its economic performance has been the worst in the industrial world over that period; more pointedly, it's been the worst of any since the Great Depression of the 1930s. It's not clear Japan will ever manage, short of far more structural and institutional changes --- along with related cultural. changes in the outlook and attitudes of Japanese politicians, bureaucrats, corporate heads, and average voters and workers --- to stay in the top ranks of the industrial countries, especially at a time when its population is aging rapidly, it bars immigration of new workers, and its public and private debt remain staggering.

 

Culture Counts Too

And finally, as the last observation hinted at, an institutional approach to an economy's overall growth performance requires an analyst to probe the dominant cultural outlook and concrete behavior of its citizenry. Consider a tiny handful of relevant questions here. How you answer them will help you understand --- as this series on the US economy, comparatively viewed --- how the US differs from most of the industrial countries, and in turn how these differences help underpin an American lead in per capita income that defies standard growth theory and has persisted now, with some us and downs, for over 125 years.

Are the members of a national society open to change or oppose it?

  • Do they accept risk-taking as desirable or something to avoid, and for that matter how will failure --- inevitable for even most successful entrepreneurs and inventors --- be treated: punished severely or easily forgiven?


  • Even if risk-taking isn't an irreparable handicap, will there be enough ambitious, driven men and women to break with standard-model means of economic and social advancement, drop out from existing corporate firms or educational systems if need be, and throw themselves whole-hog, come what may, into invention, innovation, and bold start-up ventures that are fraught with hazard and uncertainty?


  • Are existing social and economic elites willing to mix on equal terms with successful entrepreneurs --- usually outsiders or marginal men and women in their societies (immigrants, Jews, East Asians, or drop-outs of all sorts) --- or will they react snobbishly and with hostility to the newly rich, dismissing them as pushy arrivistes?


  • Are workers willing to move to new jobs, even if in other parts of the country, or do they stubbornly resist such mobility and rely on unions, bureaucrats, and politicians chasing votes to keep their jobs intact even in increasingly non-competitive industries?


  • Does the population tend to trust one another, at least to the point of cooperating spontaneously for large-scale collective purposes? Without such trust and spontaneous cooperation --- at least outside mutually back-scratching Mafioso-like patron-client networks (which prevail in the Middle East outside Israel, Africa, most of Asia, and most of Latin America and the former Soviet Union) --- the only way the heads of business firms and non-profit agencies (private or public) to achieve their goals is by means of formal rewards and sanctions. That's almost always far more costly than if, in additional to such rewards and sanctions, the members of private and public organizations see themselves as working for common desirable ends and cooperate easily with one another to achieve them.


And --- most relevant to the next article or two in our series ---

  • Are there major ideological resistances to free markets and limited government, either historically or at present, that create major political obstacles to restoring a country's economic vigor if it falters for a sustained period of time?