The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (The Princeton Economic History of the Western World Book 70)

by Robert J. Gordon

“Baumol’s disease,” in which the relative price of the innovation-intensive industries, e.g., the production of computers, declines over time while the relative price of the noninnovative industries, e.g., the playing of a string quartet, increases over time. Baumol’s disease can be cured in some instances, exemplified by how the inventions of phonograph records, tapes, CDs, and MP3s have allowed a single performance of a string quartet to be heard by millions. But some parts of economic activity still exhibit Baumol’s disease without technological relief for rising relative costs, including seats for live performances, college tuition, and medical care expenses.

as real income rises, individuals choose not to spend all their extra income on market goods and services, but rather consume a portion of it in the form of extra leisure—that is to say, by working fewer hours.

after 1996, hours worked per person fell as a result of a steady decline in the labor force participation rate of prime-age males and of young people.

total factor productivity (TFP), often called “Solow’s residual” after the most prominent inventor of growth theory and growth accounting, Robert M. Solow. This measure is the best proxy available for the underlying effect of innovation and technological change on economic growth. And the results are surprising. Because the contributions of education and capital deepening were roughly the same in each of the three intervals, all the faster growth of labor productivity in the middle period is the result of more rapid innovation and technological change.

Production miracles during 1941–45 taught firms and workers how to operate more efficiently, and the lessons of the wartime production miracle were not lost after the war: productivity continued to increase from 1945 to 1950. In addition to the increased efficiency of existing plant and equipment, the federal government financed an entire new part of the manufacturing sector, with newly built plants and newly purchased productive equipment. Chapter 16 shows the staggering amount of this new capital equipment installed during the war—its acquisition cost in real terms was equal to fully half the stock of privately owned equipment that had existed in 1941 and was more modern, and hence more productive, than the old equipment.

The subject of this book is the standard of living in the United States, the country that has expanded the frontier of technology, innovation, and labor productivity since 1870.

Both world wars greatly delayed implementation of the Great Inventions of the late nineteenth century in Europe and Japan, so much so that in 1950 the level of labor productivity in western Europe was only half that in the United States. When Europe caught up in the years the French call “les trentes glorieuses” (1945–75), Europeans were chasing the frontier carved out by the United States decades earlier.

the percentage of the French population having access to electricity and an automobile in 1948 was roughly equal to that of the United States in 1912.

The major inventions of the late nineteenth century were the creations of individual inventors rather than large corporations.

innovation through decentralization

The role of foreign inventors in the late nineteenth century was distinctly more important than it was one hundred years later, when the personal computer and Internet revolution was led almost uniformly by Americans, including Paul Allen, Bill Gates, Steve Jobs, Jeff Bezos, Larry Page, and Mark Zuckerberg. Among the pioneering giants of the Internet age, Sergei Brin (co-founder of Google) is one of the few to have been born abroad.

Their image as country bumpkins in the eyes of Europeans was erased at the London Crystal Palace exhibition of 1851, when British and foreign observers were shocked and impressed not just by the advanced tools displayed by the Americans, but, more important, by their apparently new method of manufacture:

So when the displays were erected it came as something of a surprise that the American section was an outpost of wizardry and wonder. Nearly all the American machines did things that the world earnestly wished machines to do—stamp out nails, cut stone, mold candles—but with a neatness, dispatch, and tireless reliability that left other nations blinking…. Cyrus McCormick displayed a reaper that could do the work of 40 men…. Most exciting of all was Samuel Colt’s repeat-action revolver, which was not only marvelously lethal but made from interchangeable parts, a method of manufacture so distinctive that it became known as the American system.2

more serious challenge for the Europeans was the set of manufacturing skills that the United States steadily developed in the mid-nineteenth century, as exemplified by the 1851 Crystal Palace reaction.

Bryce’s The American Commonwealth, a work of evocative historical description, comparison, and analysis, based on the author’s five trips to America in the 1870s and 1880s, in which Bryce painstakingly reproduced the travels of Tocqueville.4

Just as the country-to-town migration in Britain reduced the standard of living of the average worker during 1800–1830, so the urbanization of America after 1870 also reduced the average standard of living of working-class Americans.6

A quintessential symbol of the American advance and future promise is captured by the 1869 hammering of the golden spike that united the transcontinental railway.

The event happened at noon on May 10, 1869, at Promontory Summit, Utah. That moment was a pivotal episode in world history as Leland Stanford pounded a golden spike with a silver hammer and in an instant ended the isolation of California and the Great West from the eastern half of the United States.

first 1858 undersea ocean telegraphic cable, the famous message “DONE!” was transmitted within a second to the entire United States, Canada, and the United Kingdom.

By 2010, persons per household had declined by half, from 5.3 to 2.6, and the percentage of adults in married couple households had declined from 80.6 percent to 48.4 percent.

Labor force participation of prime-age males was a near-universal 98 percent in 1870, compared to a substantially lower 93 percent in 1940 and 92 percent in 2010.

contemporary sources suggest that men “worked until they dropped”—until they could no longer work due to disability or death—and thus that the concept of retirement for men did not exist. In the absence of old-age pensions and Social

“The coffeepot could almost stand beside the six-shooter or the covered wagon as a symbol of the Old West.”

Fixed prices were rare until the development of the department and chain stores later in the nineteenth century. The time-consuming process of waiting while individual orders were sold from bulk containers was prolonged by the need to haggle over price. It was not uncommon for higher prices to be charged to those of higher status and economic position.