July 9, 2019

“Once you start thinking about economic growth, it is hard to think about anything else.”
– Nobel Prize-winning economist Robert Lucas

Besides the Declaration of Independence and the writings of Thomas Paine (“Common Sense” and “The American Crisis”), there’s another reason to celebrate 1776: Adam Smith’s “Inquiry into the Wealth of Nations” and his codification of capitalism, which gave birth to an explosion of global growth since 1776.

Throughout most of human history, there was no economic growth to speak of. Angus Maddison (1926-2010), an economist for the Organization for Economic Co-operation and Development (OECD), is widely recognized as the leading authority in these historical data of global income levels. Measured in constant 1990 dollars, he wrote that the average GDP per capita was $450 in the year 1000 and $667 in 1820, so it only grew by 48% in 820 years – or about 0.05% per year. By 2003, however, Maddison’s data showed global income of $6,516 per person in constant 1990 dollars, or an 877% leap in 183 years.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I’ve tried to update and extend these data a bit. Measured in constant 2011 dollars, global GDP in the year zero was $182 billion. It barely budged in 1000 years to $210 billion in 1000 AD, then finally doubled to $430 billion in 1500 AD, then quadrupled to $1,820 billion in 1820, doubled again by 1900, and then grew out of all proportion to the previous historical record, exploding by over 25-fold from 1900 to 2019.

In the grand scheme of history, growth is relatively new and “fragile” in the sense that some nations have it and some don’t. Some grow and then stop growing, mostly due to a shift in their political winds.

These 7 Pillars of Economic Freedom Promote Per Capita GDP Growth

“Freedom is never more than one generation away from extinction.” – President Ronald Reagan

In a book which combines the two titles that turned the world around in 1776, “Common Sense Economics” lays out the winning game plan for countries that want to sustain growth for the long term. One of its co-authors, Dr. James D. Gwartney, a Professor of Economics at Florida State University since 1969, will join me on one of my five panels at Freedom Fest next week. (Louis Navellier will also be on a “Bull vs. Bear” debate there. I will report on his debate plus my five panels in the July 23 Growth Mail.)

Gwartney and his co-authors lay out “Seven Major Sources of Economic Progress” in their accessible economics textbook, which ought to be in every school in our land. In brief, those seven principles are:

#1: A legal system that protects private property and enforces contracts in an even-handed manner.
#2: Competitive markets to promote the efficient use of resources to reward innovative improvements.
#3: Limits on government regulation.
#4: An efficient capital market that channels capital into wealth-creating projects.
#5: Stable monetary policy.
#6: Low tax rates.
#7: Free trade.

How do these principles apply to specific nations in the post-Cold War era? In the mid-1980s, the Fraser Institute of Vancouver, Canada, began a project of studying over 100 nations for how they ranked in these categories. Dr. Gwartney helped to coordinate the work of many scholars of the highest caliber, including Nobel Laureates Milton Friedman, Gary Becker, and Douglas North, to develop the Economic Freedom of the World (EFW) index. Now published in conjunction with over 70 think tanks, the top five nations in the first 24 years, 1990 to 2013, were mostly in the Pacific Rim, led by tiny Hong Kong and Singapore:

Sometimes the components are mathematically precise. In 2015, for instance, the World Bank reported that, given the regulations in place then, it would take 144 days to legally open a business in Venezuela and 119 days in Brazil, vs. only four days in the U.S. and 2.5 days in Hong Kong, which also has much lower tax rates, however Hong Kong’s political freedom rests on the whims of their Beijing overlords.

The USA’s score reached a peak of 8.62 in the year 2000, at the tail end of the Clinton era. It declined in the Bush years and Obama’s first term to 7.73 in 2012, sinking to #16 in the world, where it stayed in 2013 and 2014. When the Republicans took control of Congress in 2015, the numbers started to improve.

Freedoms wax and wane. That’s a lesson to ponder over this July 4th holiday-shortened market week.

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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