The Little Book of Economics: How the Economy Works in the Real World, Revised and Updated

Chapter One

The Secrets of Success

How People, Capital, and Ideas Make Countries Rich

Pop quiz: The year is 1990. Which of the following countries has the brighter future?

The first country leads all major economies in growth. Its companies have taken commanding market shares in electronics, cars, and steel, and are set to dominate banking. Its government and business leaders are paragons of long-term strategic thinking. Budget and trade surpluses have left the country rich with cash.

The second country is on the brink of recession; its companies are deeply in debt or being acquired. Its managers are obsessed with short-term profits while its politicians seem incapable of mustering a coherent industrial strategy.

You’ve probably figured out that the first country is Japan and the second is the United States. And if the evidence persuaded you to put your money on Japan, you would have been in great company. “Japan has created a kind of automatic wealth machine, perhaps the first since King Midas,” Clyde Prestowitz, a prominent pundit, wrote in 1989, while the United States was a “colony-in-the-making.” Kenneth Courtis, one of the foremost experts on Japan’s economy, predicted that in a decade’s time it would approach the U.S. economy’s size in dollar terms. Investors were just as bullish; at the start of the decade Japan’s stock market was worth 50 percent more than that of the United States.

Persuasive though it was, the bullish case for Japan turned out completely wrong. The next ...