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Imagine the elites of China, Turkey, Britain, and all the other great powers of the day meeting in Davos in 1620 to discuss who among them would emerge as the world’s greatest economic power over the next few centuries. None would have even considered North America, and yet it is the United States that today produces the plurality of world GDP with less than 5 percent of the world’s population. How did that happen? In the excellent new book “Capitalism in America: A History” Alan Greenspan and Adrian Wooldridge provide the answer.
Adrian, the political editor and Bagehot columnist at The Economist, recently joined me on the show to discuss his book, American and world economic history more broadly, and the lessons voters and policymakers should draw today. What follows is an abbreviated transcript of our conversation; the complete transcript is available here. You can download the episode by clicking the link below, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.
Your book opens with an interesting thought experiment. Imagine if there was a Davos meeting back in 1620, and all the members made their case for which country or region would be the most influential and dominate the global economy over the coming centuries. Nobody would have pointed to America, which at that point was a bit of a wilderness, but obviously we’ve done pretty well over the past four centuries.
What did we do right in the United States that the rest of the world missed?
The driving force behind American greatness is that America has a greater toleration for creative destruction than any other power on Earth, than any other economy on Earth: that it’s less worried about destruction, and that it’s better at creation. And the combination of tolerance for destruction and genius for creation creates higher levels of productivity. So that’s our description of what’s going on.
The question is why. Why does America have this tolerance for creative destruction? And we say it’s partly because of the size of the country; that it’s a huge canvas for people to work on. And whereas European countries tend to be very crowded and tend to have lots of people impinging upon each other, America for a lot of its history had a huge amount of open space.
It’s secondly about its timing. It was the first country to be born in the era of capitalism, in the era of business. It was basically created at the same time as Adam Smith wrote the greatest work of capitalist economics, “The Wealth of Nations.” And it was a country that didn’t have the sort of hangover of feudal traditions that France had, Britain had, or indeed Germany had. So it was born a business civilization in a business world.
Then we go on to talk about the importance of America’s entrepreneurial spirit: the way that America regards businessman as heroes. In Britain, people tend to defer to aristocrats; they tend to want to be aristocrats. They tend to want to live this Downton Abbey life. The French like the idea of intellectuals, of being Jean-Paul Sartre or some sort of philosopher sitting on the Left Bank and meditating on the meaning of life. The Germans revere scholars and the scholarly life. In America, the highest thing that you can be really is a great entrepreneur. And that spirit is one of the constants in American history; you can see it in the 1860s, 1870s, and 1880s. You can also see it in Silicon Valley today. There’s no country, I think, that has the same reverence for entrepreneurs.
I can tell you that whenever I approach this topic, if I’m writing about it on social media, I get one of two responses. I either get a response saying American greatness was basically because of exploitation and slavery, but more popular than that is protectionism and tariffs really made America the world’s leading economy by 1900.
Let me tell you why it’s wrong. It is a powerful theory, and you can ascribe the genius of Alexander Hamilton — you can say Hamilton was one of your supporters now, and he did, of course, talk about infant industries.
The problem with the theory is first that the tariffs were a way of raising revenue. Indeed, for much of America’s history, they were the only way of raising revenue. They were principally regarded as a revenue-raising device rather than a device for government policy. I don’t think they were any coherent, well-thought-out government policy for protecting the steel industry or protecting the oil industry. There was an ad hoc policy of raising revenues because you didn’t have any other access to revenues.
And I think the most important thing about America was not that it erected tariffs to British steel or other British products. It was that it was the world’s biggest coherent internal market. It is not a story of external barriers.
But what about China? Their model is not based on creative destruction, but that government can predict what the industries of the future will be and subsidize them. Because inherent in these concerns about China is that, for the first time ever, this new model of state capitalism can at least rival America’s if not surpass us.
Now, I think China in particular, and state capitalism in particular, is the biggest single challenge that America has ever been faced with. Partly because state capitalism is quite clever. It’s much cleverer than the pure socialism of Soviet Russia because it tries to merge the best features of capitalism with the best features of statism in its mind. And partly because the Chinese economy simply is so big that we haven’t seen anything on this scale before.
State capitalism basically tries to use the genius of entrepreneurs and use the genius of companies in a way that is sort of guided by the state but isn’t completely dominated by the state, and that is a very interesting model. It’s a very exciting model in many ways, but it’s so far not demonstrated an ability to innovate. It has demonstrated an ability to be a fast follower, and while it has demonstrated an ability to create some impressive companies, it hasn’t yet demonstrated an ability to discipline those companies when they get too big and too dominant. They throw a lot of resources at that those leading companies, but they tend to reduce the efficiency of the use of those resources over time.
Robert Gordon, author of “The Rise and Fall of American Growth,” reviewed your book in the Financial Times, and he was at least mildly critical. Gordon argues that growth will be unequally shared, and he believes you did not address inequality adequately in your book.
I have two responses to that. One is to quote Schumpeter, who I like. He said famously that Elizabeth I had silk stockings, and the genius of capitalism is not to provide queens with millions and millions of silk stockings, but to make sure that something that was once reserved for queens can be purchased by shop girls. Capitalism makes basic products much, much, much cheaper.
We are seeing that happen with smartphones now, which were once luxury goods, and now almost everybody has them. We can see this with access to libraries of information via the internet. Things that only the most privileged people on Earth could get access to now we have at our fingertips.
Now where that hasn’t happened is with college education and health care. The great riddle of why American wages have been stagnant has a lot to do with the fact that more and more of people’s paychecks are being eaten up by rising costs of education and health care. The cost of buying a television or computer is going down vastly, but the cost of sending your children to a good university is going up. So it may be the case that we can apply the genius of capitalism to sophisticated service goods.
I would also say that the fact that Bill Gates is very rich or Steve Jobs was very rich or Jeff Bezos is incredibly rich doesn’t really worry me because those fortunes are in some sense signs that they’re producing, as it were, the silk stockings for more and more and more people. What does worry me is the role of rent-seeking in the modern capitalist economy: the role of cronyism and the role of political connections and the way that big corporations preserve their positions by sticking it to the competition.
To wrap up, you are focused on financial stability and on fiscal solvency going forward. But is there any other area of recommendation that you give policymakers if you want to keep America as a high-growth, technological frontier kind of economy?
I am incredibly worried about the growth of crony capitalism and the intimate connections between big corporations and big government. And that’s something that both parties are guilty of, and I think that the revolving door between the Democrats and the Obama administration and the big tech companies is just as worrying as the connections between the Republican Party and various Main Street companies. And protectionism makes that massively more likely.
Although we’ve argued in this book that America has a genius for business and that it likes corporations and entrepreneurs, and that the fact America gives them a lot of freedom is wonderful, what you have to understand in the end is what you really need are free, competitive markets. If businessmen become too powerful and too entrenched and too chummy with governments or political parties, that’s a sign that dynamism is going to be threatened.
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