Rising Tide Lifts All (Nation-State) Boats

Americans, in their (our) obsession with “national competitiveness,” too often frame the discussion in a zero-sum manner: if China rises, we fall; if India wins, we lose.

The United States over the next 50 years will experience a relative decline in material living. But in absolute terms, we will not suffer at all. To the contrary, the rise of other countries improves our material well-being.

Alex Tabarrok, in his must-watch econo-optimist TED talk, makes this point well by describing the market for cancer drugs. Suppose you were diagnosed with cancer. Would you rather have a common form of the cancer or a rare one? Common, because common cancers have a larger potential customer market, which means there's greater incentive for companies to invest in research to find a cure. This is what is happening in all sorts of markets when hundreds of millions of Chinese and Indians become middle-class consumers. If China and India were as rich as the U.S., Tabarrok says, the market for cancer drugs would be eight times larger!

More rich countries means more innovation, because of increased demand (larger target market for products like cancer drugs) and increased supply (rich countries have more educated people who can create the new ideas and innovation in the first place). More innovation in country X means more innovation for the world — everyone in the world benefits from new ideas and products, no matter where they originate. 

Why, then, do Americans fear the rise of other nations? Isn't it obviously in our self-interest to cheer on poor countries becoming rich?

In the case of China, critics may denounce its anti-democratic values and human rights violations and say to support the economic growth of China is to endorse these values and make their spread more likely. For example, China, in pursuit of oil, has used its economic might to support corrupt African dictatorships while America and Europe have withheld aid in pursuit of regime change. This is a fair critique.

Unfortunately, most reasons have nothing to do with enlightened values (yes – some values are more enlightened than others) and everything to do with a mis-understanding of economics, misguided notions of nationalism, and good ole’ xenophobia. Watch Bill O'Reilly or Lou Dobbs for more on how these concepts hang together in the minds of the stupid.

By the way, it's not just Americans who ought to remember "a rising tide lifts all boats."

When the financial crisis hit, Europeans seemed almost gleeful at American economic woes: Finally the U.S. pays the price for its gluttonous ways and rampant free market culture! Finally their arrogance comes back to hurt the! Yet they soon discovered that in an interconnected world, when one (big) country hurts, all countries hurt. Same thing went down in China: Finally U.S. consumers pay the price for not saving and reckless spending! Followed quickly by, Shit! U.S. consumers – can you binge anew on our exports?

Bottom Line: Other countries are growing richer. Rejoice! Other countries are growing more powerful. Big deal. Americans should support the economic growth of other countries, even if that growth means our political sway and material standard of living are lower in relative terms.

17 Responses to Rising Tide Lifts All (Nation-State) Boats

  1. Brian says:

    I agree it is a net positive trend. But I don’t know why you are so confident that the US will experience that large of a relative decline. Projecting 50 years in the future is always a little iffy. It is hardly inevitable considering we have the most favorable demographics (by far) of any major economic power among many, many, other advantages. I think China will grow old (thanks to the 1 child policy) before they become really rich. Their per capita GDP is still a fraction of ours.

    Another point I think you are missing is that just because it is a net positive trend doesn’t mean the gains are evenly distributed. Many Americans without an education or technical skills really are hurt (generally speaking) by the rise of countries with huge workforces and inexpensive labor costs.

  2. Ben Casnocha says:

    How political power is distributed in 50 years is harder to tell…but it seems very, very likely that countries like China and India will be significantly richer in 50 years.

    I agree that the gains are not evenly distributed. People who get an education and acquire 21st century skills will benefit disproportionally.

  3. Jeff Huber says:

    Ben, in general I agree with you. India, I have no worries or complaints with as of right now. Additionally, I really want to see billions of American investment dollars in both these countries. Investment gives power. It seems to me that the American economy is moving more and more toward a service based economy. Let’s leverage our skills in management by setting ourselves up to reap the investment benefits of explosive economies.

    One complaint I have with China is that they seem to have a zero-sum mentality. Research is not always shared across borders. One hopes that the internet will level this information field, but its hard to predict. I think the only way to manage this relationship is to increase our codependency through investment dollars.

    Just some thoughts, what do you think?

  4. Blake says:

    Ben:

    I’m surprised by your comment that
    O’Reilly and Dobbs are ‘stupid’. I’ve
    known you to quickly counter those
    that offer un-substantiated
    judgments in the name of justifying
    a position. I suspect if I called
    Nancy Pelosi a lunatic nut case,
    you would want more information
    before conceding the point, no?

    I also think using the straw man
    approach of “Most Americans” is
    risky. Most Americans cannot be
    defined by the mass media, which
    magnifies much of what’s wrong with
    the world. Americans
    shouldn’t be the bad guy or scape
    goat for the rest of the world.
    In my opinion, the future success
    of America is put in greater
    jeopardy by our current leadership
    vs. the rise of China or India.

  5. Ben Casnocha says:

    I’m all for foreign investment. Not sure what you mean when you say “research is not always shared across borders.” What’s an example of an innovation or research insight that has stayed within China’s borders?

  6. Johan says:

    Doesn’t it seem fundamental to human nature to care more about relative gains than absolute gains? We’re more interested in being better off than our neighbor than in having and maintaining a certain standard. That seems to be one underlying reason for all this.

  7. Ben Casnocha says:

    To be clear, I didn’t outright call O’Reilly and Dobbs stupid — I said the people who watch them and draw upon O’Reilly and Dobbs’ xenophobia and misguided nationalism are. That being said, I do think O’Reilly and Dobbs are stupid, and if I felt elaborating on this was material to this post, I would. Instead I linked to a solid New Yorker piece on Dobbs and a humorous clip of O’Reilly.

  8. chrisyeh says:

    Johan is right. Studies consistently show that people care more about relative status than absolute status. When given a choice between 1) Earning an income of $50,000 when most of your friends make $25,000, or 2) Earning an income of $100,000 when most of your friends make $200,000, the majority of research subjects choose (1).

    Of course, what they miss is that if your friends are richer than you, you can hit them up for money. It is left to the reader to decide how this applies to Chinese purchases of US debt.

  9. Krishna says:

    No country can grudge the growth and prosperity of another. Had that been serving some purpose, America wouldn’t have grown at all.

    U.S has led the world in Business, Education, Healthcare, Science & Tech innovation, strategic affairs etc. for years. The whole world watched in amazement at its mega corps, mega universities, mega this and mega that. They are trying hard to ape it and recreate that success in their home turf.

    Now America has trodden into an economic mire (by letting Wall Street stretch financial innovation way too far) and is showing the world how to come out of it. Every other country will be watching that too in wonderment because the powers that be in those countries realize they too could amble into one sooner than later. They have to ape that too :-) )))

  10. Jeff Huber says:

    Well I would be lying if I said I have a specific example. The way I meant to phrase that was more in terms of a fear for the future. Military technology often drives consumer technology as you know. If China’s research machine starts producing top notch military research, I am not inclined to think they will share with us. And consequently its impact on consumer tech will be 0.

  11. Andy says:

    Johan and Chrisyeh are right, people care about relative wealth. There’s some old saying, something like “real wealth is making more money than your brother-in-law,” something like that. But its clearly irrational – Ben’s post is trying to get past the natural inclination toward this irrational thought pattern, enlighten the debate, and move humans toward a higher optimal equilibrium.

    Ben, good post. Although I have a question… why don’t you just ask Tyler and Alex if you can move to Marginal Revolution? Half your posts these days are something one of them has talked about :)

  12. Amit says:

    I think it is great that “poor” countries are getting “richer”. The benefits from further innovations, new technologies, to future partnerships will be invaluable.

    However, do you think a resource argument could be made that as the poor countries get richer the demand over limited resources (water, energy, etc.) will be many times higher negatively effecting our current standard of living?

  13. Ben Casnocha says:

    Good point. You could definitely argue this….

  14. Steven Schreiber says:

    I think the important point with China is that most Americans are probably at least dimly aware of China’s competitive stance militarily. They are, in fact, fairly spooky as a government–they recently arrested executives of Rio Tinto for “state secrets” violations but it seems to have more to do with the collapsed ore price deal–and anyone who has been exposed to the fenqing is aware that not all Chinese are polite hardworking people so consistently praised by the business press…..

  15. Alex Tabarrok is quite the rah-rah cheerleader for globalization. He comes across on stage as a less slick, nerdified Joel Osteen of economics– all God’s chillun’ gonna be happy someday on that great globe in the sky.

    He glosses right over the downsides of globalization.

    The rise of other countries may improve our material well-being, but tell that to the citizens of the underdeveloped nations in Africa who were exploited by the European colonial powers, and are still kicked around by the western industrialized powers (and the developing nations).

    Their national resources are still being robbed by multi-national corporations. Even their own governments, making concessions for structural adjustment loans from the IMF and the World Bank, are selling off the public commons at firesale prices.

    That onetime international mendicant, Brazil, has around $200 billion in international reserves, and is lending $10 billion to the IMF. China plans to invest $50 billion and Russia $10 billion in IMF bonds.

    Jim O’Neill, global economist at Goldman Sachs, has proposed that Brazil, Russia, India and China may become the four dominant economies by the year 2050. Goldman Sachs also predicts China and India will be the dominant global suppliers of manufactured goods and services.

    But already the BRIC countries are co-operating to assert themselves politically. Just this past June, they issued a declaration calling for the establishment of a multipolar world order.

    “Why, then, do Americans fear the rise of other nations? Isn’t it obviously in our self-interest to cheer on poor countries becoming rich?”

    In July 1944, President Franklin D. Roosevelt said at the United Nations Monetary and Financial Conference at Bretton Woods, “The economic health of every country is a proper matter of concern to all its neighbors, near and far.”

    The motivating ideas of the conference were to encourage open markets and to lower barriers to trade and the movement of capital, but they were not completely implemented until 1959, when European currencies became convertible.

    In his farewell remarks there Henry Morgenthau said that the creation of the IMF and the World Bank would end economic nationalism, and that trade blocks and economic spheres of influence would be discarded.

    But today “the IMF insists that foreign exchange reserves maintained by other nations are held in the form of dollars, so no matter how much debt the US accumulates, its economy will not collapse.” Institutional reforms are hamstrung because the US has special veto powers over decisions made by the IMF or the World Bank.

    Also at the Bretton Woods conference, John Maynard Keynes proposed an International Clearing Union (ICU), a global bank to regulate trade between nations, but his ideas were adamantly repudiated by the US.

    “George Monbiot, a contemporary critic of the IMF, has argued that the ICU’s proposed mechanisms would have given greater weight in decision-making to the less-developed countries.”

    Until Kissinger and Nixon went to China, there were no goods from the People’s Republic of China on shelves in the US, and the Chinese had a moribund economy with little capital development.

    How ironic that now, some thirty-five odd years later, China is the principal exporter of capital to the US.

  16. ElamBend says:

    Vince,
    Not ironic at all. It is easy to look at the US’s actions over the last 100 years and (except for brief spells) see a common thread of supporting the rising prosperity of other nations and an increase in the total global market; essentially re-creating the world that existed around 1900, only without the competing empires.
    If the US had truly been a selfish empire, it never would have supported (and that is whole heartedly supported) the creation of the EU, nor would it have let the Chinese rise economically by selling cheap goods to the the US. (btw, that represents the greatest rise in material wealth in the worlds history, millions of people were lifted out of poverty because we bought the stuff they made).

    Since the end of WWII and the collapse of the European empires the trend has been toward less war and less people killed by war. Africa is suffering right now, but much of that is home grown, (they’ve been liberated for almost 50 years in some places). Even then, the death toll hasn’t approached the European wars except in perhaps Congo and Rwanda.
    If only we can reform farming and get the US and EU to accept farm products from Africa, THEN we can start to include them on this global prosperity, for that is what we are experiencing, even right now.

  17. Thanks, Elam. I was being sarcastic when I said how ironic that now China is the principal exporter of capital to the US.

    Paul Krugman has written about the great ages of globalization you mention.

    But the pre-1914 world of large-scale international trade and investment was one in which the British empire was supreme in commerce, not quite comparable to the present world of nation states competing in a global economy no longer lorded over by a now emasculated US.

    While Great Britain policed that former world with her navy, bankers in London commanded the information that made them the Davos Men of Europe. The end of World War I left the Continent fragmented economically, as Krugman says, and began the disintegration of British hegemony.

    Conversely, the end of World War II left the United States preeminent economically and challenged for global power only by the USSR.

    I agree with Krugman that the recent “war in Georgia isn’t that big a deal economically. But it does mark the end of the Pax Americana…”

    The neuterization of our government was accomplished not by foreign agents or Putin’s henchmen, but by the world’s most powerful investment bank– Goldman Sachs.

    Personally, I subscribe to Matt Taibbi’s jaundiced view that our economy is actually being managed by this “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

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