There are many factors that have enabled the US to become a global hegemon, notably its successful intervention in World War 2, and its subsequent efforts to construct a “rules-based” world order. But one key factor was its “special century”, from 1870 until 1970, where rising productivity drove economic growth. The US was able to become the world’s dominant economy, and to then translate this economic weight into political power.
The special century
In many ways, this special century came out of the blue. For millennia until the 1750s, the world only saw very modest rates of economic growth. Then the first Industrial Revolution, driven by steam energy, ushered in slightly faster growth in England, before spreading to the US and elsewhere. It was only following its Civil War, from 1870 until 1970, that America enjoyed its special century of economic growth. This was driven by the second Industrial Revolution – thanks to great inventions like electricity, urban sanitation, chemicals and pharmaceuticals, the internal combustion engine and modern communication, as Robert Gordon documents in his magistral book, The Rise and Fall of American Growth.
As Gordon says, the ordinary lot of the average Joe in the Western world changed relatively little from Roman times to about 1750. But then came the “great leap forward” of the special century with refrigeration, electric lighting, heating and air conditioning, the telephone, pharmaceuticals, synthetics, piped water and gas, flush toilets and sanitation, electric lifts, a dramatic fall in infant mortality, phonograph, movies, radio, cars and electric trains. Within the blink of a historical eye, life went from being nasty, brutish and short to pleasant, bright and relatively lengthy.
The inventions of the second Industrial Revolution were concentrated in the period 1870-1930, while their impact mainly took place in America from 1920-70, a period during which the US became the global superpower. Gordon reports that American total factor productivity had an annual average growth rate of less than 0.5% around the period 1900 to 1910. It would then creep up to almost 3.5% in 1950, before slipping back to 1.5% in 1970 at the end of the special century.
The impact of these inventions on Europe came later, being concentrated during 1945-95. At the end of World War 2, average productivity in Europe was only 50% that of the US. Europe would then catch up to the US by 1992, before falling back again during 1995-2005.
End of the special century
Ever since the end of the special century in 1970, American total factor productivity growth has hovered at around 0.5%, except for the years around 1996-2004 when the digital revolution hit our desktops (third Industrial Revolution), and temporarily lifted productivity growth to “special century rates”.
How could it be that America’s productivity boom be confined to such a short “special century”? Gordon argues that many of these inventions could only happen once, and others reached natural limits, things like achieving access to indoor plumbing, largely eliminating child mortality, and controlling infectious disease. Regarding the limited effects of the third Industrial Revolution, Gordon argues that technological advances have tended to be channelled into a narrow sphere of human activity involving entertainment, communication, and the collection and processing of information.
Some people argue that the apparent passing of the special century may not be real, but may be due to under-measurement of product quality improvement, and thus of productivity growth. But there has always been an under-measurement of product quality, perhaps more so in the past, in part because statisticians now do a much better job.
Future of the US hegemon
Looking ahead, Gordon is pessimistic about the future for American productivity growth considering America’s slowing rate of advance of educational attainment, rising inequality, ageing population, growing national debt and breakdowns in family structure. In other words, America will not repeat the miracle of “special century”, something which does not augur well for its rivalry with China.
According to Gordon, the future will likely be marked by stagnant living standards for most Americans unless it undertakes a series of reforms for which there is little support in Washington. Things like higher taxes on the very rich, increases in the minimum wage, mass pardoning to reduce the incarceration rate, drug legalisation, and improved public funding of education. He forecasts an average growth rate of just 0.3% in real median disposable income per person over the period 2015–2040, compared to 2.25% growth 1920–70.
There are of course techno-optimists who disagree with Gordon—people like Bill Gates who believe that new technologies are totally transforming the world, and will continue to do so through things like driverless cars, robotics, 3D printing, and artificial intelligence (often called the “fourth Industrial Revolution”). But despite the excitement surrounding these technologies, their effects are not at this stage evident in the productivity data. Nevertheless, we can never rule out entirely the possibility of the massive adoption of technologies of the fourth Industrial Revolution having a major impact on US productivity one day in the future.
Since the writing of Gordon’s book, there have been several developments that may affect US productivity performance. The COVID-19 pandemic stimulated an acceleration of digitalisation which is spurring productivity growth. Microsoft CEO Satya Nadella reportedly said that we have seen two years of digital transformation in two months. This highlights the unrealised productivity potential that our economies had before COVID, and raises the possibility of the existence of continuing large scope for productivity improvement.
Increased investment in R&D for vaccines and other medications may also have a positive impact. At the same time, heightened geopolitical tensions between the US and China, along with the Ukraine war have adversely affected global supply chains and business more generally. In sum, it is difficult at this stage to see a new productivity boom on the horizon.
While US global leadership may seem threatened by its slowing economic productivity, its status as a global hegemon is also dependent on the economic prospects of China, its main rival. While economic growth in China was once the envy of all, the past decade or so has seen a significant weakening in the Chinese economy, due to underlying trends like bad demographics, heavy debt and declining productivity growth. Many analysts now believe that the Chinese economy may not overtake the US in the foreseeable future, if ever—even if it has an edge in certain sectors.
While geopolitical experts debate all the various angles of great power rivalry between the US and China, one of the most important things that the US can do to maintain its global leadership is to undertake policy reforms to boost the nation’s productivity via a new special century.
John West is author of the recent book, “Asian Century … on a Knife-edge,” and executive director of the Asian Century Institute. He is also adjunct professor at Tokyo’s Sophia University and contributing editor at FDI-Intelligence, a Financial Times magazine. These positions follow a long career in international economics and relations, with major stints at the Australian Treasury where he was director of balance of payments, OECD (head of public affairs and director OECD Forum) and Asian Development Bank Institute (senior consultant for capacity building and training).