Around the middle of the 1700s, the standard of living in the American colonies started exceeding those of European standards. The immigrants to the colonies fled economic, religious and political oppression, poverty, and, for many, servitude or bondage. America was, and still is, a vast land of opportunity offering freedom for those hungry to fulfill their dreams.
Unlike the other nation-states of the world, the United States is unique in forming its government based on the fundamental rights of individuals. Europe still suffers under the legacy of being the dominant colonial powers during the Age of Imperialism. They now dream of returning to that glory by embracing the fantasy of creating and politically controlling a globalist utopia.
The United States is different. It has never been a colonial power nor an imperialist. Its first foreign war was against the Muslim fundamentalists who were Barbary pirates. Its current foreign war, like many other nations of the world, is against Muslim fundamentalism. In all the wars in between, the United States never made a defeated enemy a colony.
What is it about the United States which makes it the country of plenty while other countries do not have the productive capacity to create prosperity and abundance consistently?
Let's make something clear. Trade between regions and countries has been going on for millenniums. Trade is the driver for bettering the standard of living of every nation. Trade is good. Indeed, some countries have more benefits and many countries not as much. Geography and demographics alone make for an uneven playing field that still dramatically impacts the world today. The vast differences in language, culture, and societal institutions—like government—create frictions that are difficult and, in many situations, impossible to bypass. Even under the best of circumstances, competition and cooperation are always problematic.
What is the solution to this problem?
William Bernstein, the author of The Four Pillars of Investing and The Birth of Plenty, tells us that "In all but the most exceptional cases, national prosperity is not about physical objects or national resources. Rather, it is about institutions—the framework within which human beings think, interact, carry on business".
Bernstein points out: "Four institutions stand out as a prerequisite for economic growth". The United States has enjoyed these fundamentals from the start.
The advantage the United States has over the other countries in the world is that its people enjoy the most significant amount of individual freedom and are supported by a framework of institutional—governmental, non-governmental, and voluntary – organisations which facilitate the free-market economy to thrive.
Around the middle 1700s, a wave of technological innovation arose in Europe. It was the beginning of the industrial age which, as Bernstein notes, "New technology is the powerhouse of per capita economic growth; without it, increases in productivity and consumption do not occur". A growing economy encompassing more and more people (and the consequent complexity) requires expanding the framework of institutional organisations.
There is an essential factor here that is critical in our understanding of prosperity. Economic growth only occurs when there is an increase in productivity in the private financial sector. Productivity is the consequence of labour, capital, resources, and entrepreneurial talent creating goods and services that somebody buys.
The government exists to ensure that everyone plays by the same rules. At least, that is the intention. Unfortunately, with government comes politicians who play by different rules. Their proximal goals are to obtain campaign contributions, appease supporting special interest groups, and be re-elected. Government is a cost, sometimes evil, most often inefficient, always expensive, but necessary to make possible economic growth in the private sector and secure the nation. In economic terms, free-market competition is not the same as a free-for-all fight.
Four institutions stand out as prerequisites for economic growth within any financial system. Without these foundations, individual and concomitantly national prosperity is challenging to build and impossible to sustain.
First is the protection of private property and individual rights. Entrepreneurs, labour, resource suppliers, and capital providers must know that most of the rewards for the work performed and financial risks taken are not going to be lost or confiscated by errant governmental actions and policies, or by prohibited economic forces like monopolies. The negative impact of these two forces on the private business sector is subtle, but no less a theft or fraud than a robbery done by ordinary criminals.
Government robs its citizens in subtle ways as well as outright seizure. Turning its education facilities into indoctrination centres robs the future of competence. Its failure to control inflation, maintain orderly financial markets and banking, over-regulation, inappropriate tax systems with oppressive enforcement and other damaging government bureaucratic actions undermine private industry efficiency, effectiveness, and freedom of movement and choice. As Milton Friedman, the famous economist from the University of Chicago, wrote, "Government is the problem".
While the economy is broad and deep, its political arena is a battleground. Over half the voters in the United States do not like the politics and policies of either the Democrats or Republicans and their bureaucrats. Like the fictional character in the movie Network, Howard Beale, they are telling the Democratic and Republican political establishment that "I'm mad as hell and I'm not going to take this anymore".
The second necessary prerequisite, according to Bernstein, is scientific rationalism. We take for granted the process of taking an idea, turning it into a product or service, and then its monetisation. It is only in the last 400 years that the scientific method enjoys widespread acceptance. Rational thought requires a supportive intellectual framework that allows the freedom to contemplate, conceive, and be inspired. The scientific method by which ideas are validated through observation and using metrics enables technological advancement to power productivity. China, which steals technology, and parts of the Middle East and Africa are examples of places where creators, inventors, and philosophical intellectuals can find themselves in grave danger from the dictates of the ruling state or religious totalitarians. By contrast, the United States is the world's leader in technological advancement and innovation. It protects patents, copyrights, trademarks, service marks, and trade secrets.
The third prerequisite is capital markets. Without capital, there is no capitalism. What may be surprising is that every country believes in capitalism; that is, the use of capital. Every country uses some form of capital. The critical distinction in economic systems lies in who decides on the allocation of capital.
For collectivists (Marxists, Fascists, communists, Maoists, authoritarians, kings) the state decides where the money goes. Consequently, cronyism prevails, there is little middle-class, the masses are in poverty, and the state is always in danger of overt and violent revolution.
In contrast, in a free market economy, individuals in the private sector decide the questions of when, where, and how on capital allocation. In my view, the United States and Europe are semi-free market economies and welfare states. What saves the United States is that the private sector economy is so vast with so much opportunity that it absorbs most of the effects of intrusive governmental economic interference and financial manipulation (and accompanying corruption). Becoming a self-made millionaire is possible for people with intelligence and conscientiousness. It is a familiar story in the United States.
The fourth prerequisite is the infrastructure for energy capacity, fast communications, and efficient transportation. These factors are so apparent that little needs to be said about their critical importance to a 21st-century dynamic economy. The only threat to the dominance of the United States in each of these components is in the misguided policies of its government. The United States will survive the Biden administration and thrive while it's doing it. But I do not think it will look pretty.
The United States continues to have all the necessary elements to sustain an excellent economy. Yes, it has flaws, errors, and internal political battles. However, the European Union countries as well as Britain, China, Russia, India, and Japan, have more significant difficulties. And are starting from a place far behind the United States. Each has far greater challenges to overcome to keep their head above water. At least in the foreseeable future, there is no scenario where any one of them can overtake the United States as the world's economic powerhouse.
Denis Kleinfeld is highly regarded as a lawyer, teacher and author. His private legal practice, Kleinfeld Legal Advisors, is located in North Miami Beach Florida. He is an Adjunct Professor at the LLM Wealth and Risk Management Program, Texas A & M School of Law. His private practice focuses on strategy planning of domestic and international tax, legal, financial, matters involving the wealth and risk management for private clients and private businesses. He is co-author of the two-volume treatise, “Practical International Tax Planning,” published by Practicing Law Institute. He is the contributing author on Foreign Trusts published in “Administration of Trusts in Florida” by The Florida Bar and authored chapters for the American Bar Association’s in “Asset Protection Strategies: Wealth Preservation Planning with Domestic and Offshore Entities Vols. I and II.” He is a contributing author to the “LexisNexis Guide to FATCA”.