By Stuart Rosenblatt
The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War
Robert J. Gordon
Hardcover; 784 pages; Princeton University Press (2016)
The Rise and Fall of American Growth is a landmark study of U.S. economic policy over the past 125 years. Focusing not on monetary or financial outcomes, but rather on the expansion, and later contraction, of physical production, the book is a welcome relief from the excess of banking-centered tomes. It paints a remarkable picture of the impact of technological progress in the nation, from the late 19th Century to the beginning of the 1970s, and offers a searing indictment of the early 1970’s abandonment of that progress. Gordon develops new insights into the causes of the emergence of the United States as a great industrial power, while attacking many of the economic assumptions that have hindered serious appreciation of those breakthroughs.
His thesis is that the hundred-year period 1870-1970 represents a “Special Century” of durable economic growth, and that the period 1920-70 was the Golden Age of productivity gain and technological advance. He begins with the startling fact that real economic growth, measured in physical terms and increase in the standard of living, has only taken place in the last 200 years! From the dawn of what we might call modern civilization 100,000 years ago, the first 99,800 years were characterized by very little in the way of real expansion. The annual rate of growth on the planet was about 6% per century.
Gordon fails to acknowledge the correlation between population growth and critical scientific and technological expansion that occurred during and after the Renaissance in Europe in the 15th-16th centuries. Nor does he identify any of the offshoots of that movement, such as the prodigious accomplishments of 17th-Century France under Finance Minister Jean-Baptiste Colbert.
Nevertheless, his overall conclusion is sound. Until the advent of the American Revolution and the promotion of a manufacturing economy which began to take root in the United States in the 1820s, durable growth in the world changed little over centuries. Unfortunately, Gordon does not delve into the policy of Alexander Hamilton or his American System protégés. Nor does he elaborate on the impact of the scientific breakthroughs that proliferated in the 19th Century, such as the discovery of electromagnetism, breakthroughs in thermodynamics, developments in basic chemistry, biology, etc.
His focus is on the gigantic impact of inventions and technologies that made their way into the economy and altered its trajectory upward. He points to the two big inventions that shaped the 20th Century beyond all else. They occurred in the same year, 1879: the inventions of the electric light bulb by Thomas Edison and the internal combustion engine by Karl Benz. Gordon traces the impact of those two defining innovations as “red dye” markers for the dramatic transformation of production in the United States.
Gordon recognizes that “some inventions are more important than others.” He looks at the clustering of new inventions at the end of the 19th Century, whose implementation would take 40 years to be fully realized, as launching the Special Century.
Discarding the Shibboleths
Gordon‘s purpose in writing the book is to convey the monumental accomplishments of the U.S. economy during the Special Century, to examine the unprecedented increase in the standard of living, and to unearth the actual causes for the transformation. In the process, he discards as shibboleths the various economics truisms and measuring sticks, which have prevented serious analysis of real economic growth.
First, he repudiates the idea of a “steady-state economy” and says that his exposition proves that the real, physical, or productive economy moves upward in non-linear jumps. “Steady-state” economic theory assumes that a continuous flow of new ideas and technologies drive an economy forward, but the reality is that economic progress has been anything but continuous. The period 1870-1970 represents a quantitative and qualitative leap above all previous history, and is not predictable from studying the previous centuries.
The flood of new technologies into the economy after the Civil War was generated by breakthroughs made in the first half of the 19th Century, which itself represented a definitive break over the previous periods. The Special Century is itself divided into three periods: 1870-1920, 1920-1950, and 1950-1970; the achievements of the 1930-50, however, period far surpass the earlier part of the century, as we shall see.
Also, Gordon is emphatic in overturning the assumption that Gross Domestic Product, GDP, or more precisely Real GDP, is a valid measure of the development of the standard of living or the economy. Real GDP is the total production of goods and services adjusted for price inflation, per member of the population, that is, real GDP per person. It is the widely accepted metric for analyzing an economy.
Gordon rejects this standard on several grounds: It omits many aspects of the quality of life for the citizenry; it woefully understates changes in prices for goods, especially newly introduced products, making real calculations all but impossible; and, finally, GDP entirely omits many new technologies until years or decades after their introduction. Changes in prices–e.g., for gasoline, over decades, or new products, such as the introduction of indoor plumbing, air conditioning, automobiles, automatic washing machines, electrified tools, etc.–are not reflected in real GDP in many cases. The advent of the automobile, central to progress in the 20th Century, is not accounted for in GDP until 1935.
These innovations, incorporated into the growing and varied standard of living of the population, are a central theme of Gordon’s study. Real GDP entirely misses much of the impact.
Total Factor Productivity
Gordon replaces real GDP theory with an in-depth investigation of productivity expansion, and especially Total Factor Productivity (TFP). He delves into changes in output of goods and services that were generated by new innovations in technology, and makes this his measuring stick. Gordon elaborates this concept from the outset of the book. He analyzes output per person, per hour, and hours per person, for the entire 100 years, especially in light of introduction of new industries.
His findings are eye-popping. He then divides the century into two sections, 1870-1920, 1920-1970, and adds the final period, 1970-2014 to complete his analysis. The first and last periods are almost identical in all statistics, while the middle period (1920-70) is significantly higher. Output per person is much higher, individual hours are shockingly lower, and output per hour, productivity, is also significantly higher: 2.8% compared with 1.8% in the first, and 1.7% in the third. (See Figures 1-1 and 1-2).
Gordon’s findings pose a useful paradox. Hours per person dropped dramatically in the middle period, yet productivity surged! He points to several causes of the fall in hours of labor, the most important being the labor reforms ushered in by the New Deal in the 1930s, resulting in the 8-hour day, 40-hour week, etc. But the most powerful marker appears in the dramatic rise in labor productivity.
Labor productivity is the driver of the process, so Gordon breaks that down further. He looks at education levels, which are relatively constant for all three periods; at the impact of capital input on labor hours (also called capital deepening), which is also relatively constant for the three time frames, and at what economist Robert Solow called “the residual.” The residual is that which is unaccounted for in driving the overall rise in productivity. This segment is referred to as Total Factor Productivity, or Multi-Factor Productivity, and measures the impact of scientific and technological innovation on the economy. It is the measure for the success or failure of an economic system; the Special Century results jump off the page.
TFP growth between 1920 and 1970 is triple the growth rate registered in the preceding or succeeding periods! Within the period 1890-2014, the 1920-1970 period accounts for 66% of the TFP growth. Given that the contributions of education and capital deepening (ratio of capital input to labor hours) remain the same, the driving force is the innovation and technological development, also known as Total Factor Productivity.
Later, Gordon further investigates TFP and says that “labor productivity” can be subdivided into four categories:
1. Increases in labor quality, usually represented by changes in educational attainment2. Increases in the quantity of capital relative to the quantity of labor3. Increases in the quality of capital4. The leftovers, alternately called “total factor productivity” or “the residual,” or even “the measure of our ignorance.”
While often treated as a measure of innovation and technical progress, the residual incorporates every aspect not just of major innovation but of incremental tinkering and anything else that improves efficiency, including the movement from low productivity jobs in agriculture to higher-productivity jobs in the cities. Gordon returns to TFP throughout the book, further refining its meaning. The first three-fourths of the book are devoted to his elaboration of the causes of the Special Century and their outcomes.
Technological Innovations and the Special Century 1870-1930
Gordon dates the generation of the hundred-year breakout period to the driving-in of the Golden Spike in Utah on May 10, 1869, to connect the Transcontinental Railroad. This event signaled the culmination of the great rail and transit breakthroughs of the preceding decades and the science-driver program that linked the nation and sparked massive technological optimism. Historian Stephen Ambrose said of the Transcontinental Railroad: “There was nothing like it in the world!” It was the biggest infrastructure program ever attempted and completed by mankind; the biggest companies in the country carried it to completion. It was accompanied by the construction of the modern telegraph system, also spanning the continent, which announced to the world the completion of the rail line as it was happening. The Civil War was the point of transformation of the country which led to the breakthroughs Gordon enumerates in the book.
Gordon identifies three industrial revolutions over the past two centuries which drove the nation’s economy. The period 1770-1820, the First Industrial Revolution, was based on the development of the steam engine, and its offshoots, the railroad and steamship. It also coincided with the shift from burning wood to coal as the energy source. A critical result of that was the creation of the iron and steel industries. This upward shift in “energy-flux density” typified the first revolution (See Ben Deniston, “Energy Flux-Density,” EIR, Oct. 25, 2013).
The Second Industrial Revolution, 1870-1920, was characterized by two major breakthroughs: the development of the internal combustion engine, and the development and utilization of electricity.
The Third Revolution for Gordon occurred from 1970 to the present, and encompasses the breakthroughs in the information, communication, and entertainment industries. This latter “revolution” was the weakest of all, and its impact on productivity petered out after 2004.
The Second Revolution is elaborated in detail by Gordon for much of the first section of the book. He develops what we call the industrial, infrastructural, and consumption/standard of living aspects of the period. The best way to comprehend the overall transformation in these areas has been emphasized in Executive Intelligence Review and other locations as the creation of a new “infrastructure platform.” The platform of the early 19th Century revolved around the harnessing of steam power, and spin-offs such as steamships, steam-powered rail, and the advent of coal and related energy sources.
Gordon maintains that the internal combustion engine and electricity drove the Second Industrial Revolution, and that is fine as far as it goes. What was erected was a new platform with a higher energy throughput generated by electric power, water management, new modes of transportation generated by internal combustion engines, and even the early appearance of air travel. Gordon’s focus is on electricity and engines, but he does attempt to fill out the framework. He paints a vibrant picture of the impact of new innovations on both the production and consumption sides of the economy.
Central to the new industrial expansion was the application of electricity to most walks of life. The advent of electric lighting changed everything from household appliances to industrial applications. The first, and perhaps most extraordinary development, was the lifting the veil of darkness from daily existence. Prior to the wide availability of the electric light bulb, homes, offices, factories, and farms went virtually dark (relying candlelight or kerosene lamps, at best), from the sunset till sundown. Electric lighting and power changed all that forever.
By 1920, electric lamps were 10 times brighter than kerosene and 100 times brighter than candles. As the technology developed, prices declined. In 1900, 3% of American homes had electric lights, and by 1912, 16%. From 1902 to 1915, the annual output of electric power doubled every seven years, and every six years from 1915 to 1929. From 1910 to 1960, electricity utilization doubled every decade. Soon, a raft of new devices made their way into the economy, including refrigerators, toasters, irons, vacuum cleaners, washers and dryers, and more. On the industrial side, electricity began to power factories and then machinery, tools, etc. By 1940, 79% of America had electric lighting.
Developments in transportation were equally impressive. The United States had 60,000 miles of rail in 1870; from 1870 to 1900, railroad mileage increased by a factor of five. The nation laid 20 miles a day of new track and built seven transcontinental rail lines. Railroads and telegraph lines went hand in hand, and as a result, new cities sprung up, and older cities grew in stature. Not only did rail transport people, it also began to carry freight. With the addition of refrigeration and modernization, cargos could be transported cross-country in shorter times, while perishable goods from the West could find their way to the East Coast in record times.
From 1870 to 1930, Chicago became the fastest growing city in the world. Rail hub for the nation, Chicago boasted in 1905 that 14% of all rail mileage in the world went through the Windy City. The development of diesel engines in 1934 sped up the process. Urban transit also made enormous strides from the turn of the 20th Century onward. In 1887, Frank Sprague was hired by the city of Richmond, Virginia to design an electrified trolley car system. It began operation in 1888, and was a great success. Within two years, more than 200 electrified streetcar systems were in operation throughout the nation. In 1890, there were 1,260 miles of electric streetcars, and it tripled by 1902. Growing congestion gave way to the development of subways, with Boston building the first two-mile network in 1897. The first New York subway opened in 1904, and it quickly became a model system for the country.
The advent of urban mass transit dramatically altered the economy and increased the productive powers of the population. In so doing, it replaced the horse-powered system of the previous decades. Horses had been the mainstay of the rural and urban economy until the turn of the 20th Century.
The Internal Combustion Engine
The other major invention which transformed the standard of living and the massive increase in productivity was the internal combustion engine. The automobile and its offshoots–tractors, buses, trucks, etc.–made an immense impact on the economy. In 1908, there were 8,000 cars registered in the U.S., and by 1930 there were 27 million (this discontinuity that is not even discussed in GDP statistics at the time!).
Highlighting the transformations introduced by the Ford Motor Company, Gordon puts the spotlight on the Model T, with its lightweight design, ability to handle dirt roads (which endeared it to farmers), and low cost. The Highland Park, Michigan Ford auto factory, which opened in 1910, was the first to employ vertical integration, producing most of his parts on site, cutting costs all around. In 1913, Ford introduced the mass-production assembly line, which revolutionized the labor process. Production costs fell rapidly; the price of the Model T fell 80% between 1910 and 1923. In 1923, the Model T controlled 55% of the market, producing and selling 1.8 million vehicles.
Automobiles transformed both urban and rural life. Cars, trucks, and tractors rapidly replaced horse power. By 1924, the 6.5 million farms in the country were outfitted with 4.2 million automobiles, 370,000 trucks, and 450,000 tractors. In 1909, comparable figures were zero!
This directly contributed to a large increase in productivity on farms. Output increased, time spent on planting, harvesting, marketing, and other activities was reduced. By 1910, the total power created by automobiles exceeded that of all farm animals. By the 1930s, modern air travel had begun. The continued development of the internal combustion engine established it as a mainstay of the American economy; by 1929, the United States was producing 6 million engines of all types per year, roughly 80% of the world output. This immense capability would be deployed on a vast scale when the United States entered World War II.
In The Rise and Fall, Gordon places great emphasis on the improvement in overall living standards, which, in turn, helped to create a workforce capable of utilizing the more advanced technologies being introduced into the economy. The author makes no distinction between the productive/manufacturing operation of the economy and its impact on the standard of living.
In addition to electrification, an area of critical importance was the development and installation of clean water systems in workplaces and homes. Not only did this make available water for household chores, firefighting, industrial activities, etc., but also brought about a reduction in waterborne diseases, such as typhoid and dysentery. Central heating added to the improvement in living standards.
Another transformation occurred in hospitals, which were breeding grounds for disease. The discovery by Joseph Lister of antiseptics and their widespread use, coupled with the revolution in biology initiated by Louis Pasteur, highlighted by his germ theory of disease, significantly improved the safety of hospitals. Pasteur’s discoveries spawned development of a raft of vaccines for many diseases, including diphtheria, pneumonia, typhoid fever, scarlet fever, and later, tuberculosis and polio.
The major consequence of these developments was an increase in life expectancy and a decrease in mortality rates, especially infant mortality, which declined precipitously from 1890-1950 as life expectancy similarly rose. Infant deaths per 1,000 was 215 in 1880; by 1950, the rate was 27 per 1,000. Life expectancy for white males in 1900, was 47 years and black males 33 years. By 1940, that had risen to 62 and 53. Gordon attributes the discrepancy for black males to the impact of slavery and later Jim Crow laws.
The large increase in lifespan and total population directly contributed to the growth in GDP, and more importantly, to productivity. People lived longer, better, and were moving out of menial jobs into productive jobs. By 1940, 57% of the population lived in urban areas, up from 25% at the turn of the century.
In his summary of this landmark rise in living standards, Gordon slams the inadequacy of Real GDP as a measuring tool. The standard of living between 1870 and 1940 tripled. Gordon says that real GDP fails to capture the quality of that change. Electric light bulbs were brighter and longer lasting; the variety and freshness of food also improved. Fresh meat and vegetables could be transported by electric-powered, refrigerated rail freight cars. Real GDP does not account for this.
Nor does Real GDP account for declines in price and availability of automobiles during the first third of the 20th Century; motor cars were not included in the Consumer Price Index until 1935! Real GDP does not account for the fall in infant mortality rates, from 22% per 1000 births in 1890 to 1% in 1950. Neither does it account for the change from the 70-hour to a 40-hour work week by the 1930s.
Real GDP does not account for any of the changes inside the home: clean running water and sewage lines, indoor toilets,-electric powered washers and dryers, etc.
Real GDP does not account for any of the changes inside the home: clean running water and sewage lines, indoor toilets,-electric powered washers and dryers, etc.
1930-1950: The Golden Age of ProductivityAll of this provides prima facie evidence that the growth rate of real GDP in the years covered by part I of this book, 1870-1940, is substantially understated in all available measures … research has thus far been confined to individual output categories. The value of railroads compared to canals has been estimated at 3% of real GDP/year…. Though no studies have been carried out for a wide range of other inventions of the same period, including the value of the invention of electricity and internal combustion engines, it is not difficult to imagine an omitted value to economic growth amounting to 100% of GDP growth. In fact, Nordhaus estimates the value of increasing life expectancy in the first half of the twentieth century roughly doubles the growth rate of the standard measure of consumption expenditures.
The Rise and Fall of American Growth singles out the 20-year period 1930-1950 as the centerpiece of the expansion of real production and productivity. Gordon calls it “The Great Leap Forward.” He says that the period is not continuous, but can be broken up into several time frames. First is the plunging economy of the Great Depression period of 1929-1933, followed by the partial recovery of 1933-1937, the period coinciding with the New Deal. However, the removal of federal intervention in 1937 led to a precipitous fall in output and productivity and a steep recession in 1938, which, in turn, was followed by the World War II buildup, which Gordon correctly labels as “explosive.”
The irony of this period, Gordon writes, is that although much of the economy had collapsed, innovation in new industries and technologies continued.
There were two aspects to developments in the 1930s. First was the massive surge in direct investment in infrastructure orchestrated by the Roosevelt administration. This included expansion of the highway network, and major projects such as the Tennessee Valley Authority, Golden Gate Bridge, Hoover Dam, the Bay Bridge, etc. This is clearly reflected in the growth of Total Factor Productivity (TFP) throughout the decade along with a rise in overall output. Second, innovations from earlier breakthroughs were made.
These included developments in urban infrastructure, water-purification projects, electricity-grid expansion, urban transit, and the like. There was also the further build-out of the auto industry, and related feeder industries, such as steel, machinery, auto parts, and components, etc. While Gordon spends too little time on the impact of the New Deal, and fails to fully elaborate the critical role of the new infrastructure platform in increasing overall productivity, he does, however, fully comprehend the impact of new technologies in driving the upward trend of productivity.
Toward this end, he introduces the concept “General Purpose Technology (GPT)”; he attributes this term to authors Timothy Bresnahan and Manuel Trajtenberg, who wrote General Purpose Technologies “Engines of Growth?” (1992) as a working paper for the National Bureau of Economic Research. He says that fundamental inventions, such as electricity and internal combustion engines, can be labeled GPTs. They, in turn, spawn sub-inventions, which help drive the economy. Examples of GPT are: electricity and the internal combustion engine.
In this table, Gordon points out that electricity generated by industrial establishments grew by 57% between 1929 and 1941, even greater than the 31% from 1941 to 1950.
Electricity output continued to increase during the 1930s, ‘40s and beyond; during the war years, electricity from government-owned or -financed establishments surpassed those of privately owned sources. From 1929 to 1950, electricity production rose by 3.3 times.
By 1929, the United States produced 80% of the world’s motor vehicles; the auto industry would then be converted to turn out the planes, tanks, trucks, and other vehicles deployed to win the war.
Breakthroughs in production engineering and new sub-inventions in the 1930s contributed to the increase in output and Total Factor Productivity. Gordon acknowledges the role of the Roosevelt Administration in fostering the climate for this expansion, but he misses the boat on the revolutionary role of the New Deal in shaping the outcome.
Electricity and automotive production expanded in the 1930s and was coupled with increased investments in new equipment. Spending in new structures (buildings, factories, etc.) remained depressed during the decade, but equipment investment rebounded sharply. New investment rose every year during the New Deal, accompanied by constant innovations. “Railroad locomotives, trucks, tractors, and industrial equipment manufactured in the late 1930s were all of substantially higher quality than their counterparts of the 1920s.”
Gordon also references the discovery of oil in East Texas in 1930, which spurred breakthroughs in petroleum-related industries. The achievements of the 1930s, he writes, defined it as “the most fruitful innovative period” of this industry. The breakthroughs included: polyvinylidene chloride (1933), low-density polyethylene (1935), acrylic methacrylate (1936), polyurethanes (1937), and dozens more. The creation of the National Bureau of Standards under President Hoover had brought uniformity to the growing production capability. Production parts, from nuts to bolts, were brought into conformity. The increase in productivity catalyzed by standardization also helped shape the World War II economic mobilization. Output was ramped up to previously unimagined levels.
Gordon also emphasizes the impact of New Deal labor legislation on TFP calculations. The New Deal brought in the 40-hour work week; pay and benefits began to increase, along with mechanization. Gordon is convinced that this change contribution mightily to the increase in TFP during the 1930s, and beyond. The net result of this change during the New Deal period was the second-highest rate of TFP growth in U.S. history. Gordon calculates this as approximately 1.8% per year increase.
Gordon’s figure, reflected in the chart above, is at odds with that of Alexander Field (A Great Leap Forward: 1930s Depression and US Economic Growth, 2011), or the National Bureau of Economic Research, which believes that the TFP increase in the 1930s was near 3% per year, and the highest of all periods. This discrepancy will be resolved later in the review.
World War II: Dramatic Increase in Productivity
Gordon’s treatment of the 1940s, and especially the World War II mobilization, 1941-1945, differs from that of other analysts. Economists and historians prior to Gordon thought the mobilization significant, but that its impact on TFP was not as great as the 1930s, and, in fact, represented a slowing down of equipment investment. They also argue that the output of war industries was consumed in military production, and did not affect the overall standard of living.
Gordon unequivocally states:
The most novel aspect of this chapter [on the 1940s] is its assertion that World War II itself was perhaps the most important contributor to the Great Leap (1930-1950). We will examine the beneficial aspect of the war both through the demand and supply side of the economy. The war created the household savings that after 1945 was spent on consumer goods that had been unavailable during the war, the classic case of ‘pent up demand’. A strong case can be made that World War II, however devastating in terms of deaths and casualties among the American military, nevertheless, represented an economic miracle that rescued the American economy from the secular stagnation of the late 1930s. In fact, this chapter will argue that the case is overwhelming for the ‘economic rescue’ interpretation of World War II along every conceivable dimension, from education and the GI Bill to the deficit-financed mountain of household saving that gave a new middle class the ability to purchase the consumer durables made possible by the Second Industrial Revolution.
Every category of production rose dramatically during the World War II mobilization. Industries worked literally ’round the clock, with three shifts fully staffed. Gordon cites the Kaiser Shipyards of California and Oregon as exemplary of the extraordinary transformation of various industries. In 1942, it took the yards eight months to build a Liberty Ship; within a year, that was reduced to several weeks, and finally, to just days.
In Michigan, Henry Ford built a gigantic factory at Willow Run with government financing, and outfitted it with the latest technology and machine tools. Willow Run employed 50,000 workers, was built inside of a year, and started production in May 1942. By February the following year, it was turning out 75 bombers per month; 150/month by November 1943, topping out at 432/month in August 1944. It was the biggest mass-production plant in the nation.
During the war years, financing came from the government, and was also channeled through the Reconstruction Finance Corporation. Gordon completely misses the role of the RFC in helping to fund the war buildup. The RFC had been created under Hoover, mainly to bail out the banks and railroads. It was taken over by Roosevelt, and used to help build the infrastructure programs of the New Deal.
But in World War II, the RFC was given additional capital by the government, allowed to issue its own bonds, and authorized to recycle repaid debt into more projects. It spent nearly $30 billion on the war effort, and was directly responsible for erecting most of the new facilities used to build the war machine. The RFC created and ran the Defense Plant Corporation, Rubber Reserve Company, Defense Supply Corporation, eight large companies in all, and directly oversaw the spectacular war build-up.
The role of government financing of production, as distinct from the private sector, has heretofore been left out of GDP and TFP accounting, which has used only private-sector investments as their metric. Thus real value added to the economy from government-funded war industries was left out of their calculations! Gordon identifies their biggest blunder as the omission of machine-tool production. The number of machine tools produced in the U.S. from 1940 to 1945 doubled, rising from 942,000 in 1940 to 1,882,000 in 1945. It was the single-most important driver of the war program, and it was financed by the government, not by private firms.
Also, the amount of additional equipment that the federal government purchased that went into private-sector output was immense. The equivalent of 50% of the privately owned equipment stock that had existed before the war was purchased during the war. It was all new, and of the highest productive capability. In 1941, privately held capital stock was valued at $38 billion. New government investment totaled $19 billion by 1945. Again, none of this is counted in the GDP figures during the war years. The reason is that conventional GDP accounting calculated only non-farm, private investment.
Gordon also outlines the impact of electrified machine tools, machinery, etc. For every 100 units of electricity added to the productive process from 1902-1929, another 230 units were added between 1929 and 1950.
Summing up, Gordon argues that on the productive side of the equation, the combined impact of this mammoth investment into new technologies, new machine tools and machinery, new factories, and their spinoffs during the World War II expansion, was the single-biggest driver of The Great Leap. And it was this “Leap” which established the period of 1930-1950 as the high point of American output and TFP thus far in history.
Yet, Gordon fails to capture the dramatic impact of the plethora of infrastructure projects on the growth of TFP. What’s omitted is the fact that the tremendous upgrades to existing systems were coupled with the thousands of brand new projects, which included bridges, roads, power and water systems, such as the TVA, etc. These had an immediate visible, as well as a long-term impact. Increases in productivity manifest themselves over time, minimally the lifetime of the project, which could easily be 20-40 years. Financial payback is not direct. It is also not simply from individual projects per se, but from the replacement of one entire “platform” by another, higher one. A simple example is the supplanting of horse-and-buggy transit by internal combustion engines, etc. This is not simple to calculate.
Gordon also fails to fully articulate the role of new scientific breakthroughs on increased productivity. He does outline the development of the aluminum, synthetic rubber, oil and gas, and other petrochemical industries. But he does not develop their impact on productivity in any significant way. He omits the development of nuclear energy, which represents a profound upgrade in energy density and productive capability.
Those oversights aside, Rise and Fall draws one other powerful conclusion, that of the impact of the psychological transformation of the population during the Depression and War years. The Depression, followed by the 1933-1937 recovery, then the steep decline in 1937-1938, left the population still wary of the potential impact of the New Deal. Deeply scarred by the Depression plunge, the nation did not believe that a sustainable recovery had taken effect.
The war mobilization changed that. It raised the standard of living for most of the population, and provided meaningful jobs, where individual technical innovation was encouraged. It united the nation in a do-or-die mission of national survival. In the process, the country got a full dose of a roaring industrial machine.
Gordon quotes economic historian Robert Higgs on the essence of the mobilization:
The war economy … broke the back of the pessimistic expectations almost everybody had come to hold during the seemingly endless Depression. In the long decade of the 1930s, especially its latter half, many people had come to believe that the economic machine was irreparably broken. The frenetic activity of war production dispelled the hopelessness. People began to think: if we can produce all these planes, ships and bombs, we can also turn out prodigious quantities of cars and refrigerators.
Gordon then says that the impact of the World War II mobilization carried over into continuing TFP gains during the post-war period. The war machine was transformed into a peacetime juggernaut of consumer-oriented production, lifestyle improvements, and many government benefits, including the GI Bill. New technologies and new production techniques gained during the war were not lost; they were simply transferred as new knowledge, into peacetime production.
Causes of the Great Leap
In summarizing the causes of the Great Leap of 1930-1950, Gordon highlights the crucial link between output (of real goods) per person vs. output per hour. Output per hour is the productivity of labor, and it drives the amount of product created per person. Gordon charts the connection and states that output per person collapsed in the Depression, began growing during the 1933-37 recovery/New Deal, and soared during World War II. Output per person continued to increase well into the turn of the 21st Century.
But output per hour barely declined during the Depression, and then rapidly expanded after that. In 1941, it was 11% above the baseline figure calculated up to 1928, rose to 32% above by 1957, and was 44% higher by 1972, the peak year. Thus output per hour, or labor productivity, remained very high. Gordon attributes this to the massive technological change implemented primarily during the war years.
He then isolates the key causes of the increase in TFP during the Great Leap. While educational achievement is important for technological development, its rise throughout the century was continuous, but “steady.” So, he discounts its impact on the sharp rise in TFP 1930-1950. He also acknowledges the change in the circumstances surrounding production and the workforce. Work hours fell to 8 per day and 40 per week, and while this increased productivity, it was not decisive.
Gordon agrees with his mentor Robert Solow that there are four categories of labor productivity: increases in labor quality, one measure of which is educational attainment; increases in the quantity of capital relative to the quantity of labor; increases in the quality of capital. These measures left a residue, number 4, Total Factor Productivity. This category measured everything from major innovations to simple tinkering or minor improvements, anything that increased efficiency, including movement of large numbers of people from rural low-paying jobs to urban higher-wage jobs. TFP also includes changes in living standards, new innovations, etc. Gordon analyzed both labor and capital inputs and outputs. He found that the average productivity of capital doubled during the Great Leap!
In an important new graph, Gordon presents his own TFP findings. TFP grew markedly in the 1920s and 1930s, but skyrocketed in the 1940s, nearly doubling the previous decade. TFP remained at the 1930s level into 1970, before dropping off by nearly half over the next 40 years.
To account for this dramatic finding, Gordon underscores his concept of General Purpose Technologies, and sub-inventions derived from the GPTs. The development of electricity in all its forms and the internal combustion engine are the two GPTs at the center of the Great Leap. The merging of the two in the form of new electric-powered machines, tools, and other equipment was at the heart of the expansion.
These increases in horsepower and electricity production and utilization generated an “increased energy power density” in the production process, resulting in historic leaps in productivity and output. Horsepower and kilowatt hours grew enormously in the 20-year Great Leap; private equipment grew by 50%, motor vehicle horsepower tripled, while electricity production increased by 330%.
While acknowledging that private investment is important, Gordon underscores the role of heavy government investment. He contradicts the analysis of Alexander Field that output began to flag at the end of the 1930s. Despite the impact of the 1937 Recession, Gordon says that output continued to grow at the end of the decade and into the 1940s, with the ramping up of the war economy and the restoring of New Deal government investment. Gordon buttresses his GPT estimates by citing other build-outs that contributed to the 1930s increase in TFP:
- Distribution systems were transformed, including the advent of chain stores and the replacement of counter and shelf procurement with self-service operations
- Major innovations in all forms of petroleum production, from fuels to plastics
- Invention of the modern rubber industry, with its immediate impact on strong vehicle tires
- Standardized parts
- Major improvements in engines; better roads for transportation, etc.
Following the end of the war, from 1945 until 1972, the U.S. economy continued its upward expansion. Labor hours fell, in part due to the departure of many women from the labor force back to the home, and also to the adherence to the 40-hour work week. However, output per hour, i.e., labor productivity, continued to increase. (see Figure 1)
Gordon attributes much of this to the dramatic investment in the productive economy during World War II, and the carryover of those new technologies into the peacetime conversion of the war economy. Complementing this was the pent-up demand for consumer durables, i.e., housing, cars, and other items, that had been put aside during the war.
As for new infrastructure development, Gordon does an excellent job of presenting the impact of the highway system and the development of air travel. He praises the federal government for its leadership in the expansion of the interstate highway system and its impact on the economy. This had a direct effect on expanding the Total Factor Productivity. Congress appropriated $25 billion for over 40,000 miles of highways, and designated the Highway Trust Fund, funded by the gas tax, to pay for the program on an ongoing basis. This was capital budgeting at its best.
Gordon cites one study on the impact of the interstate system on business productivity, which showed that virtually all major industries experienced significant cost reductions due to cheaper transport. Another study said that interstate highway spending contributed to a 31% increase in American productivity during the 1950s, and a 25% increase in the 1960s. Starting in 1972, aid to transportation began its decline, and led to a precipitous fall in productivity increase to just 7% in the 1980s.
Gordon also does an excellent job outlining the development and benefits of the commercial airline industry. The result was a nationwide network of jet-powered air travel, complementing the rail and highway systems, also resulting in increased productivity in the economy.
However, there are some glaring omissions, including the role played by new water systems in the West and elsewhere. He also fails to report on the huge impact of the peaceful nuclear energy program. Nuclear power operates at a “higher flux density” than coal, gas, or oil, and hence, can direct a higher energy throughput into the economy.
He fails to even mention the space program, the signature accomplishment of the Kennedy administration, which represented a new “infrastructure” program, and a “science driver” that reshaped the economy. According to a study by Chase Econometrics, the Kennedy space program returned $14 for every dollar spent in the form of new industries, technologies, civilian applications, etc. The high point of U.S. productivity occurred in 1972, just after the peak of the space program.
Decline and Fall
In the concluding section of the book, Gordon presents a devastating critique of the last 40-year deterioration of the U.S. economy.
In summary: Rise and Fall focuses on three major industrial revolutions and their impact in the United States:
- The 19th Century Industrial Revolution I, based on the steam engine and its offshoots into rail, water, etc.
- Industrial Revolution II, centered on the late 19th Century technology breakthroughs, especially electric power, the internal combustion engine, and their many byproducts;
- Industrial Revolution III, based on information and communication technologies.
Gordon bluntly concludes that the last revolution is by far the weakest. While the information revolution was expanding during the 1990-2014 period, investment in Industrial Revolution II (IR 2) technologies was flagging, leading to an overall stagnation in productivity and output.
Rise and Fall reports the impact of the computer information technologies on the productivity of the economy; TFP did increase 1994-2004, the heyday of the application of new computer industries to output in the real economy. But from 2004 it has been on the decline.
In a devastating chart and analysis (see Figure 2), Gordon reviews the dramatic decline in productivity over the past 20 years under the domination of the information economy. Hours per person and output per person are now exhibiting negative growth, and productivity (output per hour) is also plunging toward zero!
Gordon demonstrates that TFP has been in a steady descent since 2004, and he produces several graphics as demonstration. First, he goes through the Federal Reserve index of Industrial Production and Industrial Capacity, and the ratio of the two, i.e., the rate of capacity utilization. (Figure 3)
New investment in information-communication technologies (ICT) in the 1990s resulted in a rapid expansion of manufacturing in those areas, peaking in about 1999-2000. Since then, it has been on a downward trajectory, dropping into negative territory in 2012. So much for the myth that ICT investment had a profound impact on productivity in other industries; Gordon found no increase in productivity even with large ICT inputs! (See Figure 4)
Also, since 2004, net investment into the capital stock of ICT technologies has plummeted to negative and remained there. Gordon concludes that any new revival in TFP due to the ICT industries is unlikely. He buries the ICT revolution with a quip from Solow, viz, that “we can see the computer age everywhere but in the productivity statistics.”
Gordon elaborates: “The final answer to Solow’s computer paradox is that computers are not everywhere. We don’t eat computers or wear them or drive to work in them or let them cut our hair. We live in dwelling units that have appliances much like those of the 1950s, and we drive in motor vehicles that perform the same functions as in the 1950s, albeit with more convenience and safety.”
He states categorically that in most areas of the economy, especially the consumer economy, productivity growth is converging on zero.
He highlights the decline in output per person, measuring this as the combination of hours per person and productivity (output per hour). Output per person declined rapidly from 1999 to 2014. Productivity (output per hour) growth fell from 2.7% in 1955-1964, to 1.44 in the 1977-1994 timeframe. He says this resulted from the ebbing of the impact of the Industrial Revolution 2 (IR2) technologies. Productivity grew to 2% in the heyday of the 1994-2004 ICT boomlet, fell to 1.3% in the next decade, and is at .6%, as of 2016.
The decline of the impact of IR2 and minimal impact of IR3 are summed up by Gordon as follows: In 2014, real GDP/person was $50,000; had productivity growth from 1970-2014 equaled that of 1920-1970, the real 2014 GDP per person would be $97,000. There has been an approximate 50% decline in GDP.
Gordon says he chose the title of his book, Rise and Fall of the American Economy, because of the dramatic ascent and cascading descent of output per person. The apogee was reached in 1970, and the bottom has yet to be seen. While he is pessimistic about the future of the nation, unless the policies are changed, he has posed the issues sharply. Either we return to the policies that created the greatest expansion in modern history, or we face an unthinkable plunge to oblivion.
Editor's note: This review was initially published at American System Now and has been reposted with permission.