For many Americans the long expansion of the economy during the 1990s reinforced the belief that technological advances will naturally lead to prosperity. So strong is this belief that the stock market crash, financial scandals, and a few years of recovery without many new jobs have not undermined it. Supporting this optimistic view of the economic future are gains in productivity, or the output of the economy per hour of work. In the second half of the 1990s, productivity grew rapidly. Not only did stock prices, profits, and the fortunes of the rich rise, but so did the wages and salaries of most of the rest of us, even the working poor.
According to most accounts, the emergence of the new economy—the proliferation of personal computers, of the Internet, of computerized business activity generally—led to a sustained rise in productivity, and rising productivity, as it is supposed to do, resulted in a higher standard of living. Meantime, Europe and Japan could not keep pace, as unemployment rates rose and remained high, and national incomes rose slowly. In short, to many, the US economy was apparently back on its rapid historic track and, in light of relative foreign stagnation, the case for American exceptionalism had found new justification.
That technological innovation will continue to propel the economy is widely assumed by many commentators. It is hardly surprising that Harold Evans, former publisher of Random House, editor of the London Times, and author of The American Century, has published a book of celebration of the nation’s great technological and business innovators, They Made America. “Practical innovation more than anything else is the reason America achieved preeminence while other well-endowed landmasses lagged,” Evans writes. There is, of course, much more to America’s remarkable economic success than that, not least the country’s available land, huge natural resources, and the size of its domestic market. But Evans is more interested in the stories he has to tell than in the broader conclusions they may or may not suggest. His heavily illustrated book, written with Gail Buckland and David Lefer, is a detailed and perceptive account of the efforts of seventy people whose contributions were critical in giving shape to American life. Evans devotes chapters to such familiar inventors and entrepreneurs as Eli Whitney, Henry Ford, Thomas Edison, Walt Disney, Estée Lauder, and Ted Turner, among dozens of others. But we also learn of many people few will recognize, among them Henry Miller Shreve, who, in the 1830s, cleared the nation’s rivers of fallen trees and other debris for travel; Theodore Dehone Judah, who, as its chief engineer, made possible the transcontinental railroad; Martha Matilda Harper, who franchised beauty salons in the early twentieth century; Ruth Handler, co-founder with her husband of the Mattel toy company and creator of the Barbie doll; and Gary Kildall, who wrote the first and best of the computer operating systems.
Evans is careful to show that none of these men and women did it on their own. “There are many eureka moments,” Evans writes, “but antecedents always matter.” The ambitious Robert Fulton combined the innovations of the Englishman James Watt, the American John Fitch, and others to make his commercial steam-boat. Isaac Singer liberally drew on and perhaps stole the advances of earlier sewing-machine pioneers. Samuel Colt’s repeating six-shooter was based on the work of gunmakers like the Bostonian Elisha Collier, who had already devised a rotating chamber. Bill Gates’s operating system, DOS, still the standard in the industry, and the source of Microsoft’s domination, was derived from Thomas Patterson’s QDOS, which in turn was “a slapdash clone of” Gary Kildall’s CP/M.
How the operating system created by Kildall, a true visionary who “wrote code as Mozart wrote concertos,” unjustifiably lost out to the inferior system of Bill Gates is the most fascinating of the stories in Evans’s book. In 1980, IBM began negotiations with both Microsoft and Kildall’s company DRI to develop an operating system for a new line of personal computers. Although Kildall was finishing a new version of his system that was far more advanced than anything Microsoft could offer, Gates persuaded IBM to go ahead instead with Patterson’s inferior copy of Kildall’s earlier operating system, which was renamed PC-DOS. Microsoft’s PC-DOS thus became the standard operating system for most PCs and, on the strength of Kildall’s original innovations, Gates became the dominant force in the software industry.
What interests Evans most is the intense commercial ambition of these people, which, he argues, I think correctly, has set America apart from other countries. Most of Evans’s innovators were determined to build large companies, and most were also determined to strike it rich. But was this an innate American trait or a response to the unusual opportunity afforded by a vast continent of consumers with some money to spend? Evans gives much emphasis—too much, in my view—to what he considers America’s exceptional character:
For the most part, they did not come with any special secret, any patented invention, any great wealth or connections. When they disembarked, blinking in the bright light of the New World, they had no idea what their destinies would be. The magic was in the way they found fulfillment for themselves—and others—in the freedom and raw competitive excitements of the republic.
Innovation, the concept and activity that made Dr. Johnson shudder, has turned out to be a distinguishing characteristic of the United States.
Evans recognizes, however, that the principal American innovation in manufacturing was something more down to earth, the interchangeability of parts. The many different parts of complex products had to be identical so that workers with little skill could assemble them quickly. He traces this practice along its hundred-year path to maturity, from Eli Whitney’s firearms to Colt’s revolvers and ultimately to Henry Ford’s assembly line. The so-called “American system” became the basis of mass production. But mass production was dependent on mass markets, and no other industrialized country had markets comparable in size and income to those in America. Henry Ford’s opportunities would have been much more limited in France, Germany, or England.
It is not surprising that these innovators were usually also exceptional in their ability to market products. They cleverly persuaded Americans to buy their goods, and in the process gave shape to the nation’s culture, for better and worse. Fulton publicized his cruises as the pinnacle of glamour. Colt published many tall tales of violent gun-slinging heroes to romanticize his Colt .45, and he created effective macho advertising slogans such as “There is more law in a Colt six-gun than in all the law books.” Ruth Handler quickly exploited the explosive growth of television by advertising her Barbie dolls on the new national networks.
Inevitably, Evans’s selection of business innovators is somewhat arbitrary. He relegates James Duke, the great marketer who created America’s cigarette industry, to an also-ran section in the back of the book, as he does Sam Walton of Wal-Mart and Henry Luce. But their innovations were no less important in their effects on American life than those of, say, Ted Turner, who is justifiably discussed at length. Evans apologizes for not including more women and in particular African-Americans, observing that both were victims of prejudice and disadvantages. Nevertheless, it would have been instructive to say more about African-Americans who achieved business success in spite of the odds against them. Carol Jenkins and Elizabeth Gardner Hines, for example, recently published Black Titan, the biography of Arthur Gaston, who was born in 1892, made a fortune in insurance, bailed Martin Luther King Jr. out of jail in 1963, and was named by Black Enterprise magazine the Entrepreneur of the Century in 1992.1 John Johnson, who created an empire of publications based on his magazine, Ebony, and Berry Gordy of Motown are also relegated to a paragraph or two in the back. Few people, moreover, are aware of the women who were leaders in developing electronics. Sandra Lerner, for example, was a cofounder of Cisco Systems and is now an imaginative philanthropist who has restored Jane Austen’s family house in England to serve as a center for the study of women’s literature.2
Still, Evans’s book sticks to the facts, presents them with admirable clarity, and largely avoids illusions. The same can’t be said of John Steele Gordon’s broadly conceived history of the American economy, An Empire of Wealth: The Epic History of American Economic Power. Gordon is a columnist for American Heritage magazine and author of several books of history. Technological innovation is central to his approach, and his book has been much praised by critics, for example the Newsweek columnist Robert Samuelson, who has called it “the best one-volume economic history of the United States in a long time and, perhaps, ever.” But the book turns out to be little more than a restatement of clichés about American superiority. Parts of it recall some of the more rhapsodic descriptions of Henry Steele Commager or the nineteenth-century historian George Bancroft; but they were both original and distinguished historians, while Gordon tells us an all-too-familiar story about Yankee ingenuity and the uniqueness of the American character. Readers may think they are reading a competent summary of economic progress in the United States, particularly because Gordon has a gift for narrative, but that would be a pity.
Gordon pays scant or no attention to such critical influences on the US economy as free and widespread primary education by 1830, the early extension of suffrage to all white males, including those who did not own land, or America’s sweeping religious conversions throughout the nineteenth century. I could not find mention of the relation of the Protestant work ethic to business success and nothing is said about the Second Great Awakening, which was also associated with that success. Gordon is largely dismissive of government, writing casually, “People in government will always try to help those who are powerful at the expense of those who might become so.” But he has no consistent view. He praises the development of the Erie Canal by New York State and he writes enthusiastically about Franklin D. Roosevelt’s New Deal; only a few pages later, he approves of Ronald Reagan’s attempts to roll the New Deal back. In Gordon’s history of the American economy, we find little emphasis on managerial innovation and excellence, economies of scale, or the American use of interchangeable parts—all of which figure in Evans’s book.
The desire to assert America’s natural superiority results in absurd exaggerations. Near the beginning of his book Gordon writes,
Virtually every major development in technology in the twentieth century—which was far and away the most important century in the history of technology—originated in the United States or was principally industrialized and turned into consumer products here.
He provides no convincing evidence to justify such a claim. In fact, most of the important pioneering work on such crucial twentieth-century technologies as nuclear energy and quantum mechanics was done by Europeans before World War II. Early in the century many of the world’s leading chemists and chemical industries were still in Germany; America eagerly took the enemy’s patents as booty in World War I.3 Europe produced such crucial medical advances as Roentgen’s X-ray and Fleming’s penicillin. Rocketry was mostly European in origin as well with the exception of the work of the American scientist Robert Goddard. The world’s most powerful particle accelerator will soon open in France.
As if he is aware of the need to justify his omissions, Gordon writes that when America didn’t invent something, at least it commercialized it. Here again he is wrong. As Clifford Odets wrote in the 1940s, America had entered the “age of aspirin,” but Germany’s Bayer AG had already made it a universally popular commercial product. According to Edward Tenner in his enjoyable book Our Own Devices: How Technology Remakes Humanity,4 which is devoted to the commercial technologies of everyday life, Europeans made critical contributions in the twentieth century to the production of optics, reclining chairs, and the quintessential American product, running shoes, to cite a few of many examples. Gordon seems unaware of the upheaval in the automobile market in the 1970s, when the reliable, smooth-riding, and cheap Toyota showed how backward Detroit was (and may still be). He makes much of America’s current leadership in modern personal computers but says nothing about Japan’s production of inexpensive, high-quality color TVs, as well as the VCR and the Walkman. You would not know from his book that Europe leads in the per capita use of cell phones, and that the ubiquitous BlackBerry was created by a Canadian company.
Just how superior has the US been? Any comparison of the US with Europe or Japan during the twentieth century is irresponsible if it does not take account of the appalling effects of two world wars, not to mention how much the US benefited from the emigration from Europe of many of its most brilliant minds. The industrial revolution has produced economic miracles in many nations, and in the decades after the peace in 1945 some of the participants in the world wars nearly caught up with the US in GDP per capita, and in several cases surpassed it. Moreover, GDP per capita is not the only or even the best way to measure a nation’s progress. Evans, for example, favorably compares America to Australia and Canada, noting that they have comparably large land masses. But the Human Development Index of 2004—which includes such factors as life span and educational attainment along with GDP per capita—ranks both Australia and Canada ahead of the US.5
Western Europe has its economic difficulties, notably persistent high unemployment, but it nevertheless presents a much-misunderstood challenge to American assumptions. Its GDP per capita remains high even though current levels of unemployment are also high. Moreover, national income is distributed more equally, and rates of poverty, notably for children, are significantly lower. Wages paid on an hourly basis, when discounted for what they can buy in each nation—“purchasing power parity”—are almost as high in France, Australia, and Canada as in the US; in Germany and several other European nations they are substantially higher.6
Such distorted efforts to show that the US is inherently exceptional mislead readers about the true nature of American achievements, and provide no help in understanding how the US might improve its technology and its economy. Much, in fact, can be learned from studying the experiences of other developed countries. Peter H. Lindert, an economic historian and professor at the University of California at Davis, has published the first volume of a two-volume work called Growing Public that presents comprehensive statistical and historical comparisons of developed nations. His purpose is to show how government social spending has either stimulated or retarded economic growth in nations, but he finds that there is no simple relationship between the proportion of an economy’s spending devoted to government social programs and the rate of economic growth. Many nations with high levels of social spending, such as France, Germany, and the Netherlands, have become as productive as the US. One reason is that government spending, even if it diverts resources from private industry, has often been devoted to public investments that benefit the economy. Among the most important of these is education.
Lindert shows that by 1830 America and Prussia had the most developed primary education systems in the world, as measured by school attendance. In the case of the US, this was a significant accomplishment for a nation only forty years old, and it was surely one of the most important sources of its high rate of economic development. Lindert goes on to show that the expansion of democracy, measured by the proportion of the population (of men, at this point) who had voting rights, was one of the principal factors in the development of human skills. People demanded broad access to adequate schooling.
The growth of education is by no means a simple story. Powerful traditional institutions and elite politicians and educators can resist the spread of opportunity to poorer classes by stinting on educational investment. Most notably, England lagged behind other Western countries in growth in educational opportunity during the nineteenth century. But institutions can also stimulate such investment. In autocratic Prussia, education was encouraged nationally but controlled locally, which may account for much of the expansion of its schools. Through determined effort, stimulated by citizens’ demands, the French education system eventually caught up with the standard of education under Germany’s authoritarian government in the 1880s, under the Third Republic, and then surpassed it. Using a statistical analysis of the development of education across many nations, Lindert concludes that counties with more fully developed democracies devoted more resources to education and had higher enrollments.
Free and widespread education was one of many factors that had a positive effect on both productivity and the standard of living. Other factors included the formation of labor unions, the building of transportation systems, the establishment of scientific research institutions, and the adoption of national social policies, such as unemployment insurance and Social Security. Many of these developments were a result of popular movements and democratic government. What should be clear is that technological advance, by itself, was never sufficient to explain economic growth, and it is not today.
The question the United States now faces is whether, after a few years of recovery with the creation of an unusually small number of additional jobs and slow wage growth, the economy will soon resume rapid growth, with millions of new jobs and rising wages and salaries. Economists speculate about numerous possible outcomes and have not as yet reached a consensus.7 Some are optimistic. Since the 2000–2001 recession came to an end, productivity has grown at a rate of more than 4 percent per year. This is the highest average over a three-year period since the 1960s, and though growth has slowed down recently, has been cited as evidence that the technological advances of the late 1990s continue to have a stimulating effect on the economy. One hypothesis is that overinvestment and overhiring in some industries during the booming 1990s caused a temporary excess of capital equipment and workers. If this is true, then employment and wages should rise rapidly again once the imbalance disappears.
Another largely optimistic assessment blames the failure of the recent recovery to create many new jobs on temporary business uncertainty. Short-term factors such as war, terrorism, financial scandal, new regulations requiring more open disclosure, and the pessimism created by the last stock market crash may have inhibited both investment and hiring. The current high level of corporate profits is, in fact, not being channeled confidently into new plant, equipment, and research, as many expected. Much of it is going into financial investment, such as Treasury bills or the purchase of a company’s own shares. Once business regains its confidence—so it is argued by some analysts—the previous tendencies of the economy to expand will again prevail.
Other economists are less certain. They point out that the recent pro-ductivity growth has not been accompanied by significant technological breakthroughs or by more capital investment per worker, as it was in the late 1990s. In fact, the rising productivity may simply be owing to the continuing benefits from older investments, which may soon dry up. Therefore, some economists conjecture, businesses will not hire aggressively or spend as much as previously on new equipment. These economists claim that, with less spending in general, demand for goods and services is not sufficient to lead to new hiring. Moreover, without new jobs and rising wages, consumers will not be able to spend indefinitely. Right now, they are borrowing at a high rate. Eventually more jobs and higher incomes are needed to close the circle that connects demand and supply to each other. It is far from clear that enough of these jobs will be created.
Permanent change in hiring practices could also have long-term implications for the economy. As more part-time and temporary workers have become available through temporary employment agencies, businesses can more easily retain smaller permanent workforces and supplement them as sales rise. When sales fall, they let the temporary workers go. These “just-in-time” labor practices—used by such huge companies as Wal-Mart—are becoming more common, and may lead to fewer good jobs for the nation in the long run.8
Another important negative influence, some argue, has been the changes in incentives for management.9 The growing emphasis in corporate boardrooms on stock prices, especially by tying executives’ compensation to generous stock options (which rise rapidly in value along with the stock’s price), has probably made business more concentrated on short-term results. To increase immediate profits that will affect stock prices, executives now have incentives to keep labor costs as low as possible by postponing hiring and insisting that employees work harder and longer. Some economists believe that American employees work more hours than the Bureau of Labor Statistics reports, but unreported hours are difficult to measure.
Moreover, the economic policies of the Bush administration, particularly its creation of huge deficits, have almost surely added to business uncertainty. The administration’s tax cuts, originally designed to return a surplus of revenues to the people, were an inefficient means of stimulating the economy. Too much of the current budget deficit goes to the well-to-do, who save it rather than spend it. Meanwhile, the administration’s large prospective budget deficits have probably undermined business confidence. If the money had been spent for much-needed improvements in education and infrastructure, the confidence needed for investment and hiring might not have been so damaged.
Old-fashioned greed should never be discounted. Corporations may adopt tighter wage and hiring policies because society lets them. In general, Americans today are neither very supportive of labor nor skeptical of management. Even the financial scandals of 2000 and 2001 seem to have been forgotten. Workers, in turn, may simply have become too scared to demand higher wages. Productivity and worker earnings rose together in the late 1990s, but did so only after the unemployment rate had at last dropped significantly, causing tight labor markets. The labor market is now quite slack. While the unemployment rate is an unalarming 5.2 percent, some 2.5 million people have inexplicably left the workplace and do not show up on the unemployment rolls or in the government estimates of workers who have become discouraged from looking for a job. If labor markets were tighter, worker earnings would be rising strongly.
The Bush administration may well prefer to sit back and hope that the markets will solve the economy’s problems, believing that technology will somehow bail the country out. Or the administration could make constructive policy choices to adjust to what appear to be some permanent changes in the economy. First, the policymakers should realize that a tight labor market is critical to a higher standard of living, and that demand for goods and services may now be inadequate to run the economy as efficiently as possible. The recently falling dollar will help demand by reducing prices for exports, but if the Federal Reserve raises interest rates that demand could weaken.
Second, corporate governance needs further reform in order to limit incentives to boost short-term earnings, often at the expense of long-term business growth. Following the recent financial scandals, the Sarbanes-Oxley regulations, which mostly call for more disclosure, are inadequate. Law school professors rather than eco-nomists are taking the lead in advocating reforms that give more power to shareholders and that require stock options to be accounted as a business expense—they are not now—and better oversight by auditors.10
In an age in which just-in-time labor policies are spreading rapidly and may increasingly become the norm, new policies to protect workers are also needed. Outsourcing of work to low-wage nations, though still only a small factor in the overall economy, will add to the pressure on workers to passively accept lower wages and more onerous conditions. Part-time and temporary labor therefore needs protection, as do those who lose permanent jobs because of global competition. Unemployment benefits should be adapted to support such workers and they should receive health care and pension benefits. Ideally, education, perhaps in the form of improved access to community colleges, should also be made easily available and affordable for those who lose their jobs because of global competition and are then consigned to the part-time labor market.
Finally, the US seems to have given up on leadership in a great many manufacturing technologies. Perhaps it is once again time to consider federal subsidies of some promising technologies, like a truly fuel-efficient car and stem cell research. Forgiving loans to college students who go to work as engineers, scientists, and teachers might induce the nation’s students to take jobs now relegated to well-educated immigrants, who increasingly return home.
The first year of George Bush’s second term seems likely to bring new economic difficulties. Capital spending by business, which has been strong but not as high as expected, may weaken as interest rates rise. Since productivity gains are subsiding, any wage increases may force companies to raise prices, threatening the nation with rising inflation even as growth slows down. New technologies are necessary for economic growth and rising standards of living. However much it may resist intervention in the economy, the administration ironically may soon be called on to find ways to encourage new areas of technological innovation; it will be all the more foolish if it does not start considering what those ways should be.
—February 9, 2005
March 10, 2005
Black Titan: A.G. Gaston and the Making of a Black American Millionaire (One World, 2004). ↩
For a refreshing, well-researched and elegantly written reminder that many people also failed in America, see Scott A. Sandage’s Born Losers: A History of Failure in America (Harvard University Press, 2005). ↩
For a superb history of industrial research see Paths of Innovation: Technological Change in Twentieth-Century America by David C. Mowery and Nathan Rosenberg (Cambridge University Press, 1998). ↩
Vintage, 2004; originally published as Our Own Devices: The Past and Future of Body Technology (Knopf, 2003). ↩
United Nations Development Programme, Human Development Report 2004, p. 139. ↩
Lawrence Mishel, Jared Bernstein, and Sylvia Allegretto, The State of Working America, 2004–2005 (Economic Policy Institute/Cornell University Press, 2005), p. 393. Based on data from the Bureau of Labor Statistics and the Organization of Economic Cooperation and Development. ↩
Much of the research is being done at the regional banks of the Federal Reserve. See Erica L. Groshen and Simon Potter, “Has Structural Change Contributed to a Jobless Recovery?,” Federal Reserve Bank of New York, Current Issues in Economics and Finance, Vol. 9, No. 8 (August 2003); Daniel Aaronson, Ellen R. Rissman, and Daniel G. Sullivan, “Assessing the Jobless Recovery,” Federal Reserve Bank of Chicago, Economic Perspectives, Vol. 28, No. 2 (2004); Stacey L. Schreft and Aarti Singh, “A Closer Look at Jobless Recoveries,” Federal Reserve Bank of Kansas City, Economic Review, Vol. 88, No. 2 (2003). ↩
L. Josh Bivens, Christian E. Weller, “The Causes of the ‘Job Loss’ Recovery,” Challenge Magazine, forthcoming, 2005. ↩
See Lucian Bebchuk and Jesse Fried, Pay Without Performance: The Unfulfilled Promise of Executive Compensation (Harvard University Press, 2004), and David Skeel, Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Come From (Oxford University Press, 2005). ↩