Skip to main content

Message from the President

2003 Annual Report

May 1, 2004


Message from the President

One of the most vexing questions in economics today is that which began a revolution in economic thought over two centuries ago: Why are some nations rich and others poor? When Adam Smith addressed that problem in his monumental work, An Inquiry into the Nature and Causes of the Wealth of Nations, the world was still in the early throes of what we now call the Industrial Revolution. But even then the fault lines between prosperous and poor countries were splitting. In language that parallels the current debate, Smith wrote in 1776 of nations "so miserably poor" that the young, old and infirm often met death for lack of basic necessities; meanwhile, some people in "thriving nations" were so wealthy they didn't have to work, and even a laborer of "the lowest and poorest order" enjoyed a life far better than a citizen of a poor country could ever attain.

Since then, the chasm has only widened. As Bob Lucas states up front in the following essay: "We live in a world of staggering and unprecedented income inequality." From there Bob describes the problem and offers a nice bit of economic history before presenting a framework for the consideration of possible solutions. I won't spoil the pleasure of reading the following essay by summarizing its main themes, but suffice to say that Bob describes the Industrial Revolution as being in a state of transition that can be understood, in part, by a careful review of issues related to human capital, with particular insight gleaned from an examination of birthrates.

Just as Smith was not alone in asking such questions and suggesting answers—in many respects his greatest contribution was to coalesce existing ideas into a coherent whole—likewise, a great many thinkers have made contributions over the years. The same holds true today. Economists and policymakers in universities and institutions throughout the world are grappling with the question of economic growth across countries, including economists within the Federal Reserve System and this Federal Reserve Bank. After all, one of the Fed's primary responsibilities is to establish monetary policy conducive to stable economic growth—the better we understand the nature of economic growth, the better we can do our job.

As Bob has stated in the past—once you start thinking about differences in economic growth, it's difficult to think of anything else. Whether you are familiar with the current debate about economic growth or are a relative newcomer, I am sure you will benefit from Bob's take on the subject, and that you will look at the world in a new way. We welcome your comments.

Gary H. Stern

Annual Report Essay: The Industrial Revolution: Past and Future