The Rise and Fall of American Growth

Robert Gordon’s magnum opus, The Rise and Fall of American Growth: the US Standard of Living Since the Civil War (out in mid-January), is going to be an essential read for anyone interested not only in US economic history but also American economic prospects. The book is a comprehensive overview of growth from 1870 on, with a close focus on innovation and productivity. It does not consider at all macroeconomic policy, and is not much interested in events such as the Great Depression or the creation and later collapse of Bretton Woods. This is the supply-side story. This is not a criticism; as it is, the book weighs in at 650 pages – 730 with notes etc.

There are three sections: the first covers 1870 to 1940; the second 1940-2015; the third is about the sources of growth and why it was fastest from the 1920s to 1950s (this is just about the US so this is earlier than European readers would recognise as the peak growth era) – and is slowing now. The final chapters are a kind of crescendo, for the whole book is organised to support Gordon’s well known thesis that the days of miracle and wonder, the rapid growth era of the early to mid-20th century, is long gone, and slower growth lies ahead of us. As he writes in the introduction: “Our central thesis is that some inventions are more important than others, and that the revolutionary century after the Civil War was made possible by a unique clustering, in the late 19th century, of what we will call the ‘Great Inventions’.” [his italics] By Great Inventions, he means electricity, water supply and sewage systems, the internal combustion engine, radio then TV, and innovations that reduced household drudgery such as refrigerators and washing machines. The core of his argument is that these so transformed health, life expectancy and connectivity that no future invention could possibly have such a dramatic impact on people’s living standards.

Who could argue with the idea that this era saw such dramatic change in human lives? For that matter, it is also hard to argue with the headwinds he notes about growth now: demographic change with ageing populations, and inequality, limiting the mass market for future innovations. The final chapters particularly emphasise the damaging effects on the economy of greatly increased income and wealth inequality. Hear, hear. What I find odd about Gordon’s argument is his insistence that there is a kind of competition between the good old days of ‘great innovations’ and today’s innovations – which are necessarily different.

One issue is the extent to which he ignores all but a limited range of digital innovation; low carbon energy, automated vehicles, new materials such as graphene, gene-based medicine etc. don’t feature. The book claims more recent innovations are occurring mainly in entertainment, communication and information technologies, and presents these as simply less important (while making great play of the importance of radio, telephone and TV earlier). (A minor European carp – he also claims that it is only Americans who invent things now, when it would be more accurate to say it is only Americans who commercialise them to massive scale, especially in digital.)

Sure, we won’t repeat the impact of connecting houses to the electricity grid; but if we can keep them connected while generating power at simlar cost with zero greenhouse gas emissions, well that would be a Great Invention with the potential to utterly transform humanity’s prospects. We won’t see the same gains in life expectancy as with the previous introduction of public health measures and antisepsis, but if we can increase the quality of health and life for the over-60s, that would be a very big deal.

A second issue is that throughout the first two parts of the book, Gordon repeatedly explains why it is not possible to evaluate the impact of inventions through the GDP and price statistics, and therefore through the total factor productivity figures based on them – and then uses the real GDP figures to downplay modern innovation. “This book … focuses on the aspects of improvements of human life that are missing from GDP altogether.” For example, he writes, just as important as the calorific intake, or price of a given quantity of meat, is the fact that Americans’ diets changed from the monotony of ‘hogs’n’hominy’ in the 1870s to a much more varied diet by the 1920s. I wholeheartedly agree with this approach. While the very long run of real GDP figures (the ‘hockey stick of history’) does portray the explosion of living standards under market capitalism, one needs a much richer picture of the qualitative change brought about by innovation and variety. This must include the social consequences too – and the book touches on these, from the rise of the suburbs to the transformation of the social lives of women.

Yet in the later chapters of the book, turning to modern growth, Gordon does an about turn, saying: “The impact of innovations and technological change [since 1970] was measured by their effect on total factor productivity.” If this is going to be the yardstick in the ‘race between the decades’, he should have addressed here the questions about the measurement of GDP and productivity in the modern US economy, based as it is on services and intangibles.

For instance, he says: “Nothing in the history of price index bias compares with the omission of automobile prices from the official price indexes over the entire period from 1900 to 1935.” His data in chapter 5 show a decline in quality-adjusted prices between 1906 and 1940, from $650 to $266, which does not seem to support the broad claim. Even the decline in the per capita ratio of quality adjusted price to nominal disposable income (from 2.47 to 0.46) presented there looks smaller than some other innovation-related price declines, similarly omitted from or understated in, official price indexes. The book does not explain, but it would need to go into the figures in more detail if the argument is to turn on the GDP and TFP statistics. Anyway, there are two points about current and future growth. One is about the extent to which innovation is slower, or its effects less important – case unproven, in my eyes. The other is the issue of headwinds slowing down whatever innovation-driven growth there might otherwise be – a stronger case, well expressed in the final chapters.

The obsession with things having been much better, innovation- and growth-wise, in the old days is an irritation, and does make the reader wonder how much the narrative has been bashed into shape to fit the conclusion. Having said that, the wealth of detail in the book far outweighs this annoyance. It is stuffed with wonderful evocations of the effects of economic growth, with institutional details, with tables and charts of useful historical data. The history is brought alive by such things as recounting the living conditions of different kinds of families – midwestern farms with their space and light, compared with New York tenements – or discussing the effect of food quality standards – dairy products stopped being watered down, but butter lost the distinctive taste and smell of its ‘terroir’. Some parts of the story will be familiar to some readers; if you have read a lot already about the history of the computer industry, or Ford’s creation of the assembly line and the mass market, the capsule versions here will not add much. But the book as a whole is a tremendous achievement. If not for the holiday, I wouldn’t have been able to read it from page 1 to page 650; I’m very glad I was able to do so.

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10 thoughts on “The Rise and Fall of American Growth

  1. Innovation in this new millennium has shifted to pastures that either replace existing models or scavenge; the use of alternate models do not necessarily add to growth, many therefore are zero sum. If organized retail is replaced with on-line, it does not add to economic growth automatically, unless of course there is such economic advantage in the changed model that either reduced cost for the overall chain or value. Digitization will connect many things, but the economic advantage to be derived would need added value to all participants; mere replacing one with the other is largely zero sum.

    Economic advantage in today’s world of innovation is creating more ‘winner take all’ models, where one winner is creating thousand losers. This nature of innovation is essentially different from what we had hundred years back.

    • Competition often – usually – replaces incumbents, with something people prefer. There’s nothing new about it. Without it, we don’t get ‘true’, qualitative innovations. So I disagree with you that there’s something essentially different about innovation today, except for the inevitability of time’s arrow.

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  4. Replacing incumbents is one thing, winner take all another. Has oligopoly ever been such a problem in the past? There are a hundred kinds of cereal in the grocery store, but they’re all made by a handful of companies. That seems true of almost everything today.

    • I think a lot of it would be described as monopolistic competition; there isn’t really an issue about finding yogurt made by another firm. There is plenty of uncompetitive behaviour too, to which the solution is tougher competition policy. But again, I’m not sure it’s new. What about the trust busting of the Standard Oil era? On the other hand, the dynamics of digital markets where there are winner-takes-all phenomena mean they are prone to concentration, & competition policy hasn’t caught up. See Tim Wu or Josh Gans on these issues.

    • The 19th century was the era of trusts, the very embodiment of oligopoly. Teddy Roosevelt made his reputation as the “trust-buster.” John D. Rockefeller became the wealthiest non-despot ever by turning oil into an oligopoly (or, indeed, a monopoly). So, yes, oligopoly has been such a problem in the past.

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  6. I never fail to be amazed at people who look back and see 250 years of progress which — at the time it was occurring was viewed as all played out — and then assume this time it REALLY IS played out.

    In the murky fog of the future we have the very real possibility of machines which make machines, computers which make better computers, 3 D printing, artificial intelligence, virtual reality, and so on. I think it is every bit as likely that technology will increase at a faster rate and add more value than it has in the past. But we will see. If we do see unprecedented gains, I bet everything I own that the world will be chalk full of short sighted people who continue to say “it really is played out this time.”

  7. It would be helpful to ask ourselves what life was like, and how it significantly changed, for people between 1885 and 1950, and then for people between 1950 and 2015. I was born just a year after 1950, so I am in a relatively good position to assess the 1950/2015 segment. I’m also reasonably familiar with the social and economic history of circa 1885, so I could make some assessments about the 1885-1950 segment as well. I’ll limit myself just to five of the major budget categories of ordinary households.

    Food: The 1885/1950 era witnessed enormous transformation, as most households went from eating food that they either grew for themselves on the farm or bought fresh from very local suppliers to eating food that was frequently produced at considerable distance, and was often processed and packaged for ease of shipment, storage, and sale. This was also the era when the major food purity regulations were implemented. On the other hand, from 1950/2015, what we have mostly seen is just a marginal reduction in the relative cost of foodstuffs, an increase in the diverse variety of foodstuffs available for sale, and an emerging bifurcation between “conventional” (high-input factory farmed) and “organic” (i.e., produced not much differently than they used to be on the old family farms) foodstuffs. We have also seen a trade-off of convenience: 24/7/365 supermarkets, but the death of the “mom & pop” neighborhood grocery and of home delivery of milk and other fresh foodstuffs. There are plenty of foods on the grocery shelves of 2015 that were familiar to me in the 1950s; I doubt that there was much of anything in 1950 other than a few of the fresh fruits and vegetables or meats that would have been recognizable to people in 1885.

    Clothing: In 1885 most rural households and many urban households were still making most of their own clothing, especially girls and women’s clothing. By 1950 this was in decline, yet most households still had a sewing machine and an adult female who knew how to use it and put it to use. Manufactured (in the USA) clothing was becoming both more available and less expensive, and even rural households could feasibly outfit the entire family out of the Sears catalog for a reasonable price. One could instantly tell 1885 and 1950 people apart by what they wore. By 2015, home sewing has become rare as manufactured clothes became less expensive, and the Internet has replaced the Sears catalog. There are outfits from 1950 that one could wear in 2015 and not look terribly out of place – indeed, there are prospering businesses selling such vintage clothing.

    Shelter: In 1885 rural families had moved out of the log cabins and into stick-built houses that they had usually built themselves, similar to the ones that many urban dwellers had been in for decades – except for the unfortunates stuck in multi-story crowded tenements. Renting was common, home ownership uncommon unless you had inherited or were a homesteader. By 1950, the GI bill was transforming a great swath of working-class and middle-class Americans into new homeowners; the tenements were largely gone or at least improved. Most of the housing being built in 1950 looked considerably different from 1885 styles; in particular, houses tended to be smaller (and housing smaller families). By 2015, we were moving in the opposite direction, away from home ownership and back to a rental society. A fair number of houses built today look a lot more like the houses built between 1885 and 1950, as many of the housing styles from the 50s through the 80s and beyond are now out of favor.

    Transportation: In 1885, of course, one got around on foot, by horse, or – if one lived in an urban area – possibly by rail, with the bicycle just starting to emerge as a new form of transport. Most ordinary people never went very far at all, unless they took a single once-in-a-lifetime migratory journey to relocate. By 1950, of course, The automobile (and bus) and the airplane had drastically transformed most people’s transportation options, and more frequent and more distant trips away from home for business or for pleasure became more common. The horse had been relegated strictly to recreational use and was rarely seen on streets or roads, and the bicycle was mostly just a child’s toy. By 2015, we pretty much have the same transportation options we had in 1950, except that the airplanes now have jet engines, there are a lot more of them, and travel by air has become a lot less expensive; at the same time, passenger rail has nearly disappeared as an option, with the bus not far behind. Our cars are a little safer, a little faster, a little more durable, a little more efficient – and arguably a lot less attractive. One can still see cars that were on the road in 1950 still on the road today, lovingly restored and maintained, and greatly admired.

    Energy: As we all know, in 1885 you heated your home with wood or coal, and lighting was by candle or kerosene lamp; your transportation system was fueled by hay and oats, except for the coal-fired trains. By 1950, most homes had been electrified, even in all but a few remote rural areas; while some people were still heating by coal or wood, increasing numbers of homes were being heated by gas or fuel oil. Many homes still had candles and kerosene lamps around, but these were mostly for decoration or emergency. Things which couldn’t even have been imagined in 1885, like refrigerators and radios, were powered by the new electricity. Most transportation was fueled by gasoline or another petroleum fuel. By 2015, a significant amount of residential heating (and cooling – an innovation) was by electricity instead of fossil fuel. The things that use energy in the typical household have become more efficient, but there are also many more of them. Things that used energy in the 1950s could be and sometimes were still in use in 2015.

    In summary: Just looking at these five categories, the overall pattern should be obvious. There was sweeping change between 1885 and 1950. Transporting anything or anyone from one era to the other, the difference would be immediately and starkly obvious. On the other hand, while 2015 is different from 1950, it is not THAT different. The changes over the past 65 years have really been pretty marginal at best. There is much from 1950 that could be and has been brought intact and unchaged into our world of 2015 that fits in just fine.

    There HAS been technological innovation over the past few decades, yes indeed. It has been and is making a difference. But it is not really all that big a difference compared to what happened between 1885 and 1950.