market competition in Britain starting in the 1980s. The success was dramatic,
and to its credit, "New Labour" under the leadership of Tony Blair and
Gordon Brown embraced the new freedoms, tempering their party's historical
Fabian socialist ethos with a fresh emphasis on opportunity. Britain has
welcomed foreign investment and takeovers of British corporate icons. The
current government recognized that aside from issues of national security
and pride, the nationality of British corporate shareholders has little impact
on the standard of living of the average citizen.
Today London is arguably the world's leader in cross-border finance,
though New York, by financing much of the vast economy of the United
States, remains the financial capital of the world. London's restoration of
its nineteenth-century dominance of international markets began in 1986
with the "Big Bang" that significantly deregulated British finance, and there
has been no turning back. Inventive technologies have dramatically improved
the effectiveness with which global savings have been employed to
finance global investment in plant and equipment. That improved productivity
of capital has engendered increased incomes for financial expertise,
and UK finance has prospered. The large tax revenues that have emerged
have been used by the Labour government to counter the income inequality
that is an inevitable by-product of increasing technologically oriented
financial competition.
The per capita GDP of the United Kingdom has recently outdistanced
those of Germany and France. Britain's demographics are not so dire as
those of the Continent, though its education of its children has many of
the shortcomings of the American system. If Britain continues its new
openness (a highly reasonable expectation), it should do well in the world
of 2030.
Continental Europe's outlook will remain unclear until it concludes it
cannot maintain a pay-as-you-go welfare state that requires a growing population
to finance it. With its birth rate well below its natural replacement rate
and few forecasters anticipating a recovery, continental Europe's workforce,
unless heavily augmented with new immigrant workers, is set to decline, and
its elderly dependency ratio to rise. Europe's appetite for increased immigra
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tion, however, seems limited. To counter all this, Europe's productivity
growth rate would have to accelerate to a pace that to date has seemed out
of reach. Recognizing this problem, the European Council in 2000 advanced
an ambitious program, the Lisbon Agenda, to bring the continent's state of
technology to world leadership. But the program languished and has since
been put on hold. Without an increase in productivity growth, it is difficult
to see how Europe can maintain the dominant role it has played in the world
economy since the end of World War II. But the emergence of new leaders
in France, Germany, and Great Britain may be a signal that Europe will
strengthen its commitment to the goals of Lisbon. The seeming convergence
of many of the economic perspectives of Nicolas Sarkozy, Angela Merkel,
and Gordon Brown makes a European resurgence appear more likely.
Japan's demographic future, if anything, appears even less promising
than that of Europe. Japan is strongly resisting immigration, except by those
of Japanese ancestry. Its level of technology is already world-class, so its upside
potential for productivity growth is presumably as limited as that of
the United States. Many forecasters see Japan losing its status as the world's
second-largest economy (valued at market exchange rates) sometime before
2030. The Japanese are not likely to find that outcome to their preference
and may well take steps to counter it. In any event, Japan will remain
wealthy, a formidable force in both technology and finance.
Russia has vast natural resources, but it is plagued by a declining population,
and as I noted in chapter 16, the nonenergy sections of its economy
are at risk from the effects of the Dutch disease. Its encouraging embrace
of the rule of law and respect for property rights has given way under
Vladimir Putin to selective enforcement of the law based on nationalist
expediency, a negation of the very basis of the rule of law. Because of its
energy resources, Russia will remain a formidable player on the global
economic scene. But unless it fully restores the rule of law, the nation is
unlikely to create a world-class economy. As long as Russia's energy resources
remain abundant and their prices high, per capita GDP will likely
continue to rise. But Russia's per capita GDP is less than a third (measured
by purchasing power parity) of that of the United States, and
thus Russia has a long way to go before it joins the club of developed
nations.
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India has great potential if it can end its embrace of the Fabian socialism
that it inherited from Britain. It has done so for its export-oriented,
world-class high-tech services. But this kernel of modernity is only a small
part of the sprawling economy of India. Even as tourism-associated service
industries prosper, fully three-fifths of India's workforce toil in unproductive
agriculture. While India is an admirable democracy—the largest in the
world—its economy despite important reforms since 1990, remains heavily
bureaucratic. Its economic growth rate in recent years is among the
highest in the world, but that is off a very low base. Indeed, India's per capita
GDP four decades ago was equal to that of China, but is now less than
half of China's and still losing ground. It is conceivable that India can undergo
as radical a reform as China and become world-prominent. But at this
writing, its politics appear to be leading India in a discouraging direction.
Fortunately, though India's twenty-first-century service enclave is small, its
glitter is just too evident to dismiss. Ideas do matter. And the nation is
bound to be attracted by twenty-first-century ideas as well as twenty-firstcentury
technology India may find it useful to follow the British, whose
evolution seems to have melded the free-market notions of the Enlightenment
with the sensibilities of the Fabians.
Among the challengers to America's world economic leadership, that
leaves populous China as the major competitor in 2030. China was more
prosperous than Europe in the thirteenth century. It lost its way for many
centuries, only to embark on a remarkable renaissance as it transformed itself
on a vast scale virtually overnight. China's embrace of free-market competition,
first in agriculture, then in industry, and finally in opening itself to
international trade and finance, has placed this ancient society on the path
to greater political freedom. No matter what official rhetoric may be, the
tangible lessening of power from one generation of leaders to the next gives
hope that a more democratic China will displace the authoritarian Communist
Party. While some authoritarian states have for a time successfully
adopted competitive market policies, over the longer term the correlation
between democracy and open trade is too stark to ignore.
I do not pretend to be able to foresee with certainty whether China
will remain on its current path toward greater political freedom and increasing
prominence as a world economic power, or whether, to retain the
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political control it is losing day by day to market forces, the Communist
Party will seek to reestablish the economic rigidity that prevailed prior to
Deng Xiaoping's bold reforms. Much of how the world will look in 2030
rests on this outcome. If China continues to press ahead toward free-market
capitalism, it will surely propel the world to new levels of prosperity.
Even as nations as mighty as the United States and China vie for economic
supremacy in that new world, they may find themselves partially
bending to a force more powerful still: full-blown market globalization. The
control of governments over the daily lives of their citizens has dramatically
waned as market capitalism has expanded. Gradually, without fanfare,
the voluntary promptings of individuals in the marketplace have
displaced many of the powers of the state.* Much regulation promulgating
limits to commercial transactions has quietly been dismantled in favor of
capitalism's market self-regulation. The underlying principle is simple: You
cannot have both the markets and a government edict setting the price
of copper, for example. One displaces the other. The deregulation of the
U.S. economy starting in the 1970s, Britain's freeing of enterprise under
Thatcher, Europe's partial efforts in 2000 to start building a world-class
competitive market, the embrace of markets by most of the former Soviet
bloc, India's struggle to disengage from its stifling bureaucracy, and, of
course, China's remarkable resurgence—all have reduced governments' administrative
sway over their economies, and hence their societies.
I have learned to view economic outcomes over the long run as being
determined largely, but not wholly, by the innate characteristics of people
working through the institutions we build to govern the division of labor.
The original idea of people's specializing to their mutual benefit is buried
too far back in antiquity to identify its source, but such practices inspired
John Locke and others of the Enlightenment to articulate notions of inalienable
rights as the basis of the rule of law to govern societies. From that
hotbed of liberated thought came the insights of Adam Smith and his colleagues,
who discovered the basic principles of human behavior that still
govern the workings of the productive forces of the marketplace.
*A significant segment of postwar government political control has been implemented through
economic measures.
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The last decade of unprecedented economic growth in much of both the
developed and the developing world is the ultimate proof of the dysfunction
of a more than seventy-year-long economic experiment. The Soviet bloc's
stunning collapse led to or accelerated the abandonment of central planning
throughout the world, with China and India in the vanguard. The evidence
of increasing property rights, and the rule of law more generally leading to
increasing levels of material well-being is extraordinarily persuasive. Formal
statistical proof is inhibited by the difficulty of measuring quantitatively subtle
changes in the rule of law. But the qualitative evidence is hard to deny.
The widespread dismantling of much of the apparatus of state control and its
replacement with market-based institutions appears invariably to improve
economic performance. Over the past six decades, such improvement has
been striking in China, India, Russia, West Germany, and Eastern Europe, to
name only the major examples. In fact, the instances in which expansion of
free markets, property rights, and the rule of law didn't contribute to economic
well-being, and instances where increased central planning enhanced
economic well-being, are few. Nonetheless, the rule of law is only a necessary
condition, not a sufficient one, for sustained prosperity. Culture, education,
and geography each may play a crucial role.
Why is this relationship between the rule of law and material well-being
seemingly so immutable? In my experience, it is rooted in a key aspect
of human nature. In life, unless we take action, we perish. But action risks
unforeseen consequences. The extent to which people are willing to take
risks depends on the rewards they think they may gain. Effective property
and individual rights in general decrease uncertainty and open a wider
scope for risk taking and the actions that can produce material well-being.
Inaction produces nothing.
Rational risk taking is indispensable to material progress. When it is
impaired or nonexistent, only the most necessary actions are taken. Economic
output is minimal, driven not by the calculated willingness to take risks but
often as a result of state coercion. The evidence of human history strongly
suggests that positive incentives are far more effective than fear and force.
The alternative to individual property rights is collective ownership, which
has failed time and time again to produce a civil and prosperous society. It
did not work for Robert Owen's optimistically named New Harmony in
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1826, or for Lenin and Stalin's communism, or for Mao's Cultural Revolution.
It is not working today in North Korea or Cuba.
The evidence, as best I can read it, suggests that for any given culture
and level of education, the greater the freedom to compete and the stronger
the rule of law, the greater the material wealth produced.* But, regrettably,
the greater the degree of competition—and, consequently, the more
rapid the onset of obsolescence of existing capital facilities and the skills of
the workers who staff them—the greater the degree of stress and anxiety
experienced by market participants. Many successful companies in Silicon
Valley, arguably the poster child of induced obsolescence, have had to reinvent
large segments of their businesses every couple of years.
Confronted with the angst of the baneful side of creative destruction,
virtually all of the developed world and an ever-increasing part of the developing
world have elected to accept a lesser degree of material well-being
in exchange for a reduction of competitive stress.
In the United States, Republicans and Democrats have long shared a
general consensus in support of Social Security, Medicare, and other programs
that emerged from Roosevelt's New Deal and Lyndon Johnson's Great
Society, even though there is much disagreement about the details. Virtually all
