There’s a sort of constant, low-grade handwringing about the fact that the Chinese economy—which overtook Japan as the world’s second-largest economy a couple of years ago—is expected to surpass the US in maybe 2016.
But really, that’s already happened. China is now, today, the world’s biggest economy. And has been for a while. The long dominance of the US is over.
Why is everyone else wrong? That is, ahem, a question I ask myself a lot. In this case, the answer comes down to how to compare two economies.
The most straightforward way is to simply compare GDPs. That’s nice and mathematical, but that gets screwy because of exchange rates.
For instance, in America a barber might charge $10 for a basic haircut. Every time an American barber gives a haircut, the U.S. GDP goes up by $10. In China, the barber might charge 7 yuan (I’m making this up), so every time a Chinese barber gives a haircut, the Chinese GDP goes up by 7 yuan.
Now: if a dollar trades for 7 yuan, then a haircut in China only raises China’s GDP by a dollar. But a haircut is a haircut—the US haircut doesn’t somehow cut ten times more hair than the Chinese. And if a cheap meal also costs 7 yuan in China and $10 in the US, then both barbers can give a haircut for enough money to get a cheap meal.
We can, of course, adjust the numbers to achieve “purchasing power parity.” So if you multiplied all Chinese prices by 10, the haircut and cheap meal in China would count as $10, same as in the U.S. That comes closer to reflecting reality, but there’s no one number that you can adjust all prices by. For instance, a decent bottle of wine might cost 70 yuan in China. At 7 to 1, that’s $10. Multiply all Chinese prices by 10, and the haircut comes out right but the wine counts as a ridiculous $100.
Still, GDP adjusted for purchasing power parity is generally treated as the best number we have. That 2016 date is based on it.
But what about energy use? Energy in the sense of fossil fuels, hydropower, wind, everything except human and animal muscle. Energy is, after all, used to do work. In the US or in China, a similar amount of energy lights a room, cooks a meal, or propels a car.
And by that measure, the Chinese economy is already the biggest in the world. It uses more energy, it does more work. America is second best, and has been since 2010. It’s happened. Get over it.
The fact that the U.S. uses more energy than China per person is beside the point—we’re talking about overall sums here.
Of course, one could argue that the US uses its energy more efficiently. In the crude sense that’s untenable; although a US gas stove cooks more food per unit of energy than a Chinese coal stove, Chinese cars are more efficient than US ones, our energy is often wasted on pointless “work” like insane commutes, and China clearly gets more work done without using energy (e.g., using human power instead of forklifts or tractors).
A more sophisticated version of the same argument would be to say that the sort of work that the US does is more valuable per unit of energy than the sort of work that the Chinese do. So, for instance, the true value of an iPod is in the *intellectual* work that went into it–the design and the songs on it (both of which take comparatively little energy), while the actual physical bits of it, assembled at high energy cost in China, are just a vehicle for the intellectual content.
Which is sort of true, maybe, but then there’s all of the valueless intellectual work that we do, like running hedge funds, managing endless layers of other managers, advertising sugary crap to kids, prosecuting drug users, and on and on. I don’t see any evidence that the US economy is any more efficient at doing what economies are supposed to do—make people better off, or at least producing actual goods and services that people want—per unit of energy than the Chinese is.
So, assuming I’m right (which one should always assume): Why does this matter? Who cares who gets the bragging rights?
Well, cast your mind back to the early 20th century. The British economy had dominated the previous century, but the German economy had overtaken it. Thing was, Britain had used its economic power to dominate the world politically, and was still trying to hold on to its political supremacy even as its economic supremacy slipped. That tension was one of the big factors underlying World War I.
Today, China and the U.S. are in the same position as Germany and Britain were a century ago: the U.S. is trying to hold on to its political supremacy as its economic supremacy is slipping. That doesn’t mean that war is inevitable; it does mean that we are already in a new, less predictable world, and that we *will,* rather soon, have to make room for others at the top.
If we’re smart, we’ll do it willingly and with good grace. If we’re not, we’ll still do it.
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