Speculation Part VII: Economic growth and the rise of the United States

This is another question that has intrigued me: Why did the United States become so wealthy and powerful? Why wasn’t it some other nation? I did not think of this question on my own, however. I read it as part of my Spanish and International Relations studies in college. The question I read was raised by an Argentinian and it specifically asked why it was the U.S. and not Argentina that grew so wealthy.

The author pointed out all the similarities between the United States and Argentina at the beginning of the 20th century. Americans don’t pay much attention to that part of the world even today, so they rarely realize that Argentina and some other South American countries like Uruguay and Brazil were also up-and-coming nations. They attracted their own share of European emigrants looking for opportunity. They were not impoverished lands of peasants and landlords. They had thriving, vibrant economies that were attractive to people who lived in the less-favored lands of Europe.

I also asked why other wealthy countries were wealthy. Why Japan? Why were the so-called Asian Tigers growing so quickly? How about Israel? I wanted an explanation that would cover everything I saw.

And as now may be expected, I have an idea, or rather four or five (this goes along with my tendency to believe that if you can’t think of at least three reasons something happened, you aren’t trying very hard). I think it was the result of the combination of education, a positive business environment, quality infrastructure and low corruption. I think it also really helped to have close cultural ties with the United Kingdom, which dominated so much of the world’s business in the 19th century.

In essence, I think that these factors had two major effects: they supported internal economic growth and they attracted foreign investment, particularly British investment. As I write this, it seems so obvious to me that I can hardly find things to say to support each factor. Unfortunately, this doesn’t prove I am right, but rather that these ideas are deeply entrenched in my society.

Of course education helps economic growth. An educated population is better able to create innovations, increase productivity and so forth. That is the assumption of the culture I live in. It seems to be true.

Of course a positive business environment helps economic growth. A balanced budget during inflationary times makes it possible to have lower interest rates without increasing the money supply. Reasonable regulations allow people to take risks and innovate. The ability to keep a reasonable amount of your profits has the same effect. A healthy banking sector can give loans that also help people innovate and take reasonable risks. And so on.

A capitalist system does have some downsides. It creates booms and busts and has a tendency to foster inequality, among other things. As a result people challenge it during the down times, but most people love it during the booms.

But quality infrastructure is obviously good for economic growth, right? Infrastructure allows goods and services to be transported from one place to another. (We don’t usually talk about transporting services, but that is exactly what happens when long-distance communication is possible.) That encourages the possibilities for trade and increases the chance someone can find another person who is willing and able to join them in a mutually beneficial financial arrangement. (It’s a win-win situation!)

Now, the economic benefits of low corruption may not be quite as obvious to someone who has lived in a country where corruption is less widespread, but corruption can create a serious drain on an economy. This doesn’t escape anyone who lives with corruption. You can create a great regulatory system, but corruption will defeat it. You can create a great tax system that favors healthy investment, but corruption will negate it. You can create an education system that allows your best and brightest to contribute their all, but nepotism will nullify it. Corruption works against you at every turn.

The least-noticed factor in the growth of the United States, at least if you are an American, is probably the close relationship we had with the United Kingdom. We can see how our economic and political relationships helped Israel, Japan and the Asian Tigers. We can also see how we helped Western Europe after World War II (although Western Europe had been wealthy and powerful for centuries before the war, making it difficult to say exactly how much the United States helped.) What we tend to ignore is how much British investment made America great.

I have heard that the American railways were built with Chinese labor and British money. I expect that was true. Britain has invested countless millions of dollars in the United States over a long period of time, in railroads and everything else. There is no possible way we could have developed economically the way we have without British money. The British invested in us for all of the reasons I have mentioned here, because the same things that made it more attractive for Americans to take risks and innovate made it attractive for the British to do the same.

Our shared language, our shared culture, and the shrinking distance between us (due to faster transportation) made our economy even more attractive to British investment. Some of the vast flows of money that were directed to the United Kingdom were diverted to the United States and invested here. I think that the exact portion is likely to have been fairly significant. The U.S.A. was the land of opportunity for Europe’s poor people and even more so for its rich ones.

The combination of all these things gave the United States a growing, thriving economy.  Combined with everything else (its size, its relative isolation from Europe’s wars, the particulars of the moment in time, etc.), it had everything it needed to become the most influential nation the world had ever seen, at least for a few decades.

So, if you are running a country, here is my advice: educate your people, invest in infrastructure, create a reasonable environment for investment, fight corruption and cozy up to the big wealthy countries of the world. It certainly worked for us.

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2 thoughts on “Speculation Part VII: Economic growth and the rise of the United States

    • Thanks! I occasionally like to mentally list the different reasons a baseball changes direction or why it takes a particular trajectory. Even the simplest of things can actually be quite complicated.

      Liked by 1 person

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