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The Chinese economy has been growing at an astonishing rate. In 2010, GDP per capita in China grew by nearly 10%. The same year, GDP per capita in the United States grew by just 2.2%. In its entire history, the U.S. economy has never grown as fast as the Chinese economy is growing today. If these rates continue, China will be richer than the United States in less than 25 years. How can this make sense? Is there something wrong with the U.S. economy? Do the Chinese have a magical potion for economic growth?

Remember, in the last chapter we explained that among the key institutions promoting economic growth were property rights, honest government, political stability, a dependable legal system, and competitive and open markets. But for each and every one of these institutions, the United States ranks higher than China, despite China’s having made remarkable improvements in recent decades. So why is China growing so much more rapidly than the United States?

To answer this question, we must distinguish between two types of growth, catching-up and cutting-edge. Countries that are catching up have some enormous advantages. To become rich, a poor country does not have to invent new ideas, technologies, or methods of management. All it has to do is adopt the ideas already developed in the richer countries. As we will see, catching-up countries like China grow primarily through capital accumulation and the adoption of some simple ideas that massively improve productivity.

The United States is the world’s leading economy—it is on the cutting edge. Growth on the cutting edge is primarily about developing new ideas. But developing new ideas is more difficult than adopting ideas already in existence. Calculus isn’t easy but it doesn’t take a genius to understand calculus; it does take a genius to invent calculus. Countries on the cutting edge grow primarily through idea generation.

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In this chapter, we will do two things. First, we will develop a model of economic growth based on capital accumulation. The model will help us understand some puzzles, such as why China is growing so much faster right now than the United States and why the countries that lost World War II, Germany and Japan, grew much faster in the postwar decades than did one of the winners, the United States. We will also discuss how poor and rich countries can converge in income over time.

Our model of economic growth based on capital accumulation does a good job of explaining catching-up growth but it doesn’t help much to explain growth on the cutting edge. If we think about growth in the United States, for example, we probably do not think first about more tractors, buildings, and factories—the sorts of things that characterize growth in China. Instead, we think about iPhones, the Internet, and genetic engineering, that is, new products, new processes, and new ideas. Thus, in the second half of the chapter, we turn to cutting-edge growth and the economics of ideas. The economics of ideas explains why growth in the United States is slower than in China, but also why growth in China will slow down. It also suggests, however, that U.S. and worldwide economic growth may become faster in the decades ahead than it has been in the past. To put it bluntly (but regretfully for us), many of you will see more progress in your lifetimes than we will have seen in ours.