Understanding the Great Changes in the World: Gaining Ground and Losing Ground since World War II

Abstract

This lecture interprets the great tectonic shifts in the global economy that I have witnessed since I began studying economics in the 1950s. There are three stories of gaining ground ("catching up") on the world's lead economy and one of losing ground. This experience can help us to get right our international macroeconomics: progress and prosperity in a country are mainly driven by envisaged openings for innovation or imitation of new things, not human capital formation or tax cuts. The experience also help us get right the political economy of economic performance: dynamism is not required for episodes of high growth: Any economy can grow fast up to its potential and enjoy temporary prosperity in the effort. Yet it cannot pull up to the productivity level nor sustain the prosperity of the lead economy without having the latter's dynamism. Dynamism requires that innovation be ample, aimed in good directions and finding managers and consumers open to novelty. Some dissenters deny the premise, claiming that the Continent could not have its "glorious years" of rapid growth and high activity without commensurate dynamism: the two are yoked together. They view that rapid growth in Germany, France and Italy as the fruit of economies that in the '40s got back their dynamism back when Ludwig Erhard unshackled them from the corporatist institutions erected in the interwar years and that lost their dynamism in the '70s when interest groups reacquired their stranglehold on economic change. I take a simpler view. The glorious years were the result not of a brief rebirth of dynamism but rather the fortunate result of one-time opportunities to pluck at low cost the technologies and commercial successes developed in the U.S. and elsewhere overseas. My view need not suppose that the Continent has had much dynamism at any time since corporatist ideas took root in the late 1920s--only enough to imitate or adapt overseas advances, plus long enough study of them. For the moment, such advances may be still be so new that such a modicum of dynamism is not yet sufficient to spark imitation.