From The Economist - Jan. 2016




American economic history


G force


Why economic growth soared in America in the early 20th century, and why it won't be soaring again any time soon



ON JANUARY 20th those who see themselves as the global elite will gather in the Alpine resort town of Davos to contemplate the "fourth industrial revolution", the theme chosen by Klaus Schwabs the ringmaster of the circus known as the World Economic Forum. This revolution will be bigger than anything the world has seen before, he says. It will be a tsunami compared with previous squalls. It will be more disruptive. It will be more interconnected; indeed, the revolution will take place "inside a complex ecosystem". Not only will it change what people do, it will change who they are.


Anybody who is tempted by this argument should read Robert Gordon's magnificent new book. An American economist who teaches at Northwestern University, Mr Gordon has long been famous in academic circles for advancing three iconoclastic arguments. The first is that the internet revolution is hyped. The second is that the best way to appreciate the extent of the hype is to look at the decades after the civil war, when America was transformed by inventions such as the motor car and electricity. The third is that the golden age of American growth may be over.


In "The Rise and Fall of American Growth" Mr Gordon presents his case for a general audience - and he does so with great style and panache, supporting his 


The Rise and Fall of American Growth: The US Standard of Living since the Civil War. By Robert Gordon. Princeton University Press; 762 pages


econometric data, while keeping a watchful eye on what economic change means for ordinary Americans. Even if history changes direction, and Mr Gordon's rise-and-fall thesis proves to be wrong, this book will survive as a superb reconstruction of material life in America in the heyday of industrial capitalism.


The technological revolutions of the late 19th century transformed the world. The life that Americans led before that is unrecognizable. Their idea of speed was defined by horses. The rhythm of their days was dictated by the rise and fall of the sun. The most basic daily tasks - getting water for a bath or washing clothes - were back-breaking chores. As Mr Gordon shows, a succession of revolutions transformed every aspect of life. The invention of electricity brought light in the evenings. The invention of the telephone killed distance. The invention of what General Electric called "electric servants" liberated women from domestic slavery. The speed of change was also remarkable. In the 30 years from 1870 to 1900 railway companies turn of the century, Sears Roebuck, a mailorder company that was founded in 1893, was fulfilling 100,000 orders a day from a catalogue of 1462 pages. The price of cars plummeted by 63% between 1912 and 1930, while the proportion of American households that had access to a car increased from just over 2% to 89.8%.


America quickly pulled ahead of the rest of the world in almost every new tech-nology - a locomotive to Europe's snail, as Andrew Carnegie put it. In 1900 Americans had four times as many telephones per person as the British, six times as many as the Germans and 20 times as many as the French. Almost one-sixth of the world's railway traffic passed through a single American city, Chicago. Thirty years later Americans owned more than 78% of the world's motor cars. It took the French until 1948 to have the same access to cars and electricity that America had in 1912.


The Great Depression did a little to slow America's momentum. But the private sector continued to innovate. By some measures, the 1930s were the most productive decade in terms of the numbers of inventions and patents granted relative to the size of the economy. Franklin Roosevelt's government invested in productive capacity with the Tennessee Valley Authority and the Hoover Dam.


The second world war demonstrated the astonishing power of America's production machine. After 1945 America consolidated its global pre-eminence by constructing a new global order, with the Marshall Plan and the Bretton Woods institutions, and by pouring money into higher education. The 1950s and 1960s were a golden age of prosperity in which even people with no more than a high-school education could enjoy a steady job, a house in the suburbs and safe retirement.


But Mr Gordon's tone grows gloomy when he turns to the 1970s. Economic turbulence increased as well-know. American companies were shaken by foreign competition, particularly from Japan, and as fuel priced surged thanks to the opec oil-price rise. Economic inequality surged as the rich pulled ahead of the rest. Productivity growth fell: having reached an average of 2.82% a year between 1920 and 1970, output per hour between 1970 and 2014 grew by an annual rate of no more than 1.62%. America today faces powerful headwinds: an ageing population, rising health-care and education costs, soaring inequality and festering social ills.


What chance does the country have of restoring its lost dynamism? Mr Gordon has no time for the techno-Utopians who think that the information revolution will rescue America from such "secular stagnation". His attitude to the IT revolution is much the same as that of Peter Thiel, a venture capitalist, who famously said: "We wanted flying cars but instead we got 140 characters." America has already harvested the fruits of the IT revolution. The growth rate increased each year in the decade after 1994, but the spurt did not last and it has since fallen back.


Now Mr Gordon thinks that Moore's law is beginning to fade and the new economy is turning into a mirage. He can be forgiven for giving such short shrift to Davos types who have no sense of history: driverless cars will change the world less than the invention of cars in the first place. He is also surely right that America faces unusually heavy challenges in future.


But he goes too far in downplaying the current it revolution. Where the first half of the book is brilliant, the second can be frustrating. Mr Gordon understates how it has transformed people's lives and he has little to say about the extent to which artificial intelligence will intensify this. He also fails to come to terms with the extent to which, thanks to 3D printing and the internet of things, the information revolution is spreading from the virtual world to the physical world. 


Mr Gordon may be right that the IT revolution will not restore economic growth rates to the level America once enjoyed. Only time will tell. But he is definitely wrong to underplay the extent to which the revolution is changing every aspect of our daily lives. ■