AHA Moment

Who is orbiting whom can sometimes surprise you. Why growth matters.

In my last post I showed you a nifty graphic (reproduced below) depicting the earth orbiting the sun to explain why size matters in understanding macroeconomies. In this post, I want to think of the graphic as the moon orbiting the earth. My goal is to give you the same “Oh, crap!” moment I had one day 20 years ago when I realized I had been thinking about it all wrong. Hint: Growth changes everything.

The Moon Orbiting the Earth

Like most people, I grew up thinking that the moon dutifully orbited the earth once each day. Later, I learned that’s not quite true. Both the earth and the moon orbit a point in space that is the center of gravity, fulcrum, or barycenter, of the Earth–Moon system. The mass of the earth is much larger (roughly 81.3x) than the mass of the moon, so that center of gravity is actually located in 2,902 miles from the earth's center of mass, which puts it 1061 miles beneath the surface. That barycenter is represented by the red + sign in the graphic above. The barycenter would only be in the exact center of the earth if the moon had no mass at all.

At the time I was thinking about Intellectual Property rights (IP). People were starting to complain about Chinese companies stealing our IP, as defined by international law. By international law, of course, they meant “our law” because we were the big dog at the time and we got to write the rules. Everyone else had to orbit us.

A Larger Moon Orbiting the Earth

My AHA Moment happened when I realized that if we wanted to apply this model to economics or politics we would have to allow the smaller body (China in our story) to grow much faster than the larger body (the U.S. or Europe). Over time, the barycenter would move toward the smaller, faster growing body, like the graphic above, which may be a good approximation of the U.S. and Chinese economies a decade ago.

The Moon and the Earth of Equal Mass

Today, the relative size of the US and Chinese economies look more like the picture above. GDPs today, valued at purchasing power parity, are roughly equal so the barycenter is smack in the middle and neither economy is apparently orbiting the other one. This is roughly the situation today. I say roughly, because the economies are about the same size but the political and military power of the US is still substantially larger than those of China. China’s One Belt One Road program is one obvious sign that this is changing.

The Earth Orbiting the Much Larger Moon

This is my “Oh, crap” moment. (My fourth grade daughter says I should call it my “OMG” Moment so more people will understand me.) What if we look down the road to a time when China’s higher growth rate has made the Chinese economy significantly bigger than the US economy? It could look like the above graphic, except this time it is the earth (the US) orbiting the much larger moon (China). I have found it instructive to think about all the things that might change if this were to happen. For one thing, internationally accepted IP law would likely be a lot different that what we think of as normal. But many other things would change as well.

Ironically, it is precisely the information technology, or IP, that is making this happen. Technology has made human capital increasingly valuable relative to physical capital. Human capital can be deployed at the speed of light over optical fiber anywhere in the world. To a first approximation, all of the people in the world live in Asia, especially China and India. If at some point in the future everyone in the world receives the same education, then IP would be distributed around the world approximately in proportion to populations. Gulp!

Over long periods of time, growth rates dominate everything else. Growth matters. We’d better double down on educating our children ASAP.

Dr. John