Why did America get rich?

We published a piece last week at HBR.org by Martin Feldstein, the widely respected Harvard economist and conservative, in which he lays out ten reasons why the U.S. remains richer than its peers. It just so happens that at the same time I was reading American Amnesia, a defense of government and the mixed economy, by political scientists Jacob Hacker and Paul Pierson. And they offer their own ten reasons why economies grow. I thought it’d be instructive to compare them.

Here’s Feldstein:

  1. An entrepreneurial culture.

  2. A financial system that supports entrepreneurship.

  3. World-class research universities.

  4. Labor markets that generally link workers and jobs unimpeded by large trade unions, state-owned enterprises, or excessively restrictive labor regulations.

  5. A growing population, including from immigration.

  6. A culture (and a tax system) that encourages hard work and long hours.

  7. A supply of energy that makes North America energy independent.

  8. A favorable regulatory environment.

  9. A smaller size of government than in other industrial countries.

  10. A decentralized political system in which states compete.

Here’s Hacker and Pierson, on what they consider factors for why nations get rich that “would make most analysts’ lists”:

  1. private property rights and legally secure contracts backed up by an independent legal system;

  2. a well-functioning financial system, including a central bank to provide a common currency, manage the macroeconomy, and serve as lender of last resort;

  3. internal markets linked by high-quality communications and transportation infrastructure;

  4. policies supporting and regulating external trade and financial flows;

  5. substantial public investment in R&D and education;

  6. regulation of markets to protect against externalities, such as pollution, and help consumers make informed decisions;

  7. public provision of goods that won’t be provided at all or sufficiently if left to markets, such as public health;

  8. inclusiont o f all sectors of society in the economy, so that human capital isn’t wasted;

  9. reasonably independent and representative political institutions, so that elite capture and rent seeking aren’t rife; and

  10. reasonably capable and autonomous public administration–including an effective tax system that citizens view as legitimate — so that items 1 through 9 can be carried out in relatively efficient and unbaised ways.

These are very different lists, and they mirror America’s political divisions in fairly predictable ways. They disagree over the size of government, for example, and about unions.

Yet, there are some key themes. Scientific research makes both lists, as does education and the role of human capital in general. Effective government shows up on both lists, though the authors disagree about how to encourage it. A financial system that allocates capital well makes both lists, though again with different points of emphasis. Feldstein would likely agree that private property and secure contracts are critical; and I suspect Hacker and Pierson would agree that entrepreneurship belongs on the list.

A couple of years ago I posted about “How to promote economic growth, in one paragraph” and unsurprisingly there’s considerable overlap between that paragraph — by McAfee and Brynjolfsson — and the one I just wrote. In that paragraph, they emphasized education and investments in technology. Like Hacker and Pierson, they highlighted infrastructure.

It’s sometimes easier to talk about economic growth, I think, if you put size of government to the side to begin with. Economies grow largely because of the spread of new and useful ideas. Those ideas are often produced by government-financed research and disseminated by entrepreneurs. Every part of that process depends on people, which means that investments in education are critical. The role of finance is largely to fund that process.

If we can agree on that much, then we can debate the role of government with reference to it. As the two lists I started with show, there are aspects of economic growth where experts disagree. But it’s easy to overstate the disagreement. In fact, as McAfee and Brynjolfsson wrote in that Foreign Affairs piece a few years back, in terms of promoting growth “there is a near consensus among serious economists about many of the policies that are necessary.”