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Following the end of the Cold War, we often hear it said that the United States of America is the world’s only “Superpower.” So what does it mean to be a Superpower? The CIA’s World Factbook can put some of this in perspective. (http://www.cia.gov) In 2001, the U.S. Gross Domestic Product (all goods and services produced in the United States) stood at $10.082 trillion. The world’s former superpower, Russia, had a GDP less than one eight that size at $1.2 trillion. With a billion people more than the U.S., China managed to produce a GDP, which was only half that of the United States at $5.56 trillion. In fact the combined GDP of the four other permanent members of the United Nations Security Council (France, United Kingdom, Russia and China), at $9.73 trillion, still falls short of the GDP of the United States, despite the fact that together they represent a population which is more than 5 times as large as the population of the United States.
With the end of the Cold War, we saw the establishment of the World Trade Organization, which now has 145 member nations. While the world was once divided between economies that relied on free markets, and those that used central control to produce and distribute goods, the 145 members of the WTO have agreed that the free market system, long espoused by the United States, is the best method for organizing an economy. This same theme runs through the International Monetary Fund with its 184 members.
For fiscal year 2002, the United State spent $312 billion on defense, i.e., 3% of GDP. In comparison, the Chinese spent approximately one sixth of that amount, or approximately $50 billion. France spent roughly this same amount, while the U.K. spent approximately $32 billion on defense during 2002. In other words, its extremely large productive capacity allows the United States to expend far more than any other nation on defense, and gives it the capability to project military power around the globe.
At the heart of the United States ability to act as the world’s sole Superpower is its unmatched economic capability. What is it that causes a nation to be economically successful? Using the United States as our example, let’s start with the basics, the Declaration of Independence and the Constitution of the United States.
In 1776, Thomas Jefferson wrote in the Declaration of Independence:
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed . . .
This statement contains a revolution in thought. Until 1776, governments had always been top-down affairs. Kings, Pharaohs and Emperors all made the same claim. All claimed divine authority (either from God, or that they were God) to rule over their nations. It was the sovereign that possessed divine rights. Jefferson turned this system on its head, proclaiming that it was not the King, but “all men” that are endowed by the creator with “unalienable rights.” This thought was again stated in the Preamble of the Constitution, which proclaims: “We the People of the United States . . . do ordain and establish this Constitution for the United States of America.” By placing sovereignty with the people, individuals can act as their own principals, freely making their own decisions for their own benefit, and the benefit of those they love.
Also in 1776, another revolution was lead by Scotsman named Adam Smith. Publishing An Inquiry into the Nature and Causes of the Wealth of Nations (The Wealth of Nations), Adam Smith started what has become modern economics. Smith explained the economic power of allowing individuals to act on their own behalf, writing: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” To Smith, an individual acting in a free market is “led by an invisible hand to promote an end which was no part of his intention.” Thus, the freedom of individuals to act for their own benefit is a powerful economic force that benefits us all.
Eleven years after the publication of The Wealth of Nations, the ideas of Adam Smith were in the air as the Founding Fathers met in Philadelphia to draft a new constitution for their struggling young nation. The original constitution, “The Articles of Confederation” had left the new country with difficult economic problems. The original national government was weak, and the country was more like a federation of separate countries than like a single nation. Each state was acting to protect its own farmers and businesses by penalizing trade from other states by imposing tariffs and restrictions. States were printing their own paper money, causing price inflation. These economic problems lead the nation’s leaders to convene the meeting in Philadelphia to revise the Articles of Confederation, and finally lead them to the conclusion that they must draft an entirely new Constitution.
Adam Smith was on a mission to discredit “mercantilism,” a system in which the European powers sought to increase their silver and gold reserves by pushing their own nations’ exports, while throwing up barriers to imports from other countries. Smith believed that national power did not come from the holding of precious metals, but from the productive capacity of the nation. In The Wealth of Nations, Smith developed a theory of free trade, which Smith claimed benefited all involved. In harmony with this concept, the Founding Fathers included the “commerce clause” in the constitution, which granted the Federal government the authority to regulate commerce in the United States. The states were forbidden from engaging in acts that would discriminate against trade from other states, or which would place an undue burden on such trade. Thus, Smith’s argument for free trade was codified in the Constitution of the United States.
During the ratification process, there was a great deal of resistance to the proposed stronger central government. Having thrown off the oppression of a king, many felt that a strong central government would simply replace one tyrant king with a new tyrannical system. A compromise was reached, when it was agreed that ratification of the Constitution would be followed by the adoption of ten amendments known as the “Bill of Rights.”
Within these amendments, ratified in 1791, the Congress and the people of the United States made it clear that their system was to be based on a respect for private property rights. Among the provisions that make this point clear are the prohibition against unreasonable searches and seizures, the stipulation that property not be taken without the due process of law, and the requirement that government pay fair value for condemned property.
Adam Smith was a champion of the individual and property rights. Once again these ideas had become a part of the American system. This is in stark contrast to the ideas developed by Karl Marx during the 19th Century, which formed the basis of communism. Marx saw collective ownership of property (by the state) to be a virtue, and rather than individual rights, he stressed the importance of the group over the individual.
Of course all of these rights are meaningless without the “rule of law.” The adoption of the Constitution went a long way toward establishing the rule of law. However, there have been numerous countries throughout history that have adopted constitutions guaranteeing rights, only to ignore such language when it was not convenient for those in power.
The rule of law is critical for the functioning of markets. Markets require certainty. People need to know that if they enter a contract, it can be enforced if the other side breaches the agreement. They need to know that if they invest money on equipment, the police will not storm the plant and haul it all away. They also need to know that in case of a dispute, they can have their say before an unbiased judge. Without the rule of law, it is too risky for people to engage in the activities that make an economy function.
We owe a great debt to Chief Justice Marshall. The Constitution does not state that the Supreme Court has the authority to declare an act by the government unconstitutional. This power is actually found in the Supreme Court's own words. In 1803, Chief Justice Marshall wrote the following language in the case of Marbury v. Madison.
If an act
of the legislature, repugnant to the constitution, is void, does it,
notwithstanding its invalidity, bind the courts, and oblige them to give it
effect? Or, in other words, though it be not law, does it constitute a rule
as operative as if it was a law? This would be to overthrow in fact what was
established in theory; and would seem, at first view, an absurdity too gross
to be insisted on. It shall, however, receive a more attentive
consideration.
Thus, unlike many other countries, which have constitutions declaring the rights of the people, the Unites States for 200 years has had an institution that ensures those rights. While the Supreme Court has no police force or army of its own, the President and Congress have abided by Marbury v. Madison. President Eisenhower demonstrated this American commitment during the 1950s. While he personally opposed the forcible integration of school, once the Supreme Court ruled that integration was the law of the land, Eisenhower willingly called in troops to enforce the Court’s decision.
During the 1840s, Horace Mann made the argument that public education would promote economic growth. He argued that it was in the interest of business to pay taxes for education, and thus obtain a more educated and productive workforce. Mann was right. Education has become an indispensable part of America’s economic success.
Today, we often hear the phrase “human capital.” Just like better machines and processes increase productivity, and thus the wellbeing of a nation; the skills and knowledge of a nation’s workforce are key to increasing productivity.
The importance of “human capital” can easily be seen in wage statistics. In fact, your being in school testifies to the importance of education. Businesses are willing to pay more to people with higher levels of education, because they have the “human capital” that enables them to add more value to the goods and services produced by the companies that hire them.
We live in a world where advances in technology are assumed. This is a historical anomaly. Throughout most of human history, a child could assume that they would do things the same way that their parents had done things, and that there would be little change in the way that their children would do things. However, as the Industrial Revolution was sweeping Great Britain, the new United States had the foresight to include patent and copyright protection in its Constitution.
Technological advance is dependent on rewards for those who are willing to work, invest and risk for such advances. This work is carried on by both public and private institution. Public funds are supplied to universities, national laboratories and other institutions to conduct scientific research. Often, basic research, which does not have an immediate market impact, is funded through such public investment. There is also a large amount of publicly funded research for defense purposes, which also has broader economic application.
For private parties willing to risk their own resources to develop new technologies, U.S. law offers rewards by granting the developers of new technologies a temporary monopoly on the marketing of their inventions. Companies can choose to file for a patent, which will grant a 20 year monopoly in exchange for the inventor’s public disclosure of the details of the invention, by filing the description with the U.S. Patent Office. On the other hand, there are legal protections for those who choose to keep their technology secret (trade secret law). The increased profits that can be reaped from these temporary monopolies are a powerful incentive for parties to develop new technologies.
The United State also enforces “anti-trust” laws. The goal of these laws is to ensure a competitive marketplace. Faced with innovation from competitive firms, companies either innovate or fade away. Thus, this combination of the intellectual property protection carrot and the market competition stick push technology forward.
The word “infrastructure” has a very broad meaning. Dictionary.com defines infrastructure as:
The basic facilities, services, and installations needed for the functioning of a community or society, such as transportation and communications systems, water and power lines, and public institutions including schools, post offices, and prisons.
It is crucial to an economy that the infrastructure be well developed. The physical infrastructure of roads, power, water, telephones, Internet, etc. facilitate the production and movement of goods and services. Also important is the institutional infrastructure such as police, courts, public safety institutions, schools, taxing systems, military institutions, banks, etc. play a critical roll in creating an environment for a successful economy.
An optimistic culture is also critical to success. For an economy to succeed, people must be willing to take risks, and do the things that create success. This requires faith in the future. If people believe that the future offers little hope, they will not be willing to invest. They will not work to develop new inventions. They will not be willing to buy stocks and bonds, or put money in a savings account. Their fear with be prophetic; it will ensure a dismal future. This is what Franklin D. Roosevelt meant when he said: “We have nothing to fear but fear itself.”
On the other hand, optimism leads people to act in economically beneficial ways. They work hard, save and invest. After all, they have faith that these acts will provide them with a better future. America has been blessed with optimism. It has been a place where people gather from all around the globe, believing that in America they will have a better future. This optimism is reflected in our arts, as well. When you watch an American film, you expect that somehow in the end the good guys will come out on top. This optimism breeds success.
This list of factors is obviously incomplete, and of course the United States faces many economic problems. However, there are reasons why United States stands as the world’s only superpower. America’s unmatched productive capacity provides her with capabilities unmatched by any other nation in history. I hope that this lecture will help you focus on how important economics is to us all. |
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