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same choices about theroles of government and markets. History has shown that the emerging economies such as Brazil, China, and India should devote special government resources and policies to closing the technology gap, while countries in the lead (such as the United States) should devote special government resources to cutting-edge research and development. Thus, China and the United States each needs its own distinctive kinds of industrial policies, China’s to facilitate rapid catching up and America’s to facilitate scientific and technological leadership. In neither case would a naive free-market position be warranted.
    A Market Economy? Yes—with Balance
    To recap, the modern market economy is an amazing human contrivance. 15 In a highly decentralized way it engages the self-interest of billions of people in millions of businesses and more than 1 billion households around the world to organize the use of labor time, natural resources, and produced capital goods (such as machinery and buildings). Yet the market by itself is not equipped to achieve the triple bottom line of efficiency, fairness, and sustainability. The market system must be complemented with government institutions that accomplish three things: provide public goods such as infrastructure, scientific research, and market regulation; ensure the basic fairness of income distribution and long-term help for the poor to escape from poverty; and promote sustainability of the earth’s fragile resources for the benefit of future generations. These are not simple or static tasks; they require the ingenuity and creativity of each generation to respond to the challenges of the times.

CHAPTER 5.

The Divided Nation
    The retreat of government after 1980 partly reflected Reagan’s incorrect diagnosis that “big government” had caused the economic crises of the 1970s. Another cause was globalization, as I will explain in the next chapter. A third factor was the rise of social tensions in America that made it more difficult to acknowledge, and act upon, shared principles and values. From the 1980s till now, America has seen itself as a tensely divided society, and we’ve dissipated tremendous national energies on our social divisions rather than focusing on the important values that unite most Americans and that can and should be the basis of economic policies.
    Our era’s social cleavages are well known to any American: red states versus blue states; suburbs versus urban centers; rural versus urban; whites versus minorities; fundamentalist versus mainline religious denominations; conservatives versus liberals; and Sunbelt versus Snowbelt. 1 These divisions are real. Americans have very diverse views about many important matters, from their religious preferences to cultural standards to attitudes about social justice. And as with most things in life, “Where you stand depends on where you sit” (or reside, to be more accurate). Being a white suburban southerner creates a different reality from that of an urban AfricanAmerican northerner, with a different set of cultural attitudes, social norms, and political views.
    For a time, these divisions were muted by the circumstances facing America. During the 1930s and 1940s, Americans were “in it together,” first in the Great Depression and then in World War II. These epochal events were a great crucible of consensus building. The Cold War period created a sense of shared risks and responsibilities as well, meaning that Harry Truman, Dwight D. Eisenhower, Kennedy, and Johnson all could feel, at least until 1965 or so, that they were presiding over a society that shared certain touchstones. This feeling of consensus began to unravel in the early 1960s and by the 1980s was lost.
    There were innumerable reasons for this, far too many to trace in detail. Here are some. The ebbing of Cold War tensions, ironically, created an environment in which smoldering social tensions could be acknowledged rather than suppressed