Robert Gordon, the Special Century, and the Prospects for Economic Growth
Is the slowdown in economic progress in this new century an aberration or should we have expected it all along? Is it the result of unwise policies or unfavorable demographics, or is it the comedown that naturally occurs after a century-long global economic miracle? How one views the prospects for economic growth will have profound implications for the long-term performance of the capital markets.
Robert Gordon, a celebrated economic historian and Northwestern University professor, addresses these questions in his magisterial new book, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War. Gordon has long been associated with the view that future economic growth will be slower than that of the fairly recent past. In his new work, he expands on the idea that the Second Industrial Revolution, the period from roughly 1870 to 1970 when the basic machinery of modern life was invented (from 1870 to 1940) and then distributed to the masses (1940 to 1970), was unique and unrepeatable. The car, the telephone, the airplane, the electric grid and electric appliances, and basic antibiotics and other medicines have already been invented and cannot be invented again.
Further improvements in our quality of life, he argues, will be slower and less profoundly transformative.
Arguing against this view are an assortment of techno-optimists (Elon Musk is the best-known) and econo-optimists (including the late Julian Simon, Joel Mokyr, Matt Ridley and myself). The opposing argument holds that economic growth is not a miracle; it is what happens naturally when, under conditions of secure property rights and appropriate rewards for innovation, people try to improve their lives and those of future generations. They seek advancement by learning and inventing, saving and accumulating capital, and trying to do more with less – activities that are not about to stop, partly because they have been so consistently rewarding. While economic growth in the future may mean less accumulation of “stuff” and more improvement in experiences, conveniences and leisure, we should expect economic growth to continue at roughly the pace that it has historically.
While I’ve disagreed with Gordon’s pessimism in the past, I highly recommend The Rise and Fall of American Growth for a simple reason: Most people do not know much about economic history. Gordon’s latest book is a treasure trove of this rich and neglected history. Investing is, everywhere and always about the future – but to understand the future, investors need to have more than a passing acquaintance with the past; they need a commanding knowledge of it. In particular, they need to understand the history of business and how it interacts with the rest of society and with government, culture and domestic life. Gordon’s book will greatly help investors in their pursuit of this knowledge.
Three industrial revolutions
Like many economic historians, Gordon divides technological progress in modern times into three industrial revolutions, plus periods between the revolutions. The first (roughly 1760-1840) was based on the harnessing of steam power and led to the development of mechanized farming, the railroads, an iron and steel industry and the rise of the factory system.
The second began around 1870. It gathered force with Alexander Graham Bell’s invention of the telephone in 1876 and Daimler and Maybach’s 1885 internal-combustion engine, and continued at an astonishing pace through the discovery of sulfonamide antibiotics in 1935. During that short time – many Civil War veterans lived through the whole period – almost every American family acquired a car, a telephone and a radio. All of those existed only in science-fiction stories when the Civil War was being fought. Gordon argues that the Second Industrial Revolution was the most important one, and that the scope of the change it wrought cannot be repeated. His book’s subtitle, focusing on the period since the Civil War, is a reminder that he considers this period very special.
The third is the computer revolution, which is ongoing. It began at a rudimentary level around 1950 but did not profoundly affect everyday life until the last 30 years or so. We do not know when this revolution will end or what its ultimate benefits will be.
The First Industrial Revolution and its aftermath
Gordon takes the First Industrial Revolution as a fait accompli and begins his tale at the start of the Second – but the conditions at the start of the Second were, naturally, set by the successes and failures of the First, a point that I wish Gordon had made more forcefully. By the time the First Industrial Revolution ended, certain elements of modern living were in place. Americans spent “only” 44% of their income on food, leaving quite a bit for what we think of as the rest of life; this is a remarkable contrast with the finding that German laborers at the beginning of the nineteenth century spent 85% of their income on bread. The telegraph, invented in 1837, made fast communication over long distances possible; just 22 years earlier, in 1815, Colonel Jackson fought the Battle of New Orleans two weeks after the War of 1812 had ended. Why? Because his commanders had no way to tell him.
Looking back on the First Industrial Revolution and only the first stirrings of the Second, Mark Twain wrote to Walt Whitman on his 70th birthday:
What great births you have witnessed! The steam press, the steamship, the steel ship, the railroad, the perfected cotton-gin, the telegraph, the phonograph, the photograph, photo-gravure, the electrotype, the gaslight, the electric light, the sewing machine, and the amazing, infinitely varied and innumerable products of coal tar… And you have seen even greater births than these; for you have seen the application of anesthesia to surgery-practice, whereby the ancient dominion of pain…came to an end in this earth forever.
Only a handful of these wonders – the phonograph and the electric light – were new. Twain was writing mostly about the First Revolution. And, remarkably, the usually savvy Twain missed the most important point: the greatest marvel was not the accumulation of gadgets, but the easing of backbreaking work. Farming was already becoming increasingly mechanized. While it had always been possible, by working for countless hours, to save enough money to obtain a likeness of one’s mother (by hiring a painter), the invention of the box camera in the mid-1800s made the requisite amount of labor trivially tiny.
Lest we romanticize this period in our history too much, we should note that, using purchasing-power parity measures, the U.S. was as poor in 1800 as Pakistan or Cambodia is today. By 1870, our purchasing power had only doubled. Yet our standard of living improved more than that because work and home life were becoming more pleasant in ways that are not captured by GDP statistics. Foreign travelers to the U.S. regarded it as prosperous, even in the early years of the Republic, and certainly by 1870.
Twain concluded with a prescient forecast:
Yes, you have indeed seen much – but tarry yet a while, for the greatest is yet to come. Wait thirty years, and then look out over the earth! You shall see marvels upon marvels added to these whose nativity you have witnessed; and conspicuous above them you shall see their formidable Result – Man at almost his full stature at last! – and still growing, visibly growing while you look.
The Second Industrial Revolution
In the 30 years after Twain’s 1889 birthday letter to Whitman, the Second Industrial Revolution would run much of its remaining course. By 1919, “we,” humankind, specifically John Alcock and Arthur Brown, had crossed the Atlantic nonstop in an airplane, sitting in a chair in the sky. Thirty more years after that, the innovations of the Second Revolution had become almost universal: practically every American family had not only a car, telephone and radio, but also an indoor bathroom, hot and cold running water, electrical power and an assortment of kitchen and laundry appliances.
This was truly a profound change in a short period. Not that many years earlier, one of the primary jobs of women was carrying water from a river or well to the home, as it still is in some parts of the world.
The story of this revolution of mobility and power is the heart of Gordon’s book. Each major sub-theme of the Second Industrial Revolution is treated in a chapter: housing, transportation, communication, health, working conditions and finance.
Gordon argues that the most important innovation in this period was the car. Observers during the Great Depression noted that even the poorest households, typically lacking running water, still tried to hold onto their cars. Mobility was, and still is, the key to opportunity, including the opportunity to recover from serious deprivation.
Because the first half – more than 300 pages – of The Rise and Fall of American Growth is about the Second Industrial Revolution, I will not go into any further detail in summarizing it. That part of the book is an encyclopedia of U.S. economic history, focusing on the consumer, from 1870 to 1940, and could have easily been a standalone book. Because my goal is to place Gordon’s work in context, I’ve focused on the period before that very special three-quarters of a century and I now turn to the period after it.