Think of Davos. Now imagine the annual international powwow not in 2018 but 400 years earlier. The question on the lips of “Chinese scholars in their silk robes, British adventurers in their doublets and jerkins, Turkish civil servants in their turban and caftans” once they reach the Swiss town is a big one: “Who will dominate the world in the coming centuries?”
There is a compelling case for China, with its enormous population and world-beating civil service. The Turks claim that the Ottoman Empire is poised to dominate Europe. A Spaniard argues that his devout and sea-faring nation has struck gold, literally and figuratively, with the conquest of Latin America. A Briton argues, to a sceptical audience, that “his tiny country has broken with a corrupt and ossified continent, and is developing dynamic new institutions: a powerful Parliament, a mighty navy… and a new species of organisation, the chartered corporation, which can trade all over the world.”
This is the thought experiment with which Alan Greenspan and Adrian Wooldridge begin Capitalism in America, their sweeping, lively and eye-opening new economic history of the United States. In the heated alpine debate, not a single person mentions North America, a vast expanse that “produces less wealth than the smallest German principality”. And yet, as we now know, within a few hundred years America, starting with 13 colonies, would, by every economic, cultural, political and diplomatic measure that matters, tower over the rest of the world.
Familiar stories can feel inevitable. But there was nothing predictable about America’s rise from colonial backwater to world-beating economy. What seems obvious with hindsight once looked far-fetched. And that poses the question that Greenspan and Wooldridge spend the next 400 or so pages answering: why America?
The answer proposed by Greenspan, who played more than a walk on part in US economic history as Chairman of the Federal Reserve for two decades, and Wooldridge, an editor and columnist at The Economist, starts with the good fortune of when the country was founded.
Independence coincided with “the age of the Enlightenment, when old verities were being rethought and established institutions remodelled”. The fight for independence began a year before the publication of Adam Smith’s The Wealth of Nations; “the new country was conceived in a revolt against a mercantilist regime that believes a nation’s economic success was measured by the size of its stock of gold… America was the first country to be born in an age of growth – an age when the essential economic problem was to promote the forces of change rather than divvy up a fixed set of resources.”
The Constitution’s limits on the power of the majority set America apart from the rest of the world and “did far more than anything else to guarantee America’s future prosperity – far more than conventional economic advantages such as abundant land and raw materials.” It also created a huge internal, tariff-free market.
On top of this fortuitous start is the country’s “greatest comparative advantage”: its “talent for creative destruction”, the driving force of innovation, growth and prosperity that “disequilibriates every equilibrium and discombobulates every combobulation”. Americans realised that “destruction is more than an unfortunate side effect of creation. It is part and parcel of the same thing”.
This is not a dry question of policymaking but an insight into America’s national character. Whereas Europe was what Arjo Klamer has called a “citadel society”, comparatively static and prioritising the preservation of accumulated wealth, America has historically been the “caravan society”, where the frontier – whether literal or metaphorical – looms large in the minds not just of politicians and historians but ordinary men and women.
Even intellectuals, “usually the wallflowers at the capitalist ball”, bought into the idea. Walt Whitman lauded his country’s “extreme business energy”. Ralph Waldo Emerson enthused about America as “the country of the future… a country of beginnings, of projects, of vast designs and expectations.”
The inventor Thomas Edison spoke for many of his compatriots when he said: “We can’t be like the old German professor who as long as he can get his black bread and beer is content to spend his whole life studying the fuzz on a bee!”
These entrepreneurial instincts are reflected in what Amar Bhide of Tufts University has called “venturesome consumerism”: America’s affluent middle class was more willing than their European equivalents to try new products.
The result is a system that has squeezed more productive energy out of its human capital than other countries, and generated unparalleled prosperity.
Greenspan and Wooldridge admire the consequences from multiple perspectives. Through a wide-angle lens, the results are staggering. From contributing next to nothing to global GDP at the time Western settlers arrived, America stood as “a giant among midgets” at the end of the Second World War. In 1945, “a country with 7 per cent of the world’s population produced 42 per cent of its manufactured goods, 43 per cent of its electricity, 57 per cent of its steel, 62 per cent of its oil and 80 per cent of the world’s cars.”
Just as impressive as the numbers – marshalled as expertly and persuasively as you’d expect from a former central banker – is what creative destruction did for the lives of ordinary Americans: “In 1864 the country still bore the traces of the old world of subsistence. Cities contained as many animals as people, not just horses. Cities contained as many animals as people, not just horses but also cows, pigs, and chickens. A spark could ignite an urban conflagration, as happened most spectacularly in Chicago in 1871, supposedly when a cow kicked over a lantern, because most buildings were still made of wood. People worked for small family companies. By 1914, Americans drank Coca-Cola, drove Fords, rode underground trains, worked in skyscrapers, doffed their hats to ‘scientific management,’ shaved with Gillette’s disposable razors, lit and heated their houses with electricity, flew in airplanes, or at least read about flights, and gabbed on the phone, courtesy of AT&T.”
It was a transformation that puts the technological revolution we are said to be living through in perspective.
Something similar was happening in Europe, but not nearly as quickly: “In 1900 there were as many telephones in New York State as in all of Europe.”
As the 20th century progressed, America moved away from the laissez-faire that defined the 18th and 19th century and started to look less distinct. At the turn of the century, the progressive movement persuaded more and more Americans to be less cynical about government.
The greatest state power grab came during the Great Depression: “FDR inherited a highly decentralized political economy committed to flexible markets and transformed it into a Washington-dominated political economy committed to demand management, national welfare programs, and compulsory collective bargaining.” Federal government accounted for 4 per cent of GDP in 1930, when only 3.7 million of Americans paid income tax. By 1936, federal government consumed 9 per cent of GDP.
State power ebbed and flowed throughout the 20th century, though not always as predictably as you might have thought. Greenspan and Wooldridge point out that Richard Nixon, a Republican, was responsible for a bigger expansion of the entitlement states than LBJ, his Democratic predecessor. Ronald Reagan was “responsible for creating more national debt than all the presidents who preceded him combined”.
But the authors argue that what Reagan lacked in fiscal conservativism, he more than made up for with three achievements that helped end stagflation and usher in “the age of optimism”: he broke the unions, deregulated the economy while fighting inflation and overhauled a tax system that had become a drag on the enterprise that had made America rich.
Capitalism in America brilliantly mixes economics, politics and business. The authors never get too bogged down in Washington shenanigans, instead telling a broader story: of eccentric entrepreneurs, technological breakthroughs and revolutionary ideas.
Their account is unapologetically pro-market, and for that reason I suspect that among readers who don’t share the authors’ outlook, Capitalism in America will enrage more than it converts. There is, for example, little mention of the inequality that so many see as America’s defining economic issue. For the broadly sympathetic reader, however, this book will be a fortifying read, bolstering increasingly unfashionable views.
It is impossible not to read Capitalism in America as a parable. And the final portion of the book is an examination of the way in which America has lost its way. The country is losing its lustre, they argue, because it is losing its exceptionalism. Instead looking more and more like any other advanced economy.
The authors point their fingers at America’s “productivity-suppressing entitlements”. The rate of growth has been staggering, and to Europeans convinced of America’s lack of generosity, little noticed. Over the last 50 years, social benefits have increased at an average rate of 9 per cent a year. “The share of GDP going to social benefits was 4.6 per cent [in 1965] to 14.6 per cent [in 2016].”
And payments are spread widely: “Fifty-five per cent of all US households receive cash or in-kind assistance from at least one major federal entitlement program.”
They claim that the system “bears a loose relationship to need: over 90 per cent of social insurance assistance goes to a single demographic group that is defined by age rather than need – people aged 65 and over. The government distributes about fifty thousand dollars a year in Social Security and Medicare benefits to the typical married couple who retired at age sixty-six in 2016, just six thousand dollars less than the median income of US households in general.”
The blame lies with both political parties. And the politics of reforming entitlements is made complicated by the extent to which Americans have bought into the myth of “earned” entitlements, thinking they are simply getting back what they put in. Greenspan and Wooldridge point out that this is an illusion: “Americans are collectively putting in less than they are getting out: making up the actuarial shortfall would require a permament tax increase of a third or a permanent cut in benefits of a fourth.”
How do these entitlements hurt productivity? Productivity growth is primarily driven by investment. “Worryingly,” Greenspan and Wooldridge write, “there is overwhelming statistical evidence that a significant proportion of the surge in benefit spending has been funded by the government, pre-empting private savings, through taxation – savings that would otherwise have funded domestic capital investment and productivity growth.”
When entitlements crowd out investment, a country enters a dangerous cycle in which growing deficits, low growth and fraught politics create further uncertainty for businesses, further disincentivising the kind of long-term investments that drive innovation.
Alongside entitlements on the authors’ list of complaints are the growth of the regulatory state – if you want to open a restaurant in New York you need to go through 11 different government bodies –the rise of occupational licensing, and the fragility of the financial system, which they would guard against by boosting banks’ capital reserve requirements.
There is an air of inevitability to the declinism that has infected American public life as it has politics across the West. That Donald Trump is president only adds to the pessimism. Capitalism in America is an antidote to that gloom. America has bounced back before, and can do so again.
In making clear that there was nothing predictable about America’s past successes, Greenspan and Wooldridge have delivered a testament to the power of popular capitalism and timely reminder that the country’s fate will be determined not by uncontrollable forces but political decisions. Whether or not Americans take the right decisions, and rediscover the dynamism that made their country an example of the power of economic progress, is up to them.