America's Competitive Edge

How did America become and why does it remain a super power? Here some possible factors:

• Large size - Basic economics tells us that there are huge advantages to be gained from specialization and trade. However, the magnitude of the advantage depends on the size of the market. For example, I can't specialize in making toilets if I live in a small village of population 100 and have no contact with the rest of the world. Why not? Because I won't have a large enough market to be able to sustain myself in that specialty. As a result, when someone does need a new toilet in my small isolated village, they will have to either produce it themselves, or hire someone in the village who has made toilets before to make one. Needless to say, quality will be low, and price will be high. America has at times been somewhat isolated from the rest of the world in trade terms. However, even during those times the US was a relatively large country with a large market for goods and services, and so it captured a large benefit from specialization within the market. I think this is also much of the explanation for the Soviet Union's ability to remain a super power for many decades during which it was economically isolated from the west.

• Free Market Capitalism - There are a couple of important features of free market capitalism that I believe make a big difference to the amount of wealth that is produced within the society. First, the freedom to compete within the marketplace spurs innovation, both for market incumbents and for new entrants to the market. I feel this every day at work (I'm an engineer working for a manufacturing firm) as we are constantly seeking to improve our processes and products in order to remain viable within the market. Everyone in the company knows that standing still means we'll all be out of jobs in a very short time because our competitors will beat us in the market with better products at lower prices. The second part of free market capitalism that is important is that it rewards good ideas and good execution, and punishes bad ideas and bad execution. Inefficient firms die while efficient firms take market share. The image below illustrates how differently capitalism is viewed in much of the rest of the world. If free market capitalism really IS an important part of high productivity and high standard of living, then those who reject it are putting the gun to their own heads.

•  Regime Certainty - This is the opposite of regime uncertainty, where no one is sure if the law will be the same today as it is tomorrow, whether there will be civil war tomorrow, whether property rights will be respected tomorrow, etc. The US has been stable and secure, with mostly predictable application of the law, for decades. This matters! When there is regime uncertainty investment drops because the value of any investment is a value that will mature over time, and uncertainty about the future of something as basic as the law or property rights decreases the value of any and all investment. Look to sub-Saharan Africa for an example of what regime uncertainty does to growth. Of course, the concept of regime certainty also embraces the fact that America was not ravaged by two world wars during the 20th century.

•  Immigration - The US accepts more immigrants than does any other country in the world. The US is characterized by its immigrant population, including those of us whose ancestors came here prior to the 1930s, and now think of ourselves as 'typical' Americans. I think that it is the case that the US has been very successful at attracting the best minds and the most innovative people from around the globe, in part because of the benefits of free market capitalism and regime certainty. Innovative people are drawn to places where they will be free to innovate. Entrepreneurs are drawn to places with regime certainty. I think this is much of the explanation for why the US is such an innovative and entrepreneurial nation. Listen to Paul Graham's comments on immigrants starting businesses to get a better idea of what I mean.

Now I know that this list isn't exhaustive, but these are the main things that come to my mind when I puzzle about the US and its accomplishments and place in the world. What have I left out? Or better yet, what is wrong in my approach altogether to this question?

Picking Winners

In an earlier post I asked "How do you think the founders of Tesla feel about GM being propped up by the government?" Well, it turns out that Tesla can't complain too much. I guess I should have known.


I'm worried about the government funding companies, whether startups or established players, because government investment drives out private investment, and because the companies who receive support have a competitive advantage over the ones that don't. Why is this an important problem? Because the government doesn't know which companies are going to be enormously productive, and which ones won't. Just as an example, what if the government had propped up Ask Jeeves at the expense of Google? Of course I don't actually know what would have happened, but it's possible and maybe likely that Google would have been crushed or absorbed before it had a chance to bring so much value to so many people.


Econtalk has a great interview with Y-combinator partner Paul Graham. Graham says that government attempts to 'create the next Google' are doomed to failure because no one knows what the next Google is going to be like. By definition, the next big innovation is going to be something that is not currently understood well enough for the value to be obvious. It's ludicrous to me to think that government bureaucrats, no matter how competent, are going to be able to predict which companies are the future sources of important innovation, and which aren't.

The Hurricane and the Ice Sellers

If you haven't already started listening, Russ Roberts has an excellent podcast called Econtalk. It features guests who discuss issues related to economics and policy from a variety of viewpoints.

In one podcast Russ and Mike Munger discuss price gouging, and illustrate the subject with a true story.

When Hurricane Fran came aground in the Carolinas more than 10 years ago, power and other services were knocked out in Raleigh, and transportation through the city was halted by fallen trees. The damage was so widespread that it was simply impossible to restore services to all residents of the city in the first few days after the storm.

A couple of entrepreneurial young men who lived outside the affected area realized that without power in the city, many people would be in need of ice. So they decided to take the day off work, rent a truck and some chain saws, loaded the truck full of ice and headed for Raleigh intent on cutting their way through the fallen trees until they reached the city center where the ice would command the highest price. The morning that they headed into Raleigh, emergency services still had not reached many residents of the city. The National Guard, the Red Cross, and others simply were not yet present.

It took several hours, but the men were able to clear a path into the city and when they found what seemed to them to be a likely spot, they started selling bags of ice at an elevated price. Many customers lined up.

But they weren't all happy customers, and someone called the police. Price gouging is illegal. The people who had been waiting in line to buy ice clapped as the men were handcuffed and taken to jail. Maybe they clapped because they assumed they would now be able to have access to the truck full of ice for free, but the truck and the ice were impounded, and the ice melted away uselessly.

Remember, this is happening in a city bereft of electricity. At the same time that these ice sellers are being arrested, local officials are making an impassioned plea to the federal government to PLEASE SEND ICE, as much as possible as SOON as possible.

Nobody wants to be taken advantage of, especially not in an emergency. That's why there are laws against price gouging. But do these laws make any sense?

Consider: During an emergency, valuable commodities are in short supply in the affected area. However, these same commodities are still available outside that area. What is needed is for people to transport the needed goods from the areas where they are plentiful to the area where people are suffering. We could rely on the good natures of our neighbors to do this for us, or we could rely on the government. OR we could rely on the profit motive, and this just might marshal more resources, more quickly than will the other options. Who made it to downtown Raleigh that day with a truck full of ice?

Don't forget, there are real costs associated with providing a good or service during an emergency. Maybe I care about the people who are stranded without services, but I can't just leave work and spend my own money on a truck, chainsaws, and ice. I've got responsibilities at home that may trump my desire to help.

And what IS price gouging anyway? Who can say what a fair price is for ice in a city without electricity? it cost something to get the ice there, so the price of the ice must be something higher than what it would normally be. The high price is what motivates someone to rent a truck and chainsaws and take the day off work. If enough people do that, the price of ice in Raleigh will come down because the supply will go up!

Isn't that the desired outcome?