Defining Ideas

The Real Cause Of American Growth

via Defining Ideas (Hoover Institution)
Monday, February 29, 2016
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Simon Cunningham

Judging from all the hype, the economic book of 2016 is Robert Gordon’s The Rise and Fall of American Growth. Gordon’s book offers the definitive account of how the many technological innovations between 1870 and 1940 dramatically improved life in the United States. On the positive side, he accurately chronicles the major advances in electricity, public sanitation, pharmacology, and communications—and documents the rise of the internal combustion engine. But on the negative side, the book is utterly silent on why American society was capable of making such a radical transformation during that period.

Gordon’s book has attracted much attention because of his warning that America is not likely to again see such dramatic improvements in the standard of living. The question is why. The first part of the answer is simple enough. In the late nineteenth century, there was a lot of low-hanging fruit—that is, there were many ripe opportunities for innovation. This partially helps explain why American society grew in the years between the end of the Civil War and the start of the Second World War. The second part of the answer, which Gordon leaves unmentioned, is that these innovations coincided with a period of American history when laissez-faire capitalism was at its peak. Growth started to decline because of the massive expansion of the government occasioned by the New Deal, which put a strain on the free market.

Gordon paints a vivid portrait of the painful drudgery of life in 1870: heavy manual labor in darkness and silence, with only primitive drugs and medical procedures. Overall economic growth before 1870—and on this point 1850 may be a more accurate date—took place at a snail’s pace, with life expectancy stuck at 40 years for over three centuries. Gordon argues that things began to shift when Great Britain and the United States first developed decent sanitation systems. The natural experiment of the London cholera epidemic of 1854 persuaded Dr. John Snow that the pollution of the Thames River, and not some mysterious miasma, was the source of the disease. Thereafter, the construction of the London sewers dramatically reduced infectious diseases in England and, when imitated, produced the same result in the United States. Then, in 1881, Louis Pasteur developed the germ theory of disease, which led to the isolation of several major pathogens, and many human lives being saved. At the same time, technical progress surged forward with the invention of the telephone, the electric light, the radio, the automobile, the airplane, aspirin, and much more.

The reason for this advance, as Gordon points out, is that there was so much room for growth. A horse drawn carriage averages about five miles-per-hour. At that rate, a 1000-mile journey takes a painful 200 hours. A train moving at 50 miles-per-hour not only provides greater safety and comfort, but also allows that same journey take place in 20 hours. With the development of the airplane, 20 hours becomes two hours, saving 18 hours but at far greater cost.

This pattern repeats itself with other forms of innovation, too. Understanding vitamin deficiencies in the early part of the twentieth century eliminated many horrific diseases—niacin for pellagra, thiamine for beriberi, and vitamin C for scurvy. Simple dietary supplements saved numerous lives. Similarly, the standard treatment for diabetes in 1920 was slow starvation, often ending in death. But the isolation and purification of insulin in 1922 saved many lives. (Consider the case of Elizabeth Hughes, daughter of Supreme Court Charles Evans Hughes. She contracted the disease at age 11 in 1919. When she was 15 years old in 1922, she weighed 45 pounds. But her life changed with her first shot of insulin. She rose, as if from the dead, married in 1930, and lived until 1981.) And the discovery of antibiotics had a similar transformation on the lives of individuals suffering from infectious diseases. The great Vannevar Bush, who headed the American science effort in World War II, noted in his neglected 1945 classic Science: The Endless Frontier, “The death rate for all diseases in the Army, including the overseas forces, has been reduced from 14.1 per thousand in the last war to 0.6 per thousand in this war.”

Gordon’s supports this thesis with an impressive amount of evidence. But his account overlooks why this transformation took place chiefly in the United States and Great Britain, and not elsewhere in Europe, the Americas, or Asia. The explanation cannot lie in the general state of scientific knowledge, which is always freely available across the globe. Rather it lies in the set of national institutions and norms that shape society. On this score, it is noteworthy that the words laissez-faire and capitalism do not appear in the index to American Growth, even though these institutions set the dominant political, economic, and legal frame of the age.

Gordon seems determined to negate the importance of strong property rights and limited government. It is surely no accident that the dust cover of American Growth is the 1939 painting, “The Construction of a Dam,” by the artist William Gropper. The picture shows a group of muscular and determined men precariously perched in the dangerous work of putting up the iron bars needed to support the future dam. Gropper painted in the social-realist tradition, and was known for his “lifelong antipathy to capitalism.”

The picture is an absurd counterpoint to the underlying message of the book. The source of growth and innovation was not brawn. It was brains and innovation, both of which could only take place in a culture that cherished and protected both of these values. It is supremely ironic that the most dynamic period in the world is usually described by lawyers in ominous terms as the Lochner Era, during which the Supreme Court was denounced as a superlegislature for overriding the decisions of the political branches of government when, the story goes, they sought to ameliorate the hardships of the new industrial revolution. Pundits like Louis Brandeis and Felix Frankfurter chided the Supreme Court for failing to see that the rise of large industrial complex required not only a strong antitrust law, which came with the Sherman Act of 1890, but also an extensive range of other interferences in the market in order to promote health and safety.

It is impossible to reconcile the progressive attack on laissez-faire institutions with the huge rate of material and social progress that took place in large measure because the old Court consistently followed classical liberal principles. The majority in Lochner v. New York (1905) got it right when it recognized that the maximum hour legislation of the New York baker’s law was an anti-competitive effort to advance union labor at the expense of non-union, and often immigrant, workers.

The same theme runs through the Court’s stout response to organized labor. Thus the Court properly struck down mandatory collective bargaining statutes at both the federal level in Adair v. United States (1908), and at the state level in Coppage v. Kansas (1915) for the simple reason that labor cartels should never receive state support. The old Court was equally correct in Hitchman Coal v. Mitchell (1917) in enforcing yellow-dog contracts, under which employees agreed (often at their own request) not to become (or promise to become) union members so long as they remained on the job. Similarly, the Court rightly subjected unions in Loewe v. Lawlor (1908) to liability under the Sherman Act for their collective refusals to deal. The flexible labor markets that the Court protected resulted in higher productivity, higher wages, shorter workweeks, and a higher standard of living. The progressives never noticed.

The same pattern held with the new industries. It is not generally appreciated just how expert and precise the judicial response was to government regulation of large firms, common carriers, and public utilities. The Court understood that regulation was intended to curb monopoly profits, not to create endless cross-subsidies between interest groups.

Nor should anyone overlook the excellence of patent law during this period, which gave ample protection to inventors, without allowing any one to dominate an industry or new form of technology. The situation has gotten far worse now that the misnamed America Invents Act of 2011 has undone most of the good work done by the Patent Act of 1952. It is also worth noting that the FDA had no power to stifle the development of new drugs until the constitutional revolution of 1937 gave the United States virtually plenary power to regulate the economic sphere. The 1938 Food Drug and Cosmetic Act was the first modest foray into this space, but the 1962 Kefauver-Harris Act set back drug innovation in ways that continue to this day by requiring “efficacy” to be proven in addition to safety.

The list of course does not end here: just think of the impact of Dodd-Frank on financial regulation and the Affordable Care Act on healthcare. None of these major pieces of legislation receive more than passing mention in American Growth. In his TED talk on this issue, Gordon attributes the decline in innovation to matters of demographics, education, debt, and inequality, ruefully noting the negative growth in income over the last few years in the United States. But at no point does he mention that the source of all these negative trends is an expansion in the size of government that outpaces the rise in GDP.

To be sure, the optimal government is not so small that Grover Norquist could “drag it into the bathroom and drown it in the bathtub,” whatever that means. It should be large enough to deal with the protection of individuals and their property, the creation of infrastructure, and the regulation of monopoly. But over the last 50 years, most government growth has been unrelated to these ends and concentrates on a dangerous combination of redistributive policies, which do not help the poor, and excessive economic regulations that harm everyone. Is there any wonder that the rate of economic growth has slowed, and that median income has gone down as the size of government has gone up? Gordon misses how the decline in our political institutions and social ethos have kept our anemic growth rate below 3 percent per annum since 2005. Gordon, it seems, wants to be understood as yet another champion in the war against economic inequality, just like the flawed Thomas Piketty. Pity he is fighting on the wrong side of the battle.