Stanford University

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Economists see 'mosaic' of factors contributing to prosperity

STANFORD -- America's rapid rise to world economic preeminence between the Civil War and the mid-1970s was the result of a unique set of conditions that no longer prevail, Stanford economists say in a new book, The Mosaic of Economic Growth, from Stanford University Press.

That doesn't mean, however, that hard times are inevitable or that another country's improved standard of living is at America's expense, say the editors in their introduction to 15 essays by 23 economists. Nearly all the authors are from Stanford, where issues of economic growth have been of increasing interest to professors and students since the 1980s.

The conditions that led America to unprecedented growth in prosperity included "the best market, the best resource base, the best developed higher education and technological infrastructure," according to Gavin Wright, a Stanford professor of economic history who
co-edited the book with Ralph Landau and Timothy Taylor for the Stanford Center for Economic Policy Research.

Now, Wright says, "there are any number of countries who are more or less our match, and the bases for technological performance have changed, so that it is not linked to conditions within one country." This theme is developed in detail in the opening essay, "Convergence and Deferred Catch-up," by economic historians Moses Abramovitz and Paul David.

The conclusion some popular writers have drawn from this situation is that America is slated for hard times - the "end of affluence," as journalist Jeffrey Madrick referred to it in the title of his recent book. The conclusion Wright draws is that "defining good times in terms of an international horse race - how we compare to the Japanese or the Germans - is out of date. That doesn't mean our standard of living can't improve. This image of nationalistic rivalry as the heart and soul of economic growth is mistaken. That, I would say, is an emerging view of economic growth among economists at Stanford."

Among those economists is Lawrence Lau, whose essay in the book finds a different pattern of growth in Asian countries than in America and Western Europe. Since the mid-1950s, it has been fairly well accepted among economists that countries grow initially by putting more people to work and giving them more tools.

To sustain that growth, however, they take advantage of new technology to raise the productivity of the other contributing factors of production - capital and labor. Lau's study has found that, so far, the Asian "tigers" - Hong Kong, Singapore, South Korea and Taiwan - have not shown evidence of increasing "total factor productivity," the ratio of outputs to inputs. The growth is entirely attributable to a massive infusion of capital per worker.

Lau's research was part of the basis for a recent, controversial Foreign Affairs article by Stanford economist Paul Krugman, in which Krugman dismissed as myth the widely held notion that Asia will be the next center of the world economy. Lau's own conclusion in this book is that all nations need pro-growth policies that promote three things: capital investment, education, and the development and adoption of new labor-enhancing technology.

Other essays in the book include a surprisingly positive outlook for the world's prosperity from Stanford Business School Professor Emeritus Henry Rowen, an economist who has served as assistant secretary of defense and chairman of the National Intelligence Council. Rowen concludes that long-term forecasts for lower population growth, higher investment in education and more diffusion of technology, as well as government policies permitting direct foreign investment, should lead to an improved standard of living for many of the world's most populous countries. Because prosperity has tended to be correlated with stronger democratic governments and democracies have not fought many wars against each other, Rowen writes that he also holds hope for a more peaceful world.

Most of the economists featured in the book, Wright said, now see technology as a far broader concept than the narrow sense in which engineers use the term. That is because a wide range of recent studies has shown that no single theory can account for the differences in the capacities of companies, communities and countries to take advantage of new technological developments. As a result, social characteristics that either promote or hamper the deployment of technology to aid economic growth need to be better understood, he said.

Some of the factors examined in this book include the impact of litigation on business growth in several states; the role of derivatives in providing capital for investment; the macroeconomic conditions that affect the cost of investment capital in various countries; and the potential negative impact of the baby boom's retirement on capital available for investment in the world and in the U.S. economy. (The chapter on litigation was co-authored by newly elected Congressman Tom Campbell, a Stanford law professor who is also an economist.)

In their introduction, the editors warn that concerns in the United States about lower economic growth since 1973 have led to an exaggerated or misplaced emphasis on competitiveness - the significance of foreign competition as a factor in America's economic

During most of human history, they write, countries did seek to improve their wealth by plundering or seizing their neighbors. Since industrialization, however, countries have learned to improve their standard of living without warfare. In the regime of international economic trade today, "progress abroad does not harm the United States" population generally, although particular firms and industries can be threatened by foreign competition, just as they are by domestic competition.

"When the concept of competitiveness is used appropriately," they write, "the definition amounts to this: the ability to sustain an acceptable rate of growth in the real standard of living of the population, while avoiding social costs such as high unemployment, excessive environment damage or extremes of inequality in the distribution of income.

"Furthermore, current growth must be achieved without reducing the growth potential in the standard of living of future generations. This last condition constrains borrowing from abroad or incurring excessive future tax or spending obligations to pay for the present generation's higher standard of living."



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