America's failing powerhouse Michael Lind traces our rise to economic dominance, and why we need more government involvement to revive it

The American economy has been driven by waves of technological change and the successful adoption of ideas from elsewhere. Michael Lind, the author of "Land of Promise," tells us how it happened, and what history teaches us about the way ahead.

Your latest book is a sweeping economic history of America. In a nutshell, how did America become such an economic powerhouse?

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Well, it did so as a result of collaboration between the government and the private sector and, increasingly in the 20th century, the nonprofit, academic research sector. It’s quite a different story in reality from the tale that is sometimes told of how capitalism grew up without controls in the United States, and then with the New Deal it came under regulation. In fact, the government both at the federal and the state level was deeply involved with projects for promoting the industrialization of the United States and the creation of a capitalist market from the administration of George Washington onward.

One of the ways it did so was through investing in infrastructure. We’ve had a series of ambitious infrastructure projects – the early canal system and then the transcontinental railroads that were funded by the Lincoln administration and Congress at the beginning of the Civil War, through to the interstate highway system. But government contribution to economic growth wasn’t just limited to that – it included funding basic research. For example, Congress gave a grant to Samuel Morse, who developed Morse code and the first American telegraph [in the 1840s], and the government role in R&D [research and development] became central in World War II. This continued after 1945, with Department of Defense procurement and the National Institutes of Health and other forms of basic federal R&D.

One of the things I argue in my new book is that American economic growth has not been continuous – it’s been very discontinuous and even cataclysmic. Here I follow the school of economists known as Schumpeterians, after Joseph Schumpeter – the Austrian-American economist who in the 1930s identified waves of technological change and successive techno-economic paradigms. With other historians of the U.S. economy, I argue that we’ve had three successive industrial revolutions. The first one began in the late 18th century and was based on steam power and produced the locomotive and steam-powered factories. In the second industrial revolution the key transformative technology was the internal combustion engine, which gave us automobiles, airplanes and electricity. The third industrial revolution, of which we are still in the early phases, is the information or the computer revolution. Each one of these has transformed the economy, while at the same time, the political institutions that were designed for a different stage of economic and technological development have grown increasingly anachronistic. The basic argument of my book is that periodically there are cataclysms like the Civil War and reconstruction like the Great Depression and World War II, and I believe today’s Great Recession is the beginning of another historic change. In these periods you get waves of reform in which the political and social institutions of the country are remodeled to catch up with the economic structures that have already been transformed by technology.

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You’ve touched on an issue that I was going to ask you about – the extent to which history offers a route out of the current economic malaise. You talk about reforms, but where are the reforms going to come from today? Three years into the Obama presidency, not much has changed.

I think you have to get the timing right. The Civil War started in 1860-61, and the period of reform came to a conclusion in 1877 with the end of Reconstruction, so it came about over a 15-year period. It’s the same with the New Deal. Most of the New Deal reforms came in the late 1930s, and in some ways the Great Society reforms of the 1960s were simply the finishing touches to the New Deal, so there you had a 15- to 30-year reform period. A lot of people thought that when Barack Obama assumed the presidency he would be in the position of Franklin Roosevelt in 1932. But, arguably, he was more like [President Herbert] Hoover. In other words, the real wave of reform will come after him. I may be mistaken about this, but I think that no matter who wins the next election – even if the Republicans recapture the White House and control both houses of Congress – their stated program simply will fail. Even an all-Republican government will have no alternative than to undertake some alternatives to this program of tax cuts for everybody. It helps them when they’re out of power, but once they’re in power it is not a governing program.

One of the arguments of my book is that during these periods of reform, the reform tends to be bipartisan. So, for example, if you look after the Civil War when the Democrats captured both the White House and Congress at the time of President Cleveland, they did not reverse all the reforms of the Civil War; they ratified them. The same is true with the New Deal. Under Eisenhower and Nixon, who were the Republicans in the 40-year New Deal era, they did not attempt to overturn the New Deal. So it’s not a matter of left or right particularly, but of political paradigms which become dominant in a particular era. I may be mistaken, but I think that we are toward the end of this period of neo-liberalism, which began arguably with Jimmy Carter rather than Ronald Reagan, and has included Democrats like Bill Clinton and Obama in his first term as well as Republicans.

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You say that politically it’s not a matter of left or right, but the role of government in the economy seems to be one of the key issues that divide Democrats and Republicans.

That’s particularly true at the national level. However, the vast majority of Republican Party politicians before they get to Washington have served in state legislatures or they have been governors. So they’ve spent 20 or 30 years essentially engaged in a fairly nonpartisan project, because what most state governors and state legislators do is simply fund infrastructure and promote business investment within their state. They have routinely engaged in collaboration between government, business and sometimes the state universities in the interest of economic development. So I agree, it’s paradoxical that these same Republicans who have spent 20 or 30 years taking for granted the role of government in kick-starting economic growth, then arrive in Washington and suddenly government is terrible and can’t do anything.

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To some degree that’s been the same throughout history. It has to do with regionalism and localism in the United States. There’s a Jeffersonian tradition which is extremely localist, and it’s willing for state and local government to do all kinds of things which allegedly become tyrannical when they are done by the federal government. That explains the seeming paradox that the same conservatives who will unthinkingly vote for bonds for local roads in their own states, will denounce the whole idea of a national infrastructure bank that will use bond financing for programs of national significance. So that is a built-in tension in the United States.

In fact, one of my arguments is that through all of these waves of change, the two big traditions are not liberalism and conservatism – which are loose phrases that change their meaning in different periods – it’s the Hamiltonian and the Jeffersonian traditions. These two views go back to Alexander Hamilton, who was the first secretary of the Treasury and to some degree was prime minister for George Washington during his administration, and Thomas Jefferson, Hamilton’s bitter enemy. Around these two figures, from the very early years of the republic, coalesced two views of the proper role of government in the economy. Neither view is laissez-faire. Both the Hamiltonians and Jeffersonians are willing to use government for their particular purposes, but their purposes differ.

The Hamiltonians are nationalist – they see the nation as more important than the states and the cities, which are just components. Hamilton, Abraham Lincoln, the two Roosevelts, through even to Eisenhower and Nixon, want government, business and banking to collaborate often on a very large scale for national economic development. And in different periods they are denounced by the left or the right or the center – so this isn’t a liberal or conservative thing.

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The Jeffersonian vision is not a vision of an unregulated free market; it’s a vision of local communities made up of small banks, small businesses and small government. And so the Jeffersonians, a category which includes William Jennings Bryan in the late 19th century and a lot of populist conservatives today, are perfectly willing to have the government intervene to protect small businesses and small banks against big businesses and big banks. One of the major forms of protectionism and privilege throughout American history – which continues today – is the popularity of special privileges for small businesses, even though they may be very inefficient from a Hamiltonian point of view in terms of the national economy.

This links nicely to your first recommended book, "The Elusive Republic: Political Economy in Jeffersonian America," which takes us back to the years immediately after the Declaration of Independence and examines the Founding Fathers’ attempts to reconcile their republican ideals with economic growth and development. Please tell us more.

Drew McCoy is a brilliant writer, and this is a period that is absolutely essential to understand if you want to grasp the Jeffersonian tradition, which continues to shape our values on everything from aid to farms, to support for housing and small businesses today. You really cannot understand the thought of Thomas Jefferson and James Madison, and the other opponents of Hamilton and his successors, in these early years of the republic, without realizing they did not understand that the industrial revolution would radically transform everything. For them, a factory was a sweatshop. What were called manufactories in the 18th century were sweatshops where the most miserable of the urban poor who had lost their land – or the children of farm families that had too many mouths to feed – would go and and mostly make luxuries for the European upper class. So American republicans like Madison and Jefferson, even though they were slave holders, essentially did have genuine republican values – this vision of a society of independent freeholders. They could not conceive of a democratic republic in which the majority was not independent farmers, because the wage-earning working class of their day was destitute and miserable. They were simply wrong. Now, thanks to technology, less than 2 percent of the American population works directly in agriculture.

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Nevertheless, this doesn’t mean the nightmare of Jefferson has come true and that we all are destitute, landless proletarians – although there are problems with the increasing polarization of incomes, and the U.S. does have a disgracefully large population of poor people. What happened was that we shifted as a result of productivity growth in agriculture from having most jobs in agriculture to having most jobs in wage-earning sectors without having the proletarianization that Jefferson and his contemporaries feared on the basis of pre-modern history. So agrarian republicanism turned out to be wrong, but even though it was wrong in its very pessimistic view of the future, which McCoy describes brilliantly, nevertheless these legacies continue to shape American values. So, for example, in the United States the term “big” is a pejorative word. “Big” business, “big” government, “big “ labor – there is something sinister about it. I’m a progressive myself in my politics, but it does amuse me when progressives go after “big oil” and “big pharma” – the oil and pharmaceutical industries are, by their nature, capital-intensive industries with increasing returns to scale. I have no idea what “small pharma” is. But it’s because of this Jeffersonian legacy that “big” is just a swear word in the United States.

Can you tell us more about McCoy’s treatment of this period in his book?

This book is the best guide to one of the two traditions in American history, the Jeffersonian tradition in its early phases. It’s a very close reading of the thoughts of Jefferson and also of Madison – his close ally – about political economy. It goes beyond the usual notions that they were in favor of decentralization against centralization and in favor of small business against big business. They actually had very sophisticated views about demography and the demographic future of the U.S., which, as I have said, turned out to be wrong. But they were quite brilliant men, and it’s fascinating to read this book.

Your next book is "From the American System to Mass Production, 1800-1932," by David Hounshell. The term “mass production” entered popular vocabulary in the 1920s and is very much associated with Henry Ford and car production. Can you tell us more about it and how it differed from the “American System” of manufacturing that predated it?

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The United States was famous in the 19th century in Britain and Europe for something called the “American System,” which predated the mass production of the 1910s and 1920s, and which is associated with Henry Ford and the introduction of conveyor belts and electrified factory production. The American System involved the assembly of manufactured goods – originally rifles and muskets – using interchangeable parts, which led to an enormous increase in efficiency and productivity. Before then factories were essentially sweatshops or common spaces where individual craftsmen sat and assembled each item piece by piece completely from scratch, which was enormously time and resource consuming. So, even before you had electrified conveyor belts and the modern idea of mass production, there was this vision of simply having this pile of parts and you could take any of those parts and assemble it into a single device. This seems easy, but it was not. You had to have machine tools which were capable of cutting the individual parts so that each one could fit into any product. The irony, as David Hounshell points out, was that the American System was invented in France. The French military in the 18th century, like most European countries, manufactured their own weapons, and some generals came up with this idea and they experimented with it with some success. Thomas Jefferson, while he was America’s ambassador to Paris, was given a demonstration, and he encouraged the development of this later on in the United States.

From that point, all the way up to the Civil War, federal arsenals pioneered this kind of assembly, based on interchangeable parts, which became known as the American System. And again, this goes against the idea that the government should just stay out of the economy. In fact, the federal arsenals were the leading sector in American technology and the innovations that they came up with at taxpayers’ expense were then diffused throughout the private sector, as some of the same craftsmen and contractors that they used would then go off and start their own private shops. So in the same way that the Defense Advanced Research Projects Agency, in the present-day Defense Department, spun off the Internet and computers and so on in the late 20th century, these federal arsenals diffused this highly efficient new technique of manufacturing.

It was superseded in turn by what we know as mass production. Essentially, it’s having a moving conveyor belt and people in different stations working on part of an object. This required electricity to power the conveyor belt and the tools used by the workers. So the American System developed in the steam era. The next wave of technological innovation based on electricity made possible the system of mass production.

Why is this book so important in helping us understand all this?

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It’s of historic importance in the field. It is the most thorough scholarly study. It’s very heavy going, so scholars may find it more readable than general readers, but it is the basis of all subsequent research since it was published a few decades ago. It’s based on very extensive primary research. It’s also a great work of intellectual synthesis, covering everything from the late 18th century up until the age of the Model T. So it’s a masterpiece of scholarship.

Tell us about your next pick, "Technology and American Society," which looks at the impact of technology in the United States.

I chose this book because it’s really useful. All the basic information is here. There are only a small number of books on the history of technology in the United States that look at the impact of technology on society – for example, on how electricity transformed the household. This is one of the big revolutions that has been overlooked. We focus on these big things like the canals, railroads and mass production, but domestic life has been transformed radically by technology in living memory in all the industrial countries. In 1900 you had to lug water into the house, and most toilets were outside. Simply having water piped into the home had enormous effects on sanitation but also on convenience. Then you look at what electrification did. Women in particular were liberated from the drudgery of spending most of the day washing, cooking and cleaning by the modern miracles of the dishwasher, refrigerator and the washer-dryer, which we tend to take for granted. But, if anything, these things were just as revolutionary and important to the transformation of society as some of the more dramatic ones.

The American economy has always seemed to be very inventive when it comes to technology. Manufacturing might have moved elsewhere, but companies such as Apple and Facebook seem to show America is still the leader when it comes to technological innovation. Would you agree?

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Throughout most of American history we were not that inventive. In the first and second industrial revolutions – the steam era and the electricity era – all of the major technologies were invented in Britain, Germany and France, for the most part. For example, steam engines were invented in Britain, as was the locomotive. Electricity and electrical motors were developed primarily in Europe. Thomas Edison and others adapted the technology and made their own incremental improvements on it, but essentially it was European technology. The automobile was invented in Germany and then was perfected in France. What the United States did all the way up to World War II was that it took foreign-invented technology and then applied it on a massive scale, in the same way that China is now doing with technology invented in the United States.

The other point I would like to make is that not only is the period of American R&D leading the world fairly recent – it only goes back to World War II and the 1950s – but that it was consciously modeled on the research venture capital system of imperial Germany, of all places. In the Kaiser’s Germany before World War I, the government began funding research institutes as distinct from universities. You also had in Germany the development of research universities. Americans were inspired by this to create new institutions like MIT, which was devised on the German model. If you look at MIT and Stanford – these two German-inspired research universities – they’ve contributed disproportionately to America and world inventiveness. So just as the American System started out as the French system of manufacturing with interchangeable parts, we essentially took the German idea of the research university and we integrated it with government and venture capital funding in a highly successful way, and it continues to be the most successful part of the innovation ecosystem in the U.S. But it doesn’t mean that we can be content with that alone. The idea grew up during the tech bubble that we could invent things and then outsource all the manufacturing. That may have worked in consumer electronics and a few other things, but in the long term, most innovation actually comes from the factory floor or people closely working with it. You cannot specialize in invention alone. There’s a circular flow between manufacturing and invention, and you really need both.

That takes us neatly to your next book choice, "The Past and Future of America’s Economy," which talks about the need to develop an inclusive economy that doesn’t leave any section of society behind as new technology develops.

Yes, that’s right. Robert Atkinson is one of the leading scholars of what is sometimes called evolutionary economics or sometimes the neo-Schumpeterian school. He goes back to Joseph Schumpeter, who emphasized the role of technology in transforming the economy. And Schumpeter was the one who coined the phrase “creative destruction” back in the 1940s. It’s one of those phrases that’s thrown around by people who have no idea what it means – they say it’s just ordinary market operations when some businesses go bust and others are formed. That is not what Schumpeter meant. What he meant by creative destruction was what he elsewhere referred to as “industrial mutation” – that is, the entire replacement of one kind of technology and all the businesses built on it by a radically destructive new technology. So, for example, canals did not evolve into railroads – they were just completely wiped out and replaced. Railroads have largely been wiped out by trucking and automobile travel. The telegraph was wiped out by the telephone.

Robert Atkinson, through his books and his think-tank, the Information Technology & Innovation Foundation, has been waging a battle against neoclassical economics, which says the ordinary state of the economy is one of equilibrium and if you leave it alone there is a self-regulating, harmonious economy of lots of small producers. Atkinson argues that this completely ignores the central fact of economic life, which is disruptive technological innovation. The economy is never in a condition of equilibrium. It’s been constantly rocked from one side to another by the invention of some new machine or some new technique. His book is a polemical argument about the kind of economics that is appropriate in the 21st century. I’m not an economist myself, but I definitely think there’s more to this technology-based Schumpeterian tradition than there is to these academic models that pay very little attention to technology, except as an afterthought. To those debates among economists, Robert Atkinson’s book is a very good guide.

On to your final book now, "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism," which accuses Western countries of hypocrisy when it comes to promoting economic growth in the developing world.

The three leading countries of industrial capitalism – the United States, Germany and Japan – developed by using techniques, as Ha-Joon Chang points out, that are the opposite of what are supposed to work. There are endless bestselling books about how the West developed and how it became rich. It’s a genre that says that if you just have democracy and government acts as an umpire and doesn’t interfere in the market, factories and aerospace industries will somehow just spring out of nowhere. That is not how the industrial world actually developed. Germany in many ways led the world economically before 1945 and it was an authoritarian state for most of that period. The same is true for Japan. China today is an authoritarian state and it’s catching up economically much more quickly than democracies like India.

I think we should be in favor of democracy for its own sake, whether or not it promotes economic growth. But you certainly can’t make the argument from history that democracy is the source of economic growth. The other thing that is part of the conventional wisdom is that government can only fail if it engages in protectionism. The problem is, Germany, Japan and the United States, and also Britain before the 1840s, became the leading economic powers in the world by means of naked protectionism. They used tariffs and subsidies, and they kept out foreign products and privileged their own producers. All of these things that are supposed to lead to ruin actually succeeded in the case of the four or five leading powers, including the United States. The United States was the most protectionist country in the world from the Civil War up until World War II. During that period it had the most rapid growth and the greatest industrial success of any society in history.

This does not mean that protectionism works at every level. As Chang points out, protectionism can be very useful for a country like the United States in the 19th century or Britain in the 18th century or various developing countries today that want to catch up, but once they have caught up it tends to become counterproductive. If you have world-class industries and are no longer worried about foreign competition killing off your own factories, then you want to expand your market. At that point – and it happened with Britain in the 1840s and the United States by the middle of the 20th century – the leading industrial power wants to open up foreign markets so that in addition to its own consumers, it can have access to consumers in other countries for its superior industries.

The truly radical thing about Ha-Joon Chang’s approach, which I think is quite right, is that he’s saying there is no one-size-fits-all policy for all economies at all times in history. The set of rules which would benefit the U.S. in 2012 may not be the ones that would help Brazil to catch up. If you go down that road, you come to the conclusion that the project of having a single set of rules in trade and finance that all countries must agree on is profoundly misguided.