|By SIMON JOHNSON|
For most of the last 200 years, national economic prosperity has been about creating and sustaining a symbiotic relationship between government and private business, including entrepreneurs who build businesses from scratch. This symbiosis was long a great strength of
Is the partnership between government and business now really on the rocks? What would be the implications for longer-run economic growth of any such traumatic divorce?
To think about these issues, I suggest starting with "Why Nations Fail" by Daron Acemoglu and
Income per capita in 1750 was relatively similar around the world. There were some pockets of prosperity – imperial capitals and trading cities – but most people lived at roughly the same level of income (and lived about the same length of time). That changed dramatically in the hundred years after 1800; some countries charged ahead in terms of industrialization and broader economic development, while others lagged. (Lant Pritchett memorably labeled this phenomenon "Divergence, Big Time.")
Since 1900, while average income levels have risen almost everywhere, there has been surprisingly little convergence in income per capita. Countries that were relatively rich in 1900 are, for the most part, relatively rich today. Most countries that were poor in 1900 have failed to catch up with the highest income levels today – with some notable exceptions in
In the Acemoglu-Robinson view, it was all about having a favorable head start – based on strong and fair rules of the game:
Countries such as
Great Britainand the United Statesbecame rich because their citizens overthrew the elites who controlled power and created a society where political rights were much more broadly distributed, where the government was accountable and responsive to citizens, and where the great mass of people could take advantage of economic opportunities.
These were excellent conditions for innovation and private-sector investment. People who were not born wealthy were able to educate themselves and create their own enterprises. But the government also played a very helpful role, with investments in clean water and public health, developing public education and supporting the creation of transportation and communication networks.
Equality before the law also became an essential component of successful societies – for example, much more present in
At least in the 19th century, government cooperated closely with private business in
"Why Nations Fail" has been very successful, in part because the history appeals to people on both the right and the left of the political spectrum. To those on the right, economic development requires strong property rights. To those on the left, constraints on the power of elites are essential. Both views garner a great deal of support from the Acemoglu-Robinson view of how
The 20th century brought a new and expanded role for government, putting into effect regulations that constrained what private business could do (starting with antitrust laws and food purity rules), providing various forms of social insurance (including old-age pensions) and increasing marginal tax rates (particularly on income). The modern federal government also operates a global military presence on a scale unimaginable to any American before 1941.
Unlike the populations of some countries, the American people have never reached a consensus over what was achieved and what was given up in the 1930s. In
The discussion of
A powerful coalition has risen against the state. It sees modern government as abusive and as standing in the way of economic recovery and growth. There is a strong urge to undo the reforms of the 1930s and roll back government at all levels. The economist
In truth, we all built the modern American economy. This certainly includes individuals taking responsibility for themselves, becoming more educated and working hard to develop their own companies. But the government also played a constructive role.
Can our political system reach a reasonable agreement on how to divide the benefits and share the costs? In "White House Burning,"
In my assessment last month, I found that anything close to
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