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Headpieces Filled with Straw

Hyper-competitiveness, imperialism, and domestic social tensions created immiseration in many countries in the global economy. Global growth slowed over the period 1913–1950, producing average annual growth of 1.8% in Europe and 2.8% in the United States. Growth was dampened by a wide range of poor choices including economic and political conflicts, two "world" wars, economic depressions, protectionism, and other beggar-thy-neighbor policies that emphasized domestic priorities at the expense of common concerns and international order. Ill-considered fiscal and monetary policies and a Cold War with the communist countries contributed to the litany of unfortunate events. Although these developments were very costly for the western countries that were now dominating the global economy, they were even more costly for those countries that had not found a way to consistently grow. These countries, which today are the emerging economies, fell further behind.

The early twentieth century gave rise to increasingly belligerent demands for redistribution and wholesale attacks on liberal political and economic ideas. European and American political economies addressed these tensions quite differently, reflecting the relative differences in their competitive positions in the global economy. Like small ships in a great sea, the European economies were more exposed to changes in the global economy. Following the authoritarian vision of fascism, the socialist ideals articulated by Karl Marx, or the nanny-state prescriptions of John Maynard Keynes, they relied on centralization, government intervention, and social transfers to stabilize their ships of state. The protests of classical liberals like Friedrich Hayek and Michael Polanyi were lost in the howling winds of change.

Protected by a larger and more self-sufficient economy, the goodwill engendered by their hands-off approach to international affairs, and competitive policy-making, Americans took a more laissez-faire approach to social change. Progressive changes in tax, regulatory, and suffrage policies were traded off against preserving private sector control over resource allocation, authorizing few direct social transfers, and creating incentives to encourage the development of local government, philanthropy, and self-help societies. Hayek and Polanyi were well-received, Lord Keynes was rebuffed, and Marxists and socialists were forces to be reckoned with.

Over the period 1950–1973, Maddison estimates that global growth again took off, increasing on average 4.6% per year in Europe, 3.9% in the United States, and 9.2% in Japan, the new member of the developed country club. Chastened by the disasters of the past and heightened demands for independence, the European countries ended colonialism. U.S. partnerships in Europe and Japan stimulated widespread recovery from the devastation of World War II. Extensive multilateral cooperation enlivened liberalism. A host of international institutions and organizations were born to manage crises, international trade, investment flows, and exchange rates. Intensive investments in science, technology, and education stimulated innovation, entrepreneurship, and human development. As productivity soared in Europe and Japan, for the first time since 1890, the dominant position of the United States in the global economy was under challenge.

Growth again slowed over the period 1973–1996. According to Maddison's estimates, average annual GDP increased 2.1% in Europe, 2.5% in the U.S., and 3.2% in Japan. The period was marked by a breakdown in monetary cooperation and an erosion of many of the factors that helped mitigate price increases in the developed countries. The rise of the Organization of Petroleum Producing Countries (OPEC) forced up energy prices, which contributed to inflation, changes in balances of payment, and structural adjustment. The rise of the East Asian economies in the 1980s contributed to restructuring the world economy and created new impetus for liberal reforms in Europe and the United States.

Table 1.5. Average Annual Growth Rates

GDP Growth in Constant Prices

(Average Annual Compound Growth Rates)

Region

1820–1870

1870–1913

1913–1950

1950–1973

1973–1996

Europe

1.7

2.2

1.8

4.6

2.1

USA

4.2

3.9

2.8

3.9

2.5

Japan

0.3

2.3

2.2

9.2

3.2

Per Capita GDP Growth in Constant Prices

(Average Annual Compound Growth Rates)

Region

1820–1870

1870–1913

1913–1950

1950–1973

1973–1996

Europe

0.9

1.3

1.1

4.1

1.7

USA

1.3

1.8

1.6

2.4

1.5

Japan

0.1

1.4

0.9

8.0

2.5

Source: Compiled from Maddison (1997b) Tables 9 and 10.

The breakdown of the former Soviet Union and liberalization in the developed as well as the emerging economies eased many fears about global tensions. However, conflict in the Middle East, the rise of religious fundamentalism, the development of global terrorist networks, resource pressures, and climate change fuel concerns about collective survival. These developments also pose new challenges for how we organize and govern ourselves and our economies. With fewer than 10% of the world's population committed to classical political and economic liberalism, and the emerging economies producing better than 50% of world GDP, one must wonder whether liberalism as we have come to know it will survive.

Writing to persuade his fellow Americans to adopt the U.S. constitution, James Madison argued that "government itself is the greatest of all reflections on human nature."13 But if government reflects human nature, and we observe different forms of government in the world, why has human nature produced different types of government, and why hasn't there been more convergence as our interaction with each other has increased? What does this suggest about similarities and differences in human nature across the world, how we think and make choices, our ability to understand each other, and our capacity to cooperate for mutual survival?

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