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Intelligent Economic Design

BERKELEY – As Stephen Cohen, with whom I wrote The End of Influence: What Happens When Other Countries Have the Money, likes to say, economies do not evolve; they are, rather, intelligently designed. He also likes to say that, though there is an intelligence behind their design, this does not mean that the design is in any sense wise.

The first claim is, I think, incontrovertible. Since long before Croesus, King of Lydia, came up with the game-changing idea of standardized “coinage,” what governments have done and not done to structure, nudge, and put their thumbs on the scales has been decisively important for economic development. Just look around you.

Notice the hundred-fold divergence across political jurisdictions in relative levels of economic productivity and prosperity? I dare anyone to claim that the overwhelming bulk of that disparity springs from causes other than history and the current state of governance.

The second claim is also, I think, true. To say that economies are the products of intelligent design means only that some human intelligence or intelligences lies behind the design. It does not mean that the design is smart or optimal.

For one thing, the process by which the design decisions are made resembles committee work: most people want a horse, but the push and pull and tug of negotiation produces a camel. Moreover, the government officials, lobbyists, and interest groups doing the designing may not have the public interest in mind – or even know what the public interest happens to be.

Most of the time in America , the process of intelligent design of the economy has gone well: that is why Americans are so relatively and absolutely rich today. After all, the Founding Fathers were keen on redesigning the infant American economy. Alexander Hamilton was clear on the primacy of commerce and industry.

In particular, Hamilton was convinced of the importance of a sophisticated banking system to support the growing economy. And he and his Federalist colleagues, including John Adams, believed strongly in providing infant industries with room to grow – even using money from the Department of War to fund experiments in high-tech industry.

When the Democratic-Republicans, led by Thomas Jefferson and James Madison, replaced the Federalists, they quickly decided that their small-government principles were an out-of-power luxury. Wars of conquest, territorial acquisition, continental surveying, and canal and then railroad subsidies were good for voters, immigrants, and pretty much everyone else except the outnumbered and outgunned Native Americans who got in the way.

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Indeed, any government that builds infrastructure and allocates land titles on the scale of the nineteenth-century US government is “Big Government” incarnate. Add steep tariffs on imported manufactured goods – rammed through over the angry protests of farmers and southern planters – and you have the policies that intelligently designed much of nineteenth- and early twentieth-century America .

After World War II, it was again government that led the redesign of the US economy. The decisions to build an interstate highway system (and to spend most of that money on suburban commuter roads) and to jump-start the long-term mortgage market – reflecting the widespread belief that General Motors’ interests were identical with America’s – literally reconfigured the landscape. Combine that with the large-scale development of the world’s leading research universities, which then educated tens of millions of people, and with the tradition of using defense money to finance high-tech research and development, and, voilà, you have the post-war US economy.

Whenever push has come to economic shove, America’s government has even deliberately devalued the dollar in the interest of economic prosperity. Franklin Roosevelt did it during the Great Depression, and Richard Nixon and Ronald Reagan did it, too. This history is worth reviewing because America is poised for another debate over whether its economy evolves or is designed, with President Barack Obama’s opponents claiming that whatever is good in America’s economy has always evolved with no guidance, and that whatever is bad has been designed by government.

This claim is, of course, ludicrous. American governments will continue to plan and design the development of the economy, as they always have in the past. The question is how, and whether the design will be in any sense wise. But there are two dangers in America’s forthcoming debate. The first concerns the term likely to be used to frame the debate: competitiveness. “Productivity” would be much better. “Competitiveness” carries the implication of a zero-sum game, in which America can win only if its trading partners lose.

That is a misleading, and dangerous, implication. Instead, all else being equal, richer trading partners benefit America: they make more good stuff for Americans to buy and sell more cheaply, and their stronger demand means that they are willing to pay more for the stuff that America has to sell. Win-win.

The second danger is that “competitiveness” implies that what is good for companies located in America – good, that is, for their investors, executives, and financiers – is good for America as a whole. Back when President Dwight D. Eisenhower’s cabinet nominee Charlie Wilson claimed that what was “good for America was good for General Motors – and vice versa,” GM included not just shareholders, executives, and financiers, but also suppliers and members of the United Auto Workers union. By contrast, General Electric CEO Jeffrey Immelt, recently appointed by Obama to lead the President’s Council on Jobs and Competitiveness, runs a company that has long since narrowed to executives, investors, and financiers.

Let us hope that the looming debate goes well. A more prosperous and rapidly growing America – a scenario in which the rest of the world has a vital interest – hangs in the balance.

J. Bradford DeLong, a former US Assistant Secretary of the Treasury, is Professor of Economics at the University of California at Berkeley and a Research Associate at the National Bureau for Economic Research.

Copyright: Project Syndicate, 2011.

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