Reading a very good book recently I was once again reminded of the irrepressible nature of the American economy.
The book is Chip War: The Fight for the World’s Most Critical Technology by Chris Miller. It tells the story of that technological miracle that created the modern world—the silicon chip.
It is overwhelmingly an American story, a story of gifted men and women turning brilliant scientific and technological ideas into hugely successful commercial enterprises. Other societies play important roles but the US is always the lead character.
Despite ups and downs and formidable challengers, the US has been the lead character on the world’s economics stage since WWII, well over 80 years, and it doesn’t seem about to lose that position now.
Throughout much of that period it was challenged by the Soviet Union, a colossus in its own right. But ultimately the USSR simply could not compete with the innovation and industry of its adversary. Mikhail Gorbachev, its last leader, recognized this reality and threw in the sponge, dissolving the colossus in 1991. As Chip War points out, he recognized that if his county couldn’t match American computer proficiency—and it couldn’t—his military would be too “dumb” to fight the Americans. As the author puts it: “the Cold War was over; Silicon Valley won.”
But matching economic wits with a soul-numbing system like the Soviet Union is perhaps not the best test. The US has faced more creative and nimble competitors, chief among them perhaps Japan.
After a remarkably quick recovery from WWII, Japan was soon challenging the US in a number of fields: automobiles, electronics, and others. Indeed, by the 1970s when the Americans were beset with problems—Vietnam, race riots, inflation, to name a few—Japan was feeling very chipper indeed, sensing David could slay its giant competitor. One Japanese professor predicted the US was destined to become no more than a premier agrarian power, “a giant version of Denmark.”
It did lose much manufacturing, of course, shipping it overseas to cheaper labour, but now it is even correcting that mistake. And as for Japan ever replacing it as the preeminent maker of goods, well, that was a daydream. Japan continues to do well, but deep in the shadow of the US.
More recently came the mightiest challenger of all—China. Once China shook off the intellectual shackles of communism and released its creative and entrepreneurial classes, in remarkably short time it became an economic giant. Its real GDP growth hit a high of 14.2 percent in 2007. Adjusted for purchasing power it is now higher than the United States’ (although much less on a per capita basis). Over the past 40 years, China has lifted 800 million people out of poverty.
Then came Covid. The pandemic shook the world economy up worse than the great recession. Production was crippled and supply chains disrupted. Everyone took a hit.
When it ended, the United States recovered more quickly than any other major nation. China not so much.
The American unemployment and core inflation rates are lower than any other advanced nation. With a strong job market, consumer spending is buoyant and business investment surging. The persistent strength of the American economy has surprised economists. According to Joseph Brusuelas, chief economist at accounting firm RSM, “If you’re looking for a working definition of ‘resilient,’ look no further than the American economy.”
China’s economy, on the other hand, has sputtered. Its GDP grew by less than three percent in 2022, the second slowest since 1976. According to an article in The New York Times, “Investment in China has stagnated …. Exports are shrinking. Fewer and fewer new housing projects are being started. Prices are falling. More than one in five young people is unemployed.” An aging workforce and growing curbs on access to Western technology due to security concerns will not help.
China will get back on track but as for replacing the US as the economic leader, I don’t think so. Produce more stuff no doubt (it has over four times the population, after all), but compete on innovation and entrepreneurship, not likely.
Why not? Well, let’s review what makes the US the economic champion. First, it is ridiculously well endowed with natural resources. No country—no empire—has owned such innate wealth. And then there’s its huge domestic market—334 million customers before it has to export a single widget.
But China has lots of natural resources and an even bigger domestic market, so why can’t it be the entrepreneurial match of the US?
The answer, in a word, is liberty. The US is the world’s freest country. Every resident is free to think up whatever crazy idea they like and then free to try to make a buck off it. Lots of bad ideas result, and lots of good ones, and every once in a while one that changes the world.
Chip War tells just that story. The scientific, creative and entrepreneurial Wild West that was Silicon Valley has indeed changed the world. It’s hard to imagine such uninhibited enterprise occurring in the ideologically straight-laced world of China.
Until the People’s Republic frees its people, it will never fulfil its potential. What it can best appropriate from the U.S. isn’t technology, it’s liberty.