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) Kindle Edition

Northwestern economics professor Robert Gordon has a written a mostly very good and a very long book (762 pages in the print edition) on the history of economic growth in the United States from 1870 to the present. In his view it is all about the rise and fall of total factor productivity (the gains in output not due to increased labor and capital inputs, or if you will technological improvements). I know this sound very boring, but he explains the growth in output in terms of how it affected the daily home and work lives of average Americans. In other words he tells a very good story as to how the typical American moved from a completely disconnected life without indoor plumbing in 1870 to a fully connected life with water, sewerage, electricity, radio and telephones by 1940. The American of 1940 would not recognize the life of an American in 1870 while the American of today would readily recognize the life of a typical 1940 American.

To him much of this improvement is due to what he calls the second industrial revolution which was brought into being by the widespread adoption of electricity and the internal combustion engine. along with indoor plumbing remade the economy. In a way his book is a paean to industrial capitalism whose innovations brought about this revolution. Further, although it is hard to believe today, the introduction of the automobile in the early 1900s was the clean technology of its day. Simply put the major cities of the country were knee deep in horse poop and horse piss that local residents struggled to avoid. They were literally swimming in pollution.

Compare this to the third industrial revolution we are experience today involving information technology, computers and communications. Sure those technologies have improved our lives, but how do they compare to indoor plumbing and electric lights. Gordon demonstrates through a careful analysis of the data that the information revolution peaked from 1996-2004 and has since slowed down. Specifically Moore’s Law which states computer chip capacity doubles every 18-24 months which held from the late 1960s to the early 2000s broke down in the past decade to a pace of doubling every four to six years.

Going forward Gordon is a “techno-pessimist.” He views the 1870-1970 period as a one off event. The recent slowdown in productivity and economic growth certainly supports his view. Whether he is right, or not, only time will tell. Where I would disagree with Gordon is that he labels the rise of income inequality as an impediment to growth. To me that is a stretch because during his golden age of 1870-1940 there were two distinct periods of high and rising income inequality. The first was the gilded age of 1895-1910 and second was the roaring twenties. During those two time periods the standard of living for the average American grew rapidly and it is hard to see in the data that it was an impediment to growth especially when Gordon admits the official data grossly understated overall economic growth.

I know that this review has hardly done justice to Gordon’s magisterial work. I highly recommend it for those interested in how our lives came to be.

I actually finished this book last year. A fascinating thesis and a very enjoyable read. Having emigrated to the US in the early 70s from Europe I remember only too well how impressed I was: the skyscrapers, super highways, gadgets, and lots of things I had never seen or imagined. So, I am impressed that Gordon tells us that 1970 was the peak year of productivity growth in the US, and while still a powerful and innovative economy productivity growth, which is the basis of growth in income per capita, is currently slow. He also forecasts that it will not be easy, even with massive continued investment, to revive this during the next two decades.
Some of the reading can be a little tedious and repetitive, as one by one, the author goes over all the significant factors and inventions which contributed to a huge i ncrease in US incomes since the beginning of the 20th century, and created the worlds biggest economy. Nonetheless, it really is necessary to read every chapter and page because it prepares one to understand better the book's main thesis, which is repeated over and over, but explained more fully in economic terms in the last chapters. All policymakers will have to contend with the conclusions of this work, especially the new government which vows to "make America great again". Robert Gordon's book shows that with the right policies such a goal is achievable in the economic ( and social ) sphere, but the task will not be easy.

This book covers the development of the American economy and society over the last 150 years, i.e. the second and 3rd industrial revolutions. That may sound dry, but I believe it offers an essential interpretation of the modern world, a framework that the reader can apply to all modern societies. While it is up to date in an academic sense, it is largely free of jargon and indeed simply a pleasure to read, if a bit heavy on the statistics at times. I found it dazzlingly fascinating, pulling together things I have written about since college, serving up the perfect anecdotal detail to illustrate a point, and offering a broader context and historical perspective.

Gordon sees 2 broad periods. First, there was a revolutionary period in which the internal combustion engine and the domestication of electricity fundamentally transformed the lives of the vast majority of the North American population with an unprecedented array of basic innovations, such as the telephone and the provision of clean water. This lasted from 1870 to 1940. Second, he describes what he calls the evolutionary period up to present, where most of the basic innovations are extended in the their applications and growth begins to slow, particularly from about 1970. It will be very hard, he concludes, for us to return to the rapid growth we have come to expect, in large part because you cannot invent the same things twice, i.e. we are reaching a natural equilibrium that will be hard to improve upon.

According to Gordon, for most, the world of 1870 - even with the steam engine that served as the basis for the first industrial revolution - was much as it had been since antiquity. Most cities were relatively small, the overwhelming majority (70% of the population) lived on farms where their lives were nothing but toil and drudgery, cut off from even their neighbors for long periods, often in darkness, and dangerously unsanitary. One in 5 children died in infancy, life expectancy was under 40, and you essentially worked until you died or were physically unable to continue. The only contact with the outside were the church, certain communal events, and the local store and tradesmen; otherwise, they stuck to the household for workdays of approximately 14 hours, 6 or 7 days a week in the growing season. Though I knew many of these things, Gordon's exposition of them is so brilliant that I felt it in a new way and saw them as a gestalt for the first time.

Then came the inventions. They included the internal combustion engine (i.e. cars to replace horses), electrification (bringing light, appliances, power tools, refrigeration, and water pumps), and the telephone. Gradually, the households became networked, connected to the wider world by transportation, communication, etc. With clean water and proper sewage disposal, a major source of contagion disappeared, just at the time that the germ theory of disease brought new standards for cleanliness and access to more effective medicines. Infant mortality dropped precipitously, the economy began to modernize itself as more effective markets grew (among many things, eliminating the local-store monopoly as prices began to become standardized and without haggling), and consumer goods flooded into homes, increasing choice and convenience by orders of magnitude.

Of great interest, particularly for those interested in economics, Gordon questions many basic notions, such as the utility and accuracy of the growth of the GDP as a measure of well being. The introduction of automobiles, for example, phased out horses and all their associated ills (manure and urine in the streets), which improved sanitation, ease of access to transport, even the smell, all of which are not quite included in the GDP. The comfort that air conditioning brought was similar. There are scores of additional theoretical mini-essays like this, which are both useful and simply fun to read (at least for me, a longtime student of economics). Indeed, every page had some interesting observation or interpretation that got me to think.

By 1940, once these innovations had reached most of the population, the US economy had grown completely out of recognition to the farmer of 1870. Though there was great momentum that would propel the economy to grow at full employment, Gordon emphasizes the biggest improvements had been done - what followed was largely derivative, e.g. the building of the highway system for cars, the development of big box stores, the introduction of air travel, improvements in engine efficiency, etc. - and could not be repeated. Hence, as the economy matured, growth was destined to slow and not much could be done to change that. The oil shocks of the 1970s continued to slow things down as did some "excessive" regulation, but these are marginal issues.

Gordon's treatment of the so-called 3rd industrial revolution, the development information and communication technologies (ICT), is particularly incisive. He argues that ICT led to strong growth for a limited period (1996 to 2005 or so), but were not nearly as revolutionary as had been portrayed. What it generated included a number of efficiencies and entertainment possibilities, but did not fundamentally transform the economy. I must say, I agree - we love our devices, but most of our uses of them are for trivial reasons.

Finally, Gordon looks to the future. He sees nothing that will have the impact of the original triad of inventions. Moreover, he predicts that while robotics and artificial intelligence will eliminate some jobs, other jobs will emerge symbiotically - as they always have. If this outlook is perhaps a bit too sanguine, he sees nothing that will return us to a long period of growth above 3% that we saw in the golden century.

I found his policy suggestions rather disappointing, essentially macroeconomic tweaking with tax incentives and the like. Completely absent was any prescription or speculation on ways that we might change our attitudes towards our societies, e.g. to adopt a philosophy of plenitude (satisfaction in having enough rather than always more and more). That would require a different book, I suppose.

To be clear, the book is about growth in productivity and in particular economies of scope (technologies that enable fundamental transformations and result in self-reinforcing virtuous circles of economic development). It is not about the business cycle, though the Great Depression is treated at length and does not even mention speculative bubbles, such as the real estate boom that fueled the "Reagan Revolution". I would have liked more on this with the same depth of context, but will have to look elsewhere. Interestingly, his analysis goes a long way to explaining the Asian economic miracle, i.e. those national economies are developing along similar lines to that which the US did and the growth rates of their economies will also slow down as they mature - there is nothing magical about it. (Having spent a decade worrying about Japan taking over the world economy, I now do not fret much about the Chinese ever doing so. They are following a predictable trajectory, as explained by Gordon.)

It may sound perverse, but I brought this book on vacation. I was hoping to find an absorbing analysis for many hours in transit and late evenings in sparse hotel room and it was absolutely perfect in this respect. As an intimate dialogue with a great mind, there is not a boring page in the book and I am still thinking through the ideas. It is dense, challenging, and beautifully written, a genuine masterpiece of popular, up to date economic history. One of the best books I have read in a decade.

I give this book my highest and most enthusiastic recommendation.