Friday, March 03, 2006

Cool Maps, Positive Externalities, and the World Economy

I’ve long argued that the relative (but debatable, and increasingly unsustainable) success of the Canadian health-care system is at least partially the result of free-riding off medical innovations made in the United States. Perhaps this is a harsh way to put it; another way to think about this is that the for-profit system in the U.S. produces significant positive externalities on the Canadian health care system (as well as on the rest of the world). And while not specifically focused on health research, this piece from the Atlantic Monthly nicely shows how dominant the U.S. (and to a lesser extent, Europe) is in terms of innovation, based on scientific citations. It’s fascinating to look at this map and to actually be able to see the institutions producing the research as spikes on the graph (MIT, Princeton, Stanford, Cal Tech, etc.). What’s also interesting is looking at the number of patents: here, East Asia is dominant due to the incredible work in high tech coming out of Japan and South Korea.

One of the lessons we can draw from this is the world isn’t near as flat as Thomas Friedman would like us to believe, at least not yet. Some of the other implications of this are summed up very well by Will Wilkinson:

American institutions confer a fantastically huge positive externality, in terms of knowledge, to the rest of the world. Science is a root cause of economic growth. New knowledge enables new technologies, which enable increases in the productivity of capital, which enable growth. And good institutions are the root cause of science. If the U.S. produces most of the world’s knowledge and Asia produces most of the world’s technology, then the institutions that underpin epistemic and technical advance are chiefly responsible for growth in states that have different institutions, but which are able to import knowledge. Which is why it is nonsense to compare, say, American and French GDP growth, as if those growth rates were a function of American and French institutions in isolation from one another. Because institutions are not isolated.

This reveals how country-level economic analysis is becoming increasingly meaningless in our hyper-connected world, and just how dependent the world is on American and Asian innovation. The work coming from these countries produce huge positive externalities for the rest of the world. The other lesson is that institutions matter, and we can only stifle scientific advancement and expect to continue growing our economies only if someone else is taking care of the work for us. Will concludes:

And there’s the point. French institutions are good enough to take advantage of American science and Asian technology, and so can remain stable because they are plugged into others’ comparative advantages, and can power their system (literally: the French did not think up the nuclear reactor) on the uninternalizable positive externalities of other systems of institutions. The flip side, though, is that it would be a tragedy for the French, and the world, if American institutions produced less science. It is not just that the U.S. would be worse off if its institutions were more like France. France would be worse off if U.S. institutions were more like France.

We may criticize the U.S. for the lack of egalitarianism in their education and health-care systems, but the entire world is benefiting from what they do in these areas.


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