Don Boudreaux has been doing the Lord's work by pointing out that economies are not bounded by political borders. I've made the point before that the better a state's institutions are, the less the state level is the appropriate final unit of analysis. Good institutions within a state's borders are precisely what enables the people under the jurisdiction of a state to create complex networks of economic, political, and moral cooperation with people outside that jurisdiction. Which is a way of saying the good institutions in here increase our interdependence with people and institutions out there.
Nothing has brought this point home to me more than the lovely, truthy, graphics accompanying Richard Florida's Thomas Friedman takedown “The World is Spiky” [pdf] in the October 2005 Atlantic.
[click for full-size]
What is manifest in the pictures is that U.S. institutions, in addition to producing more wealth and using more energy, produce scientific discoveries at a rate far outpacing the rest of the world. Just glancing at picture, it appears that MIT and Cal Tech combined produce almost as much scientific discovery as all of of Europe, which in turn produces more science than the rest of the world. The market economies of the Pacific Rim produce a trickle of science, but produce on overwhelming proportion of the world's tehnological innovation as measured by patents.
Here is one of these pictures' 1000 stories. American institutions confer a fantastically huge positive externality, in terms of knowledge, to the rest of the world. Science is a root cause of economic growth. New knowledge enables new technologies, which enable increases in the productivity of capital, which enable growth. And good institutions are the root cause of science. If the U.S. produces most of the world's knowledge and Asia produces most of the world's technology, then the institutions that underpin epistemic and technical advance are chiefly responsible for growth in states that have different institutions, but which are able to import knowledge. Which is why it is nonsense to compare, say, American and French GDP growth, as if those growth rates were a function of American and French institutions in isolation from one another. Because institutions are not isolated. The interesting question is: what would French GDP growth have looked like if the U.S. had produced, say, only 10% of its actual scientific output? If the Japanese had made only a 10% of their technological advances? My sense is that French growth would not have looked good. (NB: I have picked the French because they are very good in science and tech, but even so, the point is, others are much better.)
And there's the point. French institutions are good enough to take advantage of American science and Asian technology, and so can remain stable because they are plugged into others' comparative advantages, and can power their system (literally: the French did not think up the nuclear reactor) on the uninternalizable positive externalities of other systems of institutions. The flip side, though, is that it would be a tragedy for the French, and the world, if American institutions produced less science. It is not just that the U.S. would be worse off if its institutions were more like France. France would be worse off if U.S. institutions were more like France.