Economic revolution, evolution, and slow down
Review of The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War by Robert J. Gordon
In 1990, I moved to Japan to work in the US Embassy. It’s hard to imagine now, but back then everyone in DC thought Japan was going to take over the world, at least as based on its economic growth rate. A slew of popular and academic books sang the praises of Japan’s hardworking managers, the prescience of its bureaucrats, the brutal rigor of its educational system. I wanted to understand what made Japan, Inc. tick. Literally, weeks before I arrived, the stock market had crested – the “bubble economy” had popped – and it was the start of an epic 30-year stagnation that’s ongoing. Perfect timing! While prosperous, Japan is now viewed as an obscure backwater. This still astonishes me. How did it happen? This book, which covers the development of the American economy and society over the last 150 years, offers a pretty good explanation.
Gordon sees 2 broad periods in American economic history since 1870. First, there was a revolutionary period – the second industrial revolution – in which the internal combustion engine and the domestication of electricity fundamentally transformed the lives of the vast majority of the North American population; it spawned an unprecedented array of basic inventions, such as the telephone and sanitation systems to provide clean water. This lasted from 1870 to 1940. Second, he describes what he calls the evolutionary period up to present, where most of the basic innovations are extended in their applications and growth begins to slow, particularly from about 1970. It will be very hard, he concludes, for us to return to the rapid growth we have come to expect, in large part because you cannot invent the same things twice. In other words, we are reaching a natural equilibrium that will be hard, perhaps impossible, to improve upon. Even the third industrial revolution (computers, the internet, etc.) cannot accomplish this, he argues.
According to Gordon, for most workers, the world of 1870 – even with the steam engine that served as the basis for the first industrial revolution – was much as it had been since classical antiquity. Most cities were relatively small and the overwhelming majority of the population, about 70%, lived on farms where their lives were nothing but toil and drudgery, cut off from even their neighbors for long periods, often in darkness, and dangerously unsanitary. One in 5 children died in infancy, life expectancy was under 40, and you essentially worked until you died or were physically unable to continue. The rare contacts with the outside were the church, certain communal events, and the local store and tradesmen; otherwise, they stuck to the household for workdays of approximately 14 hours, 6 or 7 days a week in the growing season. Though I knew many of these things, Gordon's exposition of them is so brilliant that I felt it in a new way and saw them as a gestalt for the first time.
Then came the inventions. They included the internal combustion engine (i.e., cars to replace horses), electrification (bringing light, appliances, power tools, refrigeration, and water pumps), and the telephone. Gradually, the households became networked, connected to the wider world by transportation, communication, and the like. With clean water and proper sewage disposal, a major source of contagion disappeared, just at the time that the germ theory of disease brought new standards for cleanliness and access to more effective medicines. Infant mortality declined precipitously, the economy began to modernize itself as more effective markets grew (among many things, eliminating the local-store monopoly as prices began to become standardized and without haggling), and consumer goods flooded into homes, increasing choice and convenience by orders of magnitude.
Of great interest, Gordon questions many basic notions in textbook economics, such as the utility and accuracy of GDP growth as a measure of well being. The introduction of automobiles, for example, phased out horses and all their associated ills (manure and urine in the streets, for example), which improved sanitation, ease of access to transport, even the smell, all of which are not adequately included in the GDP. The comfort that air conditioning brought was similar. There are scores of additional theoretical mini-essays like this, which are both useful and simply fun to read (at least for me, a longtime student of economics). Indeed, every page had some interesting observation or interpretation that got me to think.
By 1940, once these innovations had reached most of the population, the US economy had grown completely out of recognition to the farmer of 1870. Though there was great momentum that would propel the economy to grow at full employment, Gordon emphasizes that the biggest improvements had been definitively accomplished – what followed was largely derivative, e.g. the building of the highway system for cars, the development of big box stores, the introduction of air travel, improvements in engine efficiency, etc. – and could not be repeated with the same scale of impact. Hence, as the economy matured, growth was destined to slow and not much could be done to change that. The oil shocks of the 1970s continued to slow things down as did some “excessive” regulation, but these are marginal issues.
Gordon's treatment of the so-called third industrial revolution, the development of information and communication technologies (ICT), is particularly incisive. He argues that ICT led to strong growth for a limited period (1996 to 2005 or so), but its products, technologies, and service practices were not nearly as revolutionary as had been portrayed. What it generated included a number of niche efficiencies and entertainment possibilities, but did not fundamentally transform the economy. I must say, I somewhat agree – we love our devices, but most of our uses of them are for trivial reasons. However, the jury is still out on this one: ICT is so interwoven into the workplace, and indeed in our lives, that new tools may be required to measure their true economic impact.
Finally, Gordon looks to the future. He sees nothing that will have the impact of the original triad of inventions. Moreover, he predicts that while robotics and artificial intelligence will eliminate some jobs, other jobs will emerge symbiotically – as they always have done. If this outlook is perhaps a bit too sanguine, he sees nothing that will return us to a long period of consistent growth above 3% that we saw in the golden century, to 1970.
Unfortunately, I found Gordon’s policy suggestions disappointing, essentially macroeconomic tweaking with tax incentives and the like. Completely absent was any prescription or speculation on ways that we might change our attitudes towards our societies, e.g. to adopt a philosophy of small is beautiful (satisfaction in having enough rather than always wanting more and more). That would require a different book, I suppose. (If anyone has suggestions of books on this, please supply them in comments.)
To be clear, the book is about growth in productivity and in particular economies of scope (technologies that enable fundamental transformations and result in the self-reinforcing economic development of so-called “virtuous circles”). It is not about the business cycle, though the Great Depression is treated at length. Moreover, Gordon does not even mention speculative bubbles, such as the booms in real estate and the stock market that fueled the “Reagan Revolution” and indeed our economy up to present - the rich are still getting richer. I had to seek more on this elsewhere. Finally, the book doesn’t get too deeply into the globalization of supply chains, also a key to understanding the modern economy.
This may sound dry, but I believe Gordon offers an essential interpretation of modern-world economics, a framework that the reader can apply to all industrializing societies. While it is up to date in an academic sense, it is largely free of jargon and indeed simply a pleasure to read, if a bit heavy on the statistics at times. It pulled together things I have written about for 40 years, serving up the perfect anecdotal detail to illustrate a point, and offering a broader context and historical perspective. I believe the book is Gordon’s capstone of a lifetime of research.
Gordon’s analysis goes a long way to explain the Asian economic miracle, i.e. those national economies are developing along similar lines to that which the US did and whose growth rates will also slow down as they mature – there is nothing magical about it. Having spent a decade as a policy wonk worrying about Japan taking over the world economy, I now do not fret much about China ever doing so. They are following a predictable trajectory, at least hypothetically, as explained by Gordon.
As an intimate dialogue with a great mind, there is not a boring page in the book. It is dense, challenging, and beautifully written, a genuine masterpiece of popular economic history. One of the best books I have read in a decade. It may sound perverse, but I brought this book on a vacation with my son in Japan. I was hoping to find an absorbing analysis for many hours in transit and late evenings in sparse ryokans and it was absolutely perfect in this respect. My son is fascinated with Japanese culture, much as I was, and we discussed our observations of its society: he saw elegance and uniqueness, I concentrated on the stagnation and renewed inwardness.
Related reviews: