9. The Birth of a Superpower: The United States, c.

1850-1940 Contents Change in technological and economic leadership: the relative decline of Great Britain and the rise of (in part) Germany and especially the United States in the context of the second industrial revolution. The factors behind the growth of the United States before (and after) the Second World War How and why the US was special The change in leadership At the end of the 19th Century (between c. 1880 and 1900) Britain loses its leadership to the US (and in Europe maybe to Germany) This process becomes even clearer in the interwar period when the US breaks away from all of Europe From the beginning the US had a high labour productivity (and high wages, in part because of the large amount of resources, in agriculture and elsewhere), but its advantage increases, something that is not explained just by higher agricultural productivity and more land British shortfall is centered in industry (although the US has an initial advantage in agriculture) It has been discussed whether this was a failure of British entrepreneurship or just of other conditions which existed in the US, but not in Britain US: Reasons for success Geography: Large empty zones with arable land; many natural resources (coal, oil, iron ore, other metals, etc.) Enormous levels of investment in the construction of cities, canals, railways, telegraph network, etc. Domestic market: very big (and growing thanks to immigration and high fertility), and ever more integrated thanks to better transport (railways), and with relatively rich consumers Economies of scale and innovations in production, marketing, advertisement, distribution, consumer credits, etc. transformation of production and consumption Institutionalization of the process of research and development (new products, new techniques) Advantages in the two world wars, which increase demand, but did not cause mayor damages to US capital stock 5 Britains relative industrial retreat Many of the following arguments are very similar to those that have been made about Britain relative to France, but now Britain is the US, and France is UK Less use of energy and capital per worker in Britain (1/3 of capital labour ratio before WWI) Britains leading industries were light industries (textile, food, shoes, etc.), that were less capital intensive and required relatively smaller investments in plants and infrastructure Little development, in comparison to the US, of new industries (Second Industrial Revolution) Chemicals, cars, electricity

 Predominance of one-plant family firms (but there were also larger firms) Difficulties of adopting mass production and predominance of artisan production Adaptation to a segmented market (not one of mass consumers) The sources of US leadership The leadership of the US can have several sources (or proximate causes): factor endowments (physical and human capital, natural resources) and/or technology (TFP) What we can do is measure directly the contribution of these to GDP or labour productivity growth (as Crafts-Harley and others have done for the UK) growth accounting Nevertheless, it is sometimes difficult to measure the contribution of for example natural resources to growth. Here, it might be a good idea to use the Heckscher-Ohlin framework (countries export goods that use relatively more intensive those factors that are relatively more abundant [and cheap] at home and imports those that intensively use those that are relatively scarce [and expensive]) So, we can look at what the US imports, what it exports, and which factors are used more intensively in the elaboration of these products From this we can see that the US exports more commodities that are intensive in physical capital (but not such a hugh difference), human capital (slightly increasing), natural resources (huge, but decreasing), and imports goods that are intensive in nonspecialized (unskilled) labour Direct measurement: growth accounting Growth in the industrializing US was much faster than in industrializing Britain. In the early stages (until c. 1890) capital played a very large role (but some of this was because technological change was capital-deepening, i.e., the increased capital stock contained capital of a higher quality, which leads to mismeasurement of the relative contributions of capital and TFP. Then the increase in TFP (technological progress, increased efficiency, etc.) gains an ever larger role. Remember Britain, 1700-1860 (class 6, slide 35) Mokyr (1993) and Crafts (2010, p. 414). The sum of contrib. deviates slightly from a calculation based on the figures in the other columns as a consequence of rounding in the former. For overall growth, 1760-1830, capital seems to have been more important than technology, but if we divide everything into per capita terms, we see that actually technology made people more productive than an increase in capital intensity of production. US leadership in mineral production, 1913 Natural gas, Oil, Copper, Phosphates, Coal, Molibdenum, Bauxite, Zinc, Iron pyrite, Lead, Silver, Mineral salts, Gold, Tungsten

Why did the US produce so much in minerals? It was not because it had the largest resources in the world. Its production exceeded its share of the worlds reserves The US had a absolutely liberal regime as to prospecting and mining for economic minerals on public land (the General Mining Act of 1872); but other countries (e.g., Spain) had similar laws with less success State assistance: US Geological Survey (1879- ), specialized education institutions, Social capacities: desire to explore and exploit is not due to the reserves, but due to social construction of the needs and capabilities of its use Why were the U.S special? Why were capital and resources so important before WWI and why did growth in the interwar years (1919-1939) rely more on TFP growth (and maybe human capital)? (1) because of the relative factor endowments (expensive labour, cheap resources, and increasingly capital), mechanization of production was more interesting in the US (a larger scale version of R.C. Allens argument of relative factor prices in Britain vs. France), and hence capital investments and the scale of capital- and resource-using plants grew (2) in a second stage we find that this American System of mechanized mass production becomes even more specialized with the introduction of scientific management and assembly lines, etc. (Taylorism, Fordism) (3) According to David and Wright, the large increase in TFP in the interwar years is because of the electrification which did not show its real potential in US production before the 1920s. This is because, with the second stage of the large firm and the introduction of scientific management, etc., not just steam engines were replaced by electric motors, etc., but the production process in the plants was reorganised to use the advantages of electricity in the best way (4) In this kind of system, semiqualified labour (some literacy, etc.) is very important to keep the process flowing and avoid high costs of unproductive capital due to downtimes (5) There are economic historians (Sokoloff and Khan for example), who say that the US way of developing social capabilities behind (1), (2), (3) and the construction of the widened resource base relied on a relatively large base of innovations thanks to the democratization of invention in US society (which is based on the institutions such as intellectual property rights and incentives society provided for inventors) especially in the first part and the middle of the 19th Century. Result: Mass production and the modern capitalist enterprise As said, mass production was a response to relative labour shortage (and shortage of skilled labour) in the US, an intent to increase labour productivity of un- and semiskilled labour Capital intensive (expensive and specialized machinery) and labour saving (especially skilled) technology Intensive in the use of natural resources (iron and steel, energy) First developed in industries like arms and watches (cheaper products but of relatively inferior quality than artisan production and sweatshops in GB) The assembly line was an advance in this direction

 At the same time this was a logical consequence of a larger (domestic) market, since it the basis of standardized mass production is a large and relatively homogeneous demand (standardized products for standardized consumers) with some purchasing power (middle class) Increases the requisites of scale (plant size) and capital, but also of velocity of transformation (throughput) managerial hierarchies are needed to organize these kinds of plants The rise of the large capitalist firm Requires (A.D. Chandler) three-ponged investment Investment in the optimum-size plant to assure economies of scale (because of high fixed costs, average costs decrease with increasing output of standardized products) Investment in networks to assure continuous raw material supply and new forms of marketing (branding, advertisement, etc.) and distribution (franchise, own sales agents, instead of wholesalers) Investment in a hierarchy of salaried managers who organized production, supply, distribution, marketing, etc. This leads to an increase in productivity and a decrease in costs (and hence prices) With this, again, it is as much the technological possibility (engineering) as the social and managerial capability that shapes the large capitalist firm The American system relies on several pillars: a good transportation network, functioning capital markets (investments are too large for one owner or his close religious or family network), technological innovations, resources and energy, existence of trained managers and a population that is ready to buy its products These large firms are mostly organized as joint-stock companies (a model that had been amply diffused by the railway and telegraph companies, which were also the initial model of managerial hierarchies) Existence and growth of these firms Appeared in two ways: vertical integration of production and distribution or horizontal growth (increasing production, merging with other firms doing the same) First, firms that invested in large plants/structures and distribution networks (for example in the railway sector) had the problem that if there were many other competitors their plants would not be used efficiently This led to a period of collaboration between firms (trusts: one firm controls many others through its joint directors/presidents) and holdings (one firm owns others) The Sherman Act (1890) declares trusts as illegal (what had been legislation since long ago) and initiates a wave of mergers and acquisitions (holdings) This leads to the emergence of a few large firms that reorganize production in the most efficient way (and then integrate vertically with suppliers or distributors to reduce transaction costs) diversification By this, we do not get cartels (agreeing to coordinate production to stabilize prices) for many small (and hence relatively unefficient) firms, but conglomerates of large firms

 The predominance of large firms and high barriers of entry (large initial investments in productive capital, supply and distribution, and management knowledge) create an industrial structure of few large firms which compete oligopolistically or are monopolies Generalization: the Second Industrial Revolution Introduced new power sources (electricity), raw materials and machines Capital requirements and the intensity of research and development (new products, product varieties and processes) became more important, in part to assure profitability of the large capital investments (especially if there was competition Emergence of continuous-flow mass production but of course not in all sectors (since in many large capital investments and mechanization do not make too much sense, and flexible production is more important) A summary: The rise of a new leader: USA Large internal market, with relatively high purchasing power per person and good Infrastructure. This makes the US relatively less dependent on international markets on the eve of WWI (they have their own internal center-periphery structure) Large investments (first from Europe, but increasingly from their own sources) in infrastructure, plants and mining Mechanization of production, massive use of capital, energy and natural resources; mass-production and economies of scale, standardized products, oligopolistic competition (and monopolies) social construction of a leadership in natural resource exploitation and the American system of production (see Nelson and Wright) With it, the modern industrial enterprise rises to fame, with its managerial hierarchies, marketing and distribution, and its departments of research and development (directly applied to the system of production to assure the even more efficient use of capital and the other factors of production) A new energy source (electricity), incorporated into the system Relatively homogeneous demand (for standardized products) Maybe the start of all this are institutions in the early 19th Century: the democratization of invention (Khan and Sokoloff; some parallel to Mokyrs industrial Enlightenment and the engineers and tinkerers of Britain) Some supplementary information on social savings of the assembly line in car production we might or might not see this in class What were the benefits of all this? A simple (but brilliant) concept: social savings (pioneered by Robert Fogel). What would it cost to produce the same amount produced with a new method using the old method (related to consumer surplus, see below) Fogel used it to estimate the cost savings of railways over canals in the US, and found them to be quite small (3.7% of US GDP in 1859 and 4.7% in 1890; but for Argentina they were found to be 26% of GDP in 1913).

In words So, at higher prices, people demand less and therefore social savings are an absolute upper bound of consumer surplus (in case demand is completely price inelastic you buy your cars at whatever price) Demand might have changed from 1908 to 1923 (real incomes and the size of the economy increased) Demand curves in reality are not linear (but convex) To disentangle this is not easy, since the counterfactual is never observable. However, Leunig and Voth are able to approximate reality more (by looking at the demand curve versus costs over time, that is estimating demand elasticity), thereby taking into account that as price falls demand increases (and the simple social savings calculation becomes more and more unrealistic) Based on this they find that the assembly line increased consumer surplus by 2 to 3.5% in 1923 by decreasing car prices (and cotton spinning innovations increase consumer surplus by 1.5 to 2.5% in Britain in 1820 comparison: Apple-Cinnamon cheerios 0.002% of US GDP in 1992; internet 2% in US in c. 2005; tea, coffee and sugar imported from oversees 8-17% in Britain in 1800 (Hersh and Voth 2009) Why did this model not triumph in Europe? Resource endowments in Europe were different (there was skilled and organized labour, and energy and other natural resources were relatively more expensive than in the US, even in Britain) Absence of economies of scale (especially in the interwar years where after the disruptions of WWI we see increasing industrial protectionism in Europe, making each European market relatively small) Lack of homogeneous demand due to lower average incomes and income distribution (no middle class, no standardized consumers) Lack of institutional means (like the ones underlying US success) and predominance of cartels (collaboration between relatively small firms without consolidation and centralization of production; in Germany this was legal, something like the Sherman Act did not exist) Difficulties in the international transmission of technologies (in part because of other relative factor prices, in part because of labour organization and entrepreneurial attitudes, in part because of closing borders and unstable capital markets especially in the interwar years)