Kolodeznaya T.

PhD Zhukova O.S.

PhD Petrachkova O.L.

Donetsk State University of Management

WHY IS AMERICA SO RICH?

Economic gloom and doom aside, the United States of America (US or USA) has the world’s largest and most technologically powerful economy. It is generally estimated to have a per capita GDP level around $45,000, while the richest European nations manage only a $40,000 or so per capita GDP, setting aside low population, oil-rich states like Norway.

Personal consumption drives around two-thirds of the total production of the country. In this market-oriented economy, private individuals and business firms make most of the decisions, and the federal and state governments buy indispensable goods and services predominantly in the private marketplace. Although the US is often referred to as a free market economy, this is not entirely true, since there are government regulations protecting certain sectors, notably energy and agriculture. It can be more accurately described as a ‘consumer economy’.

But why exactly is America so rich? According to Karl Smith there is a combination of three big factors: 1) The Common Law; 2) Massive Immigration; 3) The Great Scientific Exodus during WW II.

Notably that four of the top five countries in the Human Development Index have the Common Law and the top, Norway, is a awash in oil. It is al also evident that 3 of the top 4, again with Norway the odd man out, are immigrant nations. The founder effect here should be clear. The bonus from the great exodus is definitely waning. Most of German and Jewish scientists are dying off, but its still given us a boost that lingers to this day. There is no fundamental reason why the US should be the center of the scientific world but for a time it was the only place in the world safe for many scientists.

It's a difficult question to tackle because there is so very much to it. America jumped to a huge productivity lead early last century by developing a resource- and capital-intense, high-throughput style of manufacturing producing mass market goods. The fractious, class-riven European continent struggled to copy this technology, and while adoption of these methods eventually led to a period of rapid catch-up growth, the process of catch-up was never quite completed. And so that is one gap to explore. There is also the question of what exactly one is comparing. If we take similar European and American metropolitan areas and adjust for human capital and hours worked, on that basis, the difference between America and northern Europe looks relatively small. One might then focus on the ways in which America’s more integrated domestic market leads to a lower level of within-continent inequality, even though national inequality levels in Europe compare favorably with America.

The size of the market may be more important than one can imagine. Remarkable that four of the top five HDI countries share the Common Law. They also speak English. In a world in which national and cultural barriers still bite, America's wealth could be chalked up to the fact that it is a uniquely large and uniform nation. Common rules, culture, language, and so on facilitate high levels of trade and mobility. National and cultural barriers within Europe, by contrast, work to limit the extent to which the economic potential of the continent can be reached.

One more argument in favor of US to be a leading country in the world is immigration and talent. The economic geography of the world is lumpy, and talent likes to clump together into centers of innovation. Through fortune and foresight, America managed to develop world-leading centers of talent in places like Silicon Valley, Boston, and New York. Relatively open immigration rules and the promise of a safe shelter for war refugees, including persecuted Jews, helped build these knowledge centers. When one combines that innovative capacity with a system that makes it relatively easy to develop ideas and relatively lucrative to exploit them economically, the potential is there for rapid and sustained growth. America seems to be special in important ways, but it is not always clear what those ways are. A liberal economic order and geographically mobile population are important, but so is the level of education, the promise of social mobility, and the openness of America's borders. It is worth keeping all of that in mind as the country's leaders think about the ways economic policy should change in the wake of the Great Recession.