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Wednesday, May 18, 2005


This is the 3rd buggy article published here since prof bug came back to the site earlier this month. If it interests you, you'll find an explanation in that article --- published May 3rd, 2005 -----click here. It should set you straight on the topic.

What We're Up To Today

Our argument today continues the mini-series started on May 3rd that deals with the role of institutions and ideologies --- the two interacting and mutually reinforcing --- in accounting for the superior performance of the US economy over the last century or more, always viewed in comparative ways. Compared with what precisely? The answer: with the statist-capitalisms that prevail in Japan and the EU-15 countries on the Continent. Yes, there are some noticeable differences between Japan and the EU Continental countries, just as there are some variants of the advanced regulatory and welfare-state economies in West Europe. Seen in comparative terms, though, those differences pale if these statist-economies are set against the capitalist model that prevails in the English-speaking countries --- Britain, Australia, New Zealand, Canada (to an extent), and above all the US itself --- all of which have more market-oriented economies.

The nature of the two systems was delved into at length in the previous two article. For present purposes, it should be enough to remind that what the underlying . . .

. . . Logic of The Two Systems Is:

In statist-capitalisms, remember, states dominate markets, and the logic of politics and hence political calculations and maneuverings trump the logic of market incentives and market adaptations to radical changes of all sorts ---- whether caused by revolutionary technologies, swift-moving globalizing forces, the surge of dynamic competitor countries in Pacific Asia and India, or vrious disruptions and dislocations in the global political-power system. Simplifying considerably, market-oriented economies can be said to reverse this causation. Not that politics doesn't play a role in economic life. Obviously it does. Probably only Britain in the mid-19th century was ever a strictly laissez-faire system. For that matter, a regulatory apparatus and a minimal welfare state exist in all the English-speaking countries --- more so in Canada than elsewhere --- thanks to almost 4 decades of unbroken rule by the Quebec-based Liberal Party --- and slightly more so in Britain than in the US, New Zealand, or Australia.

Even so, the logic of market incentives and adaptations tends to be the prevailing force behind economic adjustments to the sorts of radical changes just mentioned.

Something Else: The Key Topic in This Mini-Series Is A Problem for Mainstream Economics

Of those English-speaking economies, all of which have improved their economic performances compared to the statist-economies since starting a long cycle of deregulation and limiting government spending --- including efforts to reform or hold back welfare expenditures --- back in the early 1980s except for Canada, the US stands out for its economic dynamism, innovative capabilities, and unmatched levels of per capita income and overall productivity levels. As we saw in the 1st article published on May 5th, American per capita income is roughly 55% higher than the EU average or Japan's. What's more, contrary to convergence theories of catch-up growth --- explained at length in a few moments from now --- that US lead is roughly what it was in 1905 over West Europe and in 1970 for Japan.

How is that lead possible? What underpins it?

Answering these two questions is what this and the next article in the series intend to do, stressing --- as our wider series on the performance of the US economy that goes back 10 months now to last July has tried to show --- the pivotal roles of economic and political institutions and ideologies in explaining the superior US performance. More to the point, today's article clarifies the nature of the problems that the persistent American lead creates for mainstream growth theories in economics.

A Schumpeterian View Looms Next

The next article --- already done, just needing HTML formatting to be published --- will then tease out all the findings and implications in the first 3 articles, today's included, by shifting our focus to look at the logic of the two capitalist systems in Schumpeterian terms.

Above all, in that follow-up argument, we'll be applying Joseph Schumpeter's insights into the role of creative destruction in driving technological progress and economic growth forward in those economies that allow their status quo to change quickly --- for all the dislocations and turbulence that ensue --- in order to adapt to revolutionary new technologies and the related dynamic forces of rapid-moving globalization. Meaning what precisely? In plain, pared-down terms, creative destruction means that radically restructuring technologies can't implant themselves powerfully in a national economy unless old standardized industries and firms --- manufacturing or service or agricultural --- are allowed to restructure and shrink drastically or even go bankrupt in order to free enough capital, entrepreneurial energies, managerial talent, scientific and engineering talent, and skilled workers to create new, up-to-date firms working on the technological frontier and expanding as fast as they can . . . both in the domestic market and abroad. In the process, dislocations and turbulence will mark the transition. Painful bankrupticies and restructuring of old firms and even whole industries will multiply and shoot up in all directions. Lots of the work force will have to be retrained. If the transition's successful, all sorts of growth-enhancing spillovers will occur in a national economy that adapts this way . . . at any rate, once the new promising firms and the restructured old ones that remain competitive learn to make good use of the new technologies.

It's the major way --- maybe the only --- for wealthy industrial economies with high wages and incomes to rejeuvenate themselves and spring and vault briskly into the future.

Note in passing. For Schumpeter, creative destruction can't work effectively unless the economic status quo is flexible and --- no less important, a huge drawback for Japan and the EU countries --- there is ample scope for the raw, raucous energies of glory-minded entrepreneurs to create new start-up firms that will bring revolutionary technologies successfully to the market-place. These radically restructuring technologies --- which change the ways we live, work, and spend our leisure, not to mention their impact on the distribution of global power among large countries --- erupt in long waves every 50-60 years. We're now in the midst of the 5th wave since the 18th century's industrial revolution, the 3rd, 4th, and 5th waves dominated by the US. The 5th wave started in the 1970s. Huge breakthroughs in communications and information technologies began to erupt on the scene, followed soon afterwards by radical developments in biotech. Nanotechnology --- which seeks to work at the molecular level of materials --- is the next breakthrough on the horizon, part of the ongoing wave (possibly never to end) of revolutionary innovations in a knowledge-based economy.

In all these waves, the giant pioneer firms that came to dominate the global scene all began as entrepreneurial start-ups. The 5th wave is no exception. A good 75% of the Fortune 500 American Firms these days didn't even exist 30 years ago. In the statist-capitalisms in Japan and the EU Continental countries, by contrast, the equivalent ranks of giant companies have remained virtually unchanged over the same period . . . an occasional Nokia or S.A.P. or Airbus (the latter heavily subsidized by 5 EU governments) the noticeable exceptions in all senses of the term. Whatever their achievements in the past, these statist-capitalisms have apparently run out of unruly, risk-taking entrepreneurs . . . the status quo in Japan and the EU Continental countries tenaciously manned and guard-dogged by worried, anxious managers, workers, politicians, and vested interests galore.

It gets worse for them.

In particular, whatever else we know about big established companies, their ability to innovate radical technologies that challenge their existing production processes --- themselves guarded by vested interests galore at all levels of management and throughout almost all their sub-divisions --- is noticeably limited. Not all are sluggish and overly bureaucratized, but most are; and even those that aren't --- think of IBM, dominant in pc's at the start of the 1980s --- can't spin-off new start-up divisions that take over capital, talent, and time from top management with ease. For 15 years, both huge German and Japanese companies tried that route in ICT, their countries drastically lacking entrepreneurial energies and risk-taking. And for 15 years, they have been blatant flops.



One Thing For Sure, Standard Economic Growth Theories Aren't Much Help Here

On the contrary, they all postulate various kinds of convergence catch-up growth, and that means the rich lead-country on the technological frontier will sooner or later have its lead cut or disappear entirely, with all countries --- at least those whose populations have good enough skills to work with modern technologies (plus one or two other things according to the theorist in question) --- playing catch-up growth and ending up at roughly the same levels of productivity and per capita income.

Convergence Theories

There's actually a variety of convergence theories, but they need not concern us here other than to list them briefly and draw one clear inference for our own purposes:

  • unconditional convergence: just mentioned, all countries end up in a long-run steady state of economic growth where they have similar levels of productivity and per capita income;

  • conditional convergence: countries will have different long-run levels of per capita income and productivity in the steady state of economic growth, but similar growth rates;

  • conditional or unconditional convergence limited to certain countries: those, to be more precise, whose populations are educated and skillful enough to work with modern technologies that they can import and diffuse through their economies;

  • and country-specific long-run growth rates and per capita income and productivity levels: it all depends on certain auxiliary (pre-) conditions, mainly market-oriented government policies, legal protection of private property, and political stability.

The one inference we can draw? When it comes to dealing with the advanced industrial countries --- the EU-15, Japan, the US, and Australia, Canada, and New Zealand --- unconditional convergence ought to apply to them. That's the general consensus, not only among growth theorists, but the media everywhere and politicians apparently in Japan and all over the EU. All these countries qualify for membership in the convergence club; they all grew faster at times in the 20th century than the US itself; they all have educated, skillful populations; and they all satisfy the pre-conditions for sustained catch-up growth. Meaning? In shorthand terms, it refers to a variety of economic opportunities for follower countries to grow faster than the rich lead country and close the gap with it in the levels of per capita income and productivity.

Catch-Up Opportunities Clarified
Start with the rich leader country and call it the US if you want. Given existing technologies that don't radically change --- a key assumption, please note --- the rich leader will have higher levels of capital accumulation than the follower countries and hence run into diminishing returns in its growth rate of per capita income far faster than they will. The reason? Increasing the number of steel mills from 1 to 2 might double steel output for any country with a new steel industry; adding 1 more to 12 steel mills might lead only to 8% more output, yet the cost of a steel mill remains the same. Similarly, the rich leader's firms --- being on the technological frontier --- have to spend a lot of capital in R&D, much of it leading to a dead-end or at best some incremental improvements in output . . . again, always assuming technologies aren't radically changing.

Enter the faster growth rates of the follower countries in the convergence club.

At lower levels of cumulative capital and hence higher rates of return on each dollar invested, they have far more investment opportunities at lower levels of cumulative capital. With higher marginal rates of return on their investments, their capital accumulation should grow rapidly without incurring diminishing returns --- at any rate, possibly for decades. They also have lower-wages and can import the technologies developed by the rich lead country and then diffuse them throughout their economy. No less important, they will likely be able to acquire the advanced technologies created with enormous expense by the firms of the rich lead country at much cheaper prices: either through licensing agreements with the lead country's firms, or through multinational implantation, or by reverse engineering (dismantling technologies embedded in machines, then rebuilding them in ways that skirt patents), or --- a Chinese specialty these days --- by outright piracy. In the upshot, they can build a new steel mill --- their first, second, or third, say --- with the most advanced technologies available; and if their managers, engineers, skilled workers, and others have the right know-how, they could do the same, in principle, with television sets, VCR's, pc's, or pc-peripherals and software.

More Catch-Up Stuff

There are other catch-up processes as well that can accelerate the rate of growth in GDP and per capita income.

Take productivity. Apart from technological progress, there are other fertile ways that a follower country can increase its efficiency and levels of productivity . . . especially at the outset. In particular, as new, more up-to-date industries implant themselves in their countries --- whether by importing technologies from the rich leader country or benefiting from its multinational firms locating there --- a dynamic follower country can reallocate a lot of redundant, low-productive labor into the more promising industries, to the benefit of overall national productivity growth. In the early 1980s, China's labor productivity leapt ahead precisely by reducing its labor force in agriculture --- roughly 65% of the population then --- and letting the former peasant farmers find jobs in the new, rapidly growing industrial firms owned privately or by towns and country-villages. Then, too, the follower country's work force is likely to be willing to work harder and for longer hours than its counterparts in rich countries. Simultaneously, its firms can also import "best practices" in management and business organization developed by the lead country, adapting them to local conditions. One other big opportunity is available as well, especially for follower countries with small domestic markets. As Taiwan, Singapore, and Hong Kong have shown, the ability to export into large rich economies allows their up-to-date firms to enjoy returns-to-scale and hence to compete on equal terms with the giant firms in the rich leader country (or countries in the case of Pacific Asia two decades ago

What Follows?

Thanks to all these advantages and opportunities of "relative backwardness" and catch-up processes, dynamic follower countries should be able to grow faster and continue to converge on the slower growing lead country's levels of productivity and per capita income.

Their rate of catch-up growth will, of course, begin to slow down as the follower countries close the gap in levels of productivity and per capita income and themselves approach the technological frontier. Two reasons bulk large here. First, the closer any one follower country's firms approach the frontier, the more they will have to rely increasingly on their own costly R&D and ability to compete on even terms with the rich leader country --- whether in its domestic market or in markets abroad. And second, diminishing returns will invariably begin to set in at some point for any follower country as its own capital stock grows and offsets more and more of its own firms' investment levels. The 2nd steel mill, remember, might double steel output; the 12th might bring only 8% increase in steel output for the same amount of investment capital.

The overall result, at any rate for all the advanced industrial countries --- the ones we're concerned with here? All of them will, in principle, tend to end up at the same technological frontier and enjoy similar levels of productivity and per capita income.

The Reality? Has Convergence with the US Occurred?

As the table below shows --- reproduced from a buggy article of May 6th, 2005 --- there's been no convergence whatever over the last century for West Europe as a whole. For Japan --- barely industrializing in 1905 and very poor still --- the record is more complex: it did engage in rapid catch-up growth after 1945 and continued doing so until the late 1980s. By then, the huge American lead had been cut to around 85% of American per capita income. People marveled. They even talked about Japan surpassing the US in per capita income by 2000, then pushing on at a faster growth rate until its national GDP --- for 120 million people --- would surpass the US on that score too. The outcome? Japan has endured 14 years of stagnant growth, and today its per capita income has fallen back to around 55% of the US's, roughly where it was in 1970.

Untitled Document
Per Capita Income 1905 - 2004
  1905 1950 1990 2005*
USA 4,565 9,561 23,740, 40, 650
W. Europe 3,054 4579 16,872 26, 437
Japan 1,157 1,921 18,789 28, 230
Germany 3,104 3,810 18,596 27, 381
Britain 4492 6, 930 19,817 27, 490
Sources: Angus Maddison http://www.eco.rug.nl/~Maddison/ for the data in the first three columns; Bureau of Economic Analysis; CIA World Factbook; OECD.

*The first three columns of per capita income are taken from Maddison impressive work (a real achievement, worthy of a Nobel prize), with Maddison using a 1990 constant dollar that he converts into Purchasing Power Parity (PPP) back over the centuries. For 2004, by contrast, the buggy prof has used a later PPP-converter --- based on the US$ for 2001 --- which is found at the BEA web site. Hence the reason for the big jump in the per capita income for all the countries compared to Maddison's 1990 figure.

Note that this is no sleight-of-hand. By using an updated dollar, Prof. Bug is able to draw on the more current figures for GDP and per capita income that are found at the BEA, the CIA World Factbook, Eurostat, the OECD, and the World Bank. Needless to say, the real percentage gaps in per capita income across these countries and regions remain what they would be if Maddison had extended his figures through 2004 .

Note the striking fact here. Contrary to all forms of mainstream economic growth, each of which variants postulate some form of convergence between dynamic follower countries and the lead country on the technological frontier, there has been no closing of the gap with the US by West Europe for a good century! As for Japan, yes it has closed the gap, but only because it was so poor in 1905. Essentially, it entered the 1950s with about 30% of the levels of US per capita income and productivity, closed on them impressively for about 40 years until the gaps were only about 15%, and then fell back abruptly to roughly where it was in the late 1960s.

One more point. In his more recent work, Maddison notes that the level of American per capita income and productivity surpassed Britain's at an earlier date, some time in the 1890s. Other economic historians find the US lead emerged in the 1880s.

A Supplemental View

Here's a more detailed look at what has happened to the gap between the US and the other major industrial countries since 1955, a good starting point when West Europe and Japan had recovered from WWII's devastation and were caught up in rapid catch-up growth . . . a trend that would last for roughly 30-35 years. Since then, the US has forged ahead again, and Canada, Japan, and the major EU countries are roughly where they were in 1970 compared to the US in per capita income ratios.

Real Per Capita Income As A Percent of the U.S. Level

Untitled Document
  1955 1960 1970 1980 1990 2004
USA 100 100 100 100 100 100
Canada 72 73 78 92 95 77
Germany 53 66 73 78 79 67
Japan 21 30 56 66 79 69
France 49 59 71 77 77 68
UK 64 69 66 66 73 68
Italy 37 46 58 67 69 66

Sources: OECD, CIA WorldFactbook 

So We're Back To Square One: What Underlies The Gap?

The Problem For Mainstream Growth Theories

What explains the failure of convergence catch-up processes to close the per capita income gap with the USA for a good century now for West Europe as a whole, and for the reversal of catch-up growth over the last 30 years for Japan?

One big hint appeared earlier in the buggy analysis of catch-up processes: it assumes that technologies are given, with no breakthroughs in new revolutionary technologies that the lead country might be pioneering and that the others --- the follower countries --- can't quickly emulate.

That's a big drawback of standard neo-classical growth theory of the Solow sort --- which agrees that technological progress will drive a country out of a steady-state of per capita income growth . . . without, however, being able to explain how and why technological progress occurs or in which countries. In statistical terms, the theory treats technology as exogenous: growth theory: it's the key driving force of long-run economic growth, but it operates from outside the model's explanatory variables of capital accumulation, labor force growth, and the quality of the labor force over time

But note: even more recent endogenous growth theory --- which does have technological progress has an explanatory variable --- still has a big problem when it comes to explaining why the US should be the richest country in per capita income for a century or more now.

The theory has the advantage of trying to account for technology's key impact on long-term growth: countries will grow richer as technology developed elsewhere spreads to their own economies and their own firms make good use of it. By the same token, it even explains the failure of countries around the world to converge in levels of productivity and per capita output: tersely put, their different levels on these scores are due to technological gaps that can't be easily bridged. All these are sound insights. For all that, it can't account for the huge gap the US has enjoyed --- despite some ups and downs in its lead, especially from 1945 until 1975 --- over the other industrial countries in per capita income for over a century now. And that persistent gap, as great over West Europe today as it was in 1905, is what needs to be explained.

So What Then Does Explain It?

The buggy answer: a combination of any industrial country's institutions and dominant political ideologies, which --- over history --- will shape any one country's economy and above all the relations between its state and its markets and hence the logic of political maneuvering and calculations as opposed to market incentives and adaptability to radical or turbulent change: whether found in revolutionary new technologies, globalizing forces, the emergence of dynamic competitor countries as in Pacific Asia, or even major political and diplomatic dislocations right down to large regional or global wars.

In the upshot, different kinds of capitalisms will emerge --- above all, in the industrial world these days, various forms of statist-capitalism that exist in the EU-15 and throughout Pacific Asia and, alternatively, market-oriented capitalism that prevails in the English-speaking countries . . . above all, in more pronounced form, in the US.

Again and again, since the early 1980s, the English-speaking model has outperformed the statist-capitalisms of the advanced industrial countries --- meaning Japan and the EU-15 Continental countries. More to the point, the American variant of that model has outperformed the West European statist-capitalisms for well over a century, and for that matter --- as we just saw --- Japan and West Europe since 1975.

Agreed, these points need to be clarified. And the best way at this juncture is to note what some recent growth theory has tried to do with the role of institutions in explaining economic growth, at any rate for developing countries. (Note quickly in passing, though, that if you're interested in what we mean by institutions --- political, administration, legal, financial, business organization, and the like --- click on this buggy link. This link adds some more clarifying remarks. As for the concept of ideologies and the various types, it too has been clarified in a variety of earlier buggy articles: click here for the one that's the most encompassing, with some diagrams as added illumination Be sure to look at both diagrams

More Recent Growth Theory Does Try To Grapple With Institutions, But . . . Unsatisfactorily

Enter Institutions

Starting roughly in the late 1990s, some growth theorists did begin to recognize the importance of not just proper government policies in creating the conditions of sustained long-term growth --- such as fiscal and monetary discipline, privatization of nationalized industries, openness to international trade, and the like: all policies embodied in the Washington Consensus a decade earlier --- but of institutions as equally important, or even more so. (In a burgeoning literature, the two that will be easier for a general visitor to this site to grasp are by Dani Rodrik. see Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development (2002) and Getting Institutions Right (2004), both of which are available at his web site. ) The turn toward institutions by certain theorists marks a big step in advance over earlier growth theories, particularly since the role of institutions as a deep determinant of sustained long-term economic growth and convergence on the rich lead (or leader) countries can be put against the other two candidates for deep determinant influences: 1) geography, tropical countries having too many disadvantages compared to those further from the equator; and 2)openness to the global economy in trade and investment.

Even so, lots of problems remain --- particularly in accounting for our main concern here: why the US has been the rich lead country for well over a century now, with no convergence at all showing up in that long period for West Europe as a whole, and for Japan only down to 1975 . . . since which time it has fallen back to less than 70% of the US level of per capita income (and lower still for labor productivity).

But Big Problems

Specifically --- without getting too pedantic --- the drawbacks in the recent burgeoning literature here are several in number, three of which are especially relevant for us:

1. Institutions are treated too narrowly in terms of their good outcomes: a rule of law, protection of private property, limited corruption, or constraints on the role of the executive. Worse, when factored into statistical models, the standard measure is even more narrowly defined --- as in a couple of recent papers by Daron Acemoglu and co-authors, which looks at European colonies and finds that European settler immigration and longevity (mortality rates) can proxy good institutions. Operationalizing institutions will always remain a big challenge, with predictably lots of disagreement among theorists.

2. Those theorists stressing institutions deal only with developing countries, to determine which ones qualify for membership in the convergence club and those that don't. It's as if all advanced industrial countries have equally good institutions --- political, administrative, legal, financial, business organization, educational, and so on. That isn't just an omission; it's a serious problem in theorizing and ignores, among other things, different kinds of advanced capitalisms.

As we've argued, two kinds of capitalisms can be distinguished among the advanced industrial countries --- the EU-15, Japan, the US, and the rest of the English-speaking countries: statist-capitalism and market-oriented capitalism.

In the former, politics trumps economics, and the logic of political calculations and maneuvering dominates the logic of market incentives and adaptability to swift changing conditions, often turbulent and full of dislocations . . . whether those conditions derive from radical changes in technologies or from big shifts in economic dynamism around the world or from other fast-moving globalizing forces such as multinational activity or outsourcing of jobs. The result? The economic status quo is hard to alter and make it adapt fairly quickly --- or even at all --- to these turbulent.

In the alternative form of capitalism --- embodied most vividly by the US --- market-oriented capitalism loosens considerably the ties between state and economy and puts clear limits on political calculations and maneuvering as determining economic activities . . . above all, when it comes to adapting to the sorts of turbulent, fast-moving conditions just mentioned.

3. Finally, institutions are not only defined narrowly --- and even more narrowly still when coded into a standard measure for statistical treatment --- they are also, as it happens, treated in isolation from political ideologies and, if you want, more generally, cultural influences as well such as prevailing social norms, social values, social networks, social trust or distrust, social capital, and so on. We prefer here to focus on ideologies, with culture itself --- defined this way --- not so much unimportant as vague and very hard to pin down, not just for quantitative treatment, but also even as an explanatory concept. ( See M.G. Quibria, The Puzzle of Social Capital: A Critical Review (Asian Development Bank) for one big exception.)

Ideologies, by contrast, are not only significant in shaping the kinds of economic systems countries may have --- whether capitalist or not, and (if capitalist) whether statist-capitalism or market-oriented capitalism --- but are easy to observe and study in depth: they are embraced by political parties and show up in the kinds of institutions and links between states and markets as well as in specific government policies: regulatory, redistributive, fiscal, monetary (if the government controls the central bank), trade, regional, educational, and the like.

Our Conclusion?

When it comes to using institutions and relating their nature and behavior within any country to account for its overall economic performance --- especially in the advanced industrial countries, and in particular why the US has outperformed all its rivals among them for over a hundred years --- the recent developmental literature on institutions is of little help. All of which brings us to the . . .



No Need To Repeat Everything

The buggy take on all this matter stretches back now over 9 articles all the way to December 2004, so there's little to be gained from repeating the key points. Consider it enough to note the US's unique institutional system --- in both economics and politics --- is directly related to the pragmatic ideological heritage that mark this country's history for the last 216 years, except of course during the civil war. That heritage immunized the American left to Marxist and other socialist appeals, something that we've grappled with over several of those 9 earlier articles. On the right, there has been nothing equivalent to the statist conservatisms found all over Japan and West Europe --- even in the Tory wing of the British Conservative Party.

True, the causal nexus here is hard to separate. The influences ran both ways: from institutions to ideological outlooks and vice versa.

Consider briefly a few examples. Certain institutional trends like the protection of private property and its uncommonly wide distribution in the US during the 1800s and later --- always comparatively viewed --- predate the Constitution itself, even as it worked against socialist appeals that surged in Europe and later Japan from the mid-19th century on. Similarly, a large and dynamic middle class --- full of bold, often ruthless and grasping inventors and entrepreneurs --- meant that American industrialization needed little of the state-guided role that dominated in Japan or the Continental European countries . . . the state almost always ruled in those countries by elites of the right, moderate or otherwise, to which left-wing parties (socialist or otherwise) had to accommodate themselves before 1945. The limited state role, in turn, was reinforced by Constitutional law: strong federalism and a division of powers at the center, all of which not only worked against a strong central government of the sort that emerged everywhere in West Europe and Japan before WWII (even in Britain after 1918), but moderated any strong statist tendencies that conservative parties in this country might have been inclined too.

In the end, though, the causal interactions don't matter that much for our purposes. What does matter is the . . .

Resulting Complex of Institutions and Ideological Heritages:

As we noted ---with one exceptional breakdown, the Civil War to destroy slavery --- both the left and right eschewed the kinds of statist ideologies that flourished all over Europe by the late 19th century: Marxist socialisms of various kinds on the left and hierarchical statist beliefs on the right that had long roots in European feudalism and the reactions to the French and Industrial Revolutions in the late 18th and early 19th centuries.

In their place, the American right adopted a pragmatic approach to free-market capitalism . . . including the need, starting in the late 19th century and intensifying in the presidency of Teddy Roosevelt, to develop a limited regulatory apparatus to deal with the new giant corporations that had blazed into existence by 1900: not least, anti-monopoly legislation, a Federal banking system, and even some environmental protection while opting for free trade openings. Similarly, the American left not only renounced Marxist socialisms, but socialist appeals of any sort. In their place, it entered the 20th century as a pragmatic reformist party, accepting the basics of American capitalism but pushing for more regulatory responses to giant corporate power, just as it worked hard in cooperation with moderate Republicans in the Progressive era to clean up and modernize city government all around the country. Not that the progressive agenda stopped there. It went much further. Progressives in both the Democratic and Republican parties made sustained efforts also made to bring a centralizing Federal government and state governments closer to the grass-roots electorate.

The New Deal of Franklyn Roosevelt and later the Great Society of Lyndon Johnson led to the creation of the modern, fairly modest welfare-state in the US --- modest in scope, not in expenditures: above all, unemployment insurance, social security, and Medicare for the aged and Medicaid for the poor. Welfare for families with dependent children was also added in Johnson's era, with disastrous results: by the mid-1990s, a definitive study put out by the National Academy of Sciences found that every 10% increase in such welfare entailed an 11% increase in illegitimacy. It turned out to be the single biggest cause of the abrupt decline of the two-parent black family, which in the early 1950s was scarcely distinguishable from the two-parent white family as a percentage of the total: about 88% for both. By the mid-1990s, 70% or so of black children were born out of wedlock, usually to poorly educated mothers with no father present or offering financial support. The first result? While two-parent black families earn essentially the same level of income as their white counterparts --- taking into account age and education --- the level for African Americans overall is about 60%.

Fortunately, the second result will help to reverse this trend in the future, however slowly: the bi-partisan legislation in the Clinton presidency to reform the welfare system and reign in the length and benefits of eligibility. Overwhelmingly, Democrats went along with the reform, and a Democratic president signed the new legislation.

Other Signs of Pragmatism and Its Benefits for American Institutional Development: Grass-Roots Democracy That Has No Parallel Elsewhere

Before World War II, a series of unique institutional innovations took root that have no parallel at all in the EU or Japan, all intended to give average citizens more say in government: the referendum, the initiative, the recall election of a governor --- as happened in California in 2003 --- and direct primaries for selecting political leaders among them. (Switzerland, it needs to be added immediately, incorporates the first three instruments in its own political system.)

Come to that, there's also no equivalent abroad in the way we hold the judicial system politically accountable: all judges and prosecutors as well as country sheriffs are elected directly at the local and state levels, while their counterparts --- all the way up to the Supreme Court --- are elected indirectly by the need for Congressional approval. Just as, recall, there is no equivalent anywhere in West Europe or Japan to the usual legislative powers that Congress enjoys here . . . in shaping legislation, in approving it, in matters of budget control, and not least in being able to monitor and hold accountable the executive. You think this is an exaggeration? Ask Richard Nixon, who resigned in 1974 to avoid impeachment. Ask the National Security advisers and others around Ronald Reagan who were all found in contempt of Congress during the Iran-Contra affair in the mid-late 1980s. And ask Bill Clinton, who narrowly escaped full impeachment when the House voted on it in 1999.

And if you want, ask George W. Bush why his scare-tactics on social security have all but collapsed both in public opinion and among Congressional Republicans who are, after all, mainly interested in re-election next year or in 2006.


What Follows For Economic Institutions and Structures?

Here we can be brief --- in part, because the previous two clues in this buggy series on ideologies and economic performance dealt at length with the outcomes, but in part too because the next article in this series --- a direct follow-up of the current argument --- will unfold a new twist or two into those earlier observations, using a Schumpeterian analysis. That article, to repeat what was said at the outset today, is already done, lacking only the HTML formatting before it's published.

Replies: 1 Comment

I really enjoyed reading this article. I'm a Law student in the University of São Paulo (Brazil), and I found it while researching for my thesis on Notification of Regional Trade Agreements in the WTO.

I really was wondering if you could send me some bibliography on the theories commented, since I'm in a deadlock in describing the interest a large developed country has in maintaining an open international trade structure. I would really appreciate if we could talk by e-mail.

Yours sincerely, Vinicius

Posted by Vinicius Tersi @ 08/09/2005 12:21 PM PST