Leadership and progress: democratic capitalism and the Pax Americana have brought many more global benefits than is often realized

Business Economics, Jan, 2004 by Allan H. Meltzer

During the postwar years, more people in more countries increased their living standards by larger amounts than in any period in recorded history. Two institutional changes, working together, explain much of the difference between postwar and previous experience. One is the spread of democratic capitalism, joining the market system to property rights and the rule of law. The other is the Pax Americana, the willingness and ability of the United States to use military strength to deter international aggression. Countries that have adopted democratic capitalism and integration into the global economy have thrived. Those who have not have languished. However, the Pax Americana has been and will be a necessary condition for healthy global economic growth.

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It is almost sixty years since the end of World War II, the effective beginning of the Pax Americana, a great experiment to reshape the world's institutional structure, to prevent reoccurrence of major wars and economic depression, and to extend liberty to places and people where it had never been known. Sixty years is a long time in the life of a nation, more than a quarter of our history and sufficient time to assess the main domestic and international achievements and failures of U.S. leadership. If we listen to the critics, we might conclude that the gains have been modest, the failures large, and the future clouded by environmental degradation, population explosion, nuclear proliferation, rising anti-Americanism, and anti-globalization. This is a one-sided conclusion.

Looking back a century in the United States, the average person earned (in nominal dollars) less than $500 a year, a dentist $2500, and a mechanical engineer about $5000. Pneumonia was the leading cause of death. In the next century, the United States moved from one among many countries to a position of pre-eminence. At the end of World War II, it could design the institutions that shaped the postwar economic order.

The late economist, Jacob Viner, writing in 1944, described United States' objectives for international economic relations embodied in legislation that ratified both the General Agreement on Tariffs and Trade and the Bretton Woods Agreement, which established the International Monetary Fund and the World Bank. "Trade barriers will be as moderate and nondiscriminating as government and peoples ... can be persuaded to make them; ... currencies will be freely convertible into each other; ... long-term capital will move from capital-rich to capital-poor countries; ... abundant scope will be preserved for the exercise in the international field of competitive enterprise." (Viner 1944, p. 53) The world achieved much of that program.

Soon after these new rules of the Pax Americana were in place, the beginning of the Cold War required military preparedness, heavy expenditures for developing and producing armaments, maintenance of a large standing army, and a system of alliances to share some of the costs and to mark the geographical limits beyond which Soviet expansion would risk war.

Only a few years before the Soviet Union collapsed, some analysts and historians saw only failure. Two years before the Soviet system collapsed, a popular book by historian Paul Kennedy (1987) warned that the Reagan tax cuts and "imperial overstretch" caused budget deficits that would destroy American power and end American influence. In the same year, Walter Russell Mead wrote: "The foreign position of the United States decayed rapidly during Reagan's tenure, reflecting a continuing erosion of the economic structure of the American Empire." (Mead 1987, p. 200) Mead added: "It was unlikely that future British prime ministers, of any party, would court political disaster by cooperating too closely with the United States." (p. 202) At home, Mead found "the record was even more dismal." (p. 202)

Within less than a decade after these books appeared, the complaint had changed. America was now to be feared as the hyper-power militarily, economically, and in producing popular culture. It is well to recall that French complaints began before there was a Bush administration or a war in Iraq.

The well-known analysts who made these forecasts looked at foreign and domestic events through the filter of an inappropriate and invalid set of ideas that led them into error. They overlooked the significant differences that made the postwar years very different from the interwar years. They disregarded very relevant facts that could have corrected their errors. One of the principal facts of the postwar years was well known long before they wrote. These years saw an enormous change in living standards and extraordinary economic and social progress around the world. In the United States, since 1945 per capita income in constant dollars tripled from a level about equal to current Portugal or Ireland to $25,000. A sustained annual rate of increase of less than 2 percent that produced this progress compares to an annual average of nearly 5.5 percent in Hong Kong and Singapore in the 1980s and 8 percent in Japan during its high growth period.