Economic network

The pessimistic economic forecast ignores a history of dynamism

John Landry is a historian in Providence and Howard Wolk is an entrepreneur and investor in Boston. They are co-authors of Launchpad Republic: America’s entrepreneurial advantage and why it matters (Wiley, August 2).

Swift meatpacking plant and refrigerated wagons, Sioux City, Iowa, 1917

“I refuse to recognize impossibilities. I cannot find that anyone knows enough about anything on this earth to say for sure what is and what is not possible. – Henry Ford, 1922

Pessimism is in the air. A growing number of economists seem to have resigned themselves to slowing US economic growth. They cite both the slow recovery from recent recessions and the failure of recent technologies to boost productivity. Like Robert Gordon, they look back with nostalgia to the century from 1870 to 1970, when the “second industrial revolution” of mechanical and chemical progress brought real per capita growth to an annual rate of 2%. Even the most optimistic economists now expect 1% growth.

This slowdown, combined with rising income inequality, has challenged capitalism. Critics seek increased government intervention in the economy, with aggressive antitrust, wealth redistribution and heavy regulation. But this approach overlooks a crucial factor in the glorious century of rapid growth.

Despite calls for the nationalization of industries, the weakening of the currency or the radical expansion of governmental power, 19e Century Americans maintained a decentralized political economy balancing property rights with the right to compete. The result was an entrepreneurial drive that fueled the breakthrough innovations of those decades. To regain that growth, we need to trust our entrepreneurial drive to solve our core problems, with government supporting rather than leading.

Advance the glorious century

Most stories from the period 1870-1970 tell a rather deflating story. Yes, the US economy has managed to connect isolated homes to water, electricity, transportation and telecommunications, while dramatically reducing pollution and child mortality. People started to live a much better life. But these were all low-hanging fruit, the inevitable consequence of easy innovation fueled by government spending, cheap immigrant labor and high tariff protection.

A close look at those decades, however, tells a different story. Most of the great innovations were hardly obvious at the time and required remarkable ingenuity and perseverance. Even building national markets required overcoming local monopolies and connecting disparate transport networks – a political as well as an economic challenge.

True innovators had to work even harder. Consider the advent of refrigerated wagons, which dramatically reduced the cost of meat for urban households. Until the 1880s, people who wanted meat had to rely on livestock transported on foot or by train, which increased costs and decreased quality. Gustavus Swift, a Chicago meat packer, introduced refrigeration, which made centralized and efficient slaughterhouses near grazing areas possible. But the existing railroads, which preferred to own all the freight equipment, refused to carry Swift’s specialized wagons.

At that point, Swift could have given up and let the highways end up copying his invention. But he was ambitious and relentless, so he cleverly partnered with Canadian and smaller railroads to get his cars northeast. The invention proved so popular that the highways eventually capitulated. His entrepreneurial drive gave the country cheap meat years, if not decades, earlier than it otherwise would have.

An even bigger leap came from Henry Ford, who (as in the epigraph) refused to accept the conventional wisdom that automobiles were just horseless carriages for the wealthy. He was crazy enough to believe he could make durable, reliable cars that his father and other farmers could afford. Like entrepreneurs throughout this period, he learned the basics of an established business, but was too restless to live comfortably going with the flow. He quit to start his own business, a business that revolutionized the industry and improved everyone’s standard of living.

Keeping the entrepreneurial spark alive

Why then did America’s glorious century come to an end? Part of the problem was the rise of large corporations that gradually tamed the entrepreneurial spirit. The aggressive moves of Swift and Ford, like those of McCormick, Rockefeller and Carnegie, were so successful that they spawned large organizations that increasingly valued stability over innovation. Meanwhile, growing wealth led to calls for government intervention to stabilize and regulate the economy. We still generated remarkable inventions, from antibiotics to semiconductors, but now had fewer entrepreneurs to push them into the economy.

Many economists and historians have taken the downturn head on, as evidenced by books such as America in the Middle Ages. But fortunately, a wave of new entrepreneurs emerged after 1970 to take up the challenge. Rather than settle complacently into comfortable positions in the company, they started pushing crazy ideas that benefited us all. Political leaders supported dynamism with deregulation and stable fiscal and monetary policies. Unlike many other countries, entrepreneurs have thrived here because of our balance of property rights and the right to compete. From Microsoft and Apple to Uber and Tesla, they’ve built world-class companies that have improved our lives.

We continue to see talented people quitting their jobs to try out a business. Some, like Marc Lore, become serial disruptors: build a profitable upstart (Quidsi), sell it to a slower incumbent, use the proceeds to build another challenger (Jet), and repeat (Wonder). Money just isn’t enough to satisfy them – studies suggest they would make more money per hour with a corporate job. They prefer the adventure of starting a business outside of the corporate world.

These efforts gained momentum in the 1990s, with the Internet and the great expansion of venture capital. The great innovations of this period, which continue to emerge, have not yet revived growth. That’s partly because these fundamental changes, like electricity in the 1880s, can take decades to catch on. We probably need another generation of persistent tinkerers before we realize the full productivity boost of computers and robots. But there is plenty of room for optimism.

Contrary to the gloom of most commentators, the world of entrepreneurship has never been so exciting. We see capital flowing into companies that promise major improvements, from lower delivery costs to improving climate change. All we have to do is learn from the end of the 19e century and take care not to discourage this dynamism.