Leverage and GDP

Tina Haapala |

Written by Gary Silverman, CFP®

If you have a computer near you, go do an Internet search on “The Economic History of the Last 2000 Years in 1 Little Graph.” Likely the first selection is Atlantic magazine’s economic history of the last 2000 years in one little graph (surprise!). This colorful graph attempts to display the changes in what countries have what percentage of world’s gross domestic product (GDP) over time.

What you’ll see is that back in the year one, India had one-third of the world’s GDP, while China had one-quarter of it. That’s right, India and China had well over half of all the world’s GDP. If you’re wondering where the U.S. was in all this, remember this was the year one. While the continent was there, there was no U.S.

Other than the U.S. not being around, how the heck did India and China manage to get most of the world’s pie? What about the Roman Empire, the Greeks, Egypt and Turkey? The answer is simple: population. At that time most all GDP was agricultural and people were the main driving force in making it happen. Not only did India and China have one-third and one-half of the world’s GDP they also had one-third and one-half of the world’s population.

However, something dramatic happened. Starting in the 1700s, accelerating in the mid-1800s and well into the 20th century, Europe and the United States start dramatically increasing their share of worldwide GDP (America’s growth is astounding). That was the result of the industrial revolution.

Using horses and oxen increased a single human’s production a great amount, but machines took that concept to a whole new level. That is, if other humans, the leaders, let them. India and China fell way behind on this account. Maintaining caste systems and communist revolutions weren’t kind to the leveraging effect of the industrial age. India and China dropped to less than 20% combined GDP at the same time the U.S. grew toward having 40% by itself.

You and I grew up in a world when the U.S. was the economic gorilla. And while I don’t predict the demise of our country, let’s not forget where this all began: Population. Our systems, machines, infrastructure, and computers all combine to give each of our workers some amazing leverage that translates to GDP. Thing is, there’s nothing stopping India and China from doing the same—and they have a whole lot more people to leverage.

This doesn’t mean we are falling behind. China, and to a lesser extent, India, aren’t “stealing” our part of the world’s pie; they are just using what they have now to regain some of what they had long ago. As much as we might complain about currency manipulation and unfair trade practices, the bottom line truth is that they have simply out-birthed us. But remember, their productivity (leverage) is still far behind ours. We can continue to be leaders by focusing on creative ways to increase productivity. Think science and technology innovation. Think new ways to train folks in our workforce. Our people hold our country’s potential, as long we nurture them and allow them to grow.

This article was printed in the Wichita Falls Times Record News on January 17, 2016