According to Voltaire, the Roman Empire fell "because all things fall." It is hard to argue with this as a general statement about decline: Nothing lasts forever. But it is also not very useful. In thinking, for example, about American predominance in the world today, it would be nice to know when it will decline, and whether the United States can do anything to postpone the inevitable.
Contemporary commenters despaired of the Roman Empire for several hundred years before it finally collapsed. Could America find its way to a similar extension?
In terms of providing an essential structure for discussion of this problem, Arvind Subramanian's new book, Eclipse: Living in the Shadow of China's Economic Dominance, is a major contribution. (Full disclosure: Subramanian and I are colleagues at the Peterson Institute for International Economics, and we have worked together on other issues.)
In particular, Subramanian develops an index of economic dominance that should become a focus of conversation anywhere that people want to think about changes in world economic leadership. There is no need to know any economics in order to be fascinated by this book: It is about power, pure and simple.
The basic facts are incontrovertible. The United Kingdom was the world's dominant economic power from the rise of industrialization in the early 19th century. But it lost its predominance and was gradually eclipsed by the U.S., which, at least since 1945, has been the undisputed leader among market-based economies.
The U.S. surpassed the U.K. in terms of industrial production as early as the end of the 19th century, but that was not enough to tip the balance. Economic predominance shifted only when the U.K. ran large current-account deficits during World Wars I and II—the country had to borrow heavily in order to finance its war effort, and imports were significantly higher than exports. Much of the world's gold reserves ended up in the hands of the U.S.
This helped undermine the role of the British pound internationally and catapulted the U.S. dollar to the fore—particularly after the Bretton Woods conference in 1944, at which it was agreed that countries would hold their reserves in dollars as well as gold.
More recently, however, it has been the Americans' turn consistently to run large current-account deficits, buying more from the rest of the world than they earn by selling goods and services abroad. On this dimension, the U.S. seems destined to repeat the mistake of the British.
At the same time, emerging-market countries' per capita income has risen—as has their international role. In particular, China has followed a strategy in the past decade or so that entails running large current-account surpluses and building up foreign-exchange reserves, which are now reported to be in excess of $3 trillion. Indeed, Subramanian's most provocative argument is that China has already surpassed the U.S. in terms of economic dominance, but we have not yet woken up to this new reality.
The story is fascinating and well told; but there is still a great deal worth arguing. For example, did the British decline because the U.S. could not be stopped, or because of problems within the British Empire and at home?