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Alan Greenspan, Adrian Wooldridge: Capitalism in America, A History

Many leading economies are dangerously focused on one city: most obviously United Kingdom but also South Korea and Sweden. The United States has numerous centres of excellence: New York for finance, San Francisco for technology, Houston for energy and Los Angeles for films.

R.H. Macy: “Goods suitable for millionaire at prices in reach of millions.”

Development of America – Three hundred years ago America was nothing more than a collection of sparsely populated settlements hanging off the edge of the known world. In 1803 Jefferson bought Louisiana Territory from France. In 1821 they bought Florida from Spain. In 1845 they annexed Texas and Oregon in 1846. And with a win in a war against Mexico they added California in 1850.

From 0 to 1820 growth rate of economy was 0,11 percent according to Angus Maddison.

In times after Adam Smith’s Wealth of Nations was written, America was prime representative of his belief that if individuals are to pursue their potential by improving their status as much as they can and generating as much gains for them self as they can, then a nation with successful individuals, will also be successful as a nation. American constitution incorporated this quest in setting firm ground for certain individual’s rights …life, liberty and pursuit of happiness, and by establishing proper framework for property tangible and intangible.

In 1830 Americans began to use phrase businessman to refer to people who were engaged in mercantile transactions.

America after War of Independence was torn between two vision of the future:

  • Thomas Jefferson’s vision of a decentralized agrarian republic of yeomen farmers
  • Alexander Hamilton’s vision of an urban republic with industrial mills driving economic growth and a powerful bank irrigating the economy.

The capitalist North and slave-owning South and civil war eventually decided which version of America will prevail.

There are three main principles of economic growth:

  • Productivity – that describes society’s ability to get more output from a given input. The most commonly used version of productivity is labour productivity. In includes amount of capital (plant and equipment) employed in making things and the number of hours people work, adjusted for their level of education and skills. But “growth economist” lead by Moses Abramovitz and Rober Solow added also innovation as factor that explain difference between value of input and output – MFP (multifactor productivity).
  • Creative destruction – defines process that drives productivity growth. It is principal driving force of economic growth. Elements like information revolution, reduction of cost of basic inputs in economy, more efficient use of those inputs, transportation revolution (including rise of information technology), location improvement, all those are elements of creative destruction that led to new models that provided growth also on account of diminishing old models.
  • Politics – creating environment that support economic growth. America was always good at creating those conditions. Environment that allows failures and deals with bankruptcy quickly and efficiently. Every time politic tried to introduce more regulation it was penalised by losing power.

America was built on architecture of Constitution that set proper structure for individuals to pursue their best interest. It protected individuals from what majority can do. It protected their rights and their property, extended it into world of ideas. From 1776 to 1830 America was wild country in development, they didn’t have central bank until 1830, main dynamic force of economy was combination of horse and person. The climate was harsh – winters in the Northeast, tornados in the Midwest and heat in the South.

Fast growth in America after War for independence was followed by first crisis in 1818 that lasted until 1821. This cycle of growth and crisis was seen again in 1837, 1857, 1873, 1884, 1893, 1896, 1907. All those led to establishment of Federal Reserve in 1913.

Two traditions had powerful influences on American open culture and hard work. Protestants value hard work as proof of virtue and Enlightenment made them question authority and hierarchy. The Patent act from 1790 and opening of patent office in 1836 created an environment that allowed those hard-working American entrepreneurs to create new inventions like sawing machine, mills, telegraph, device to separate seeds from cotton, plow.

Boost in growth in beginning of 19. Century was induced by three factors:

  • Resource revolution – oil, new sorts of coal, new location for resources.
  • Transport revolution – building of canals and railroads and use of steam for means of transportation.
  • Information revolution – building telegraph lines reduced time for communication from days to seconds.

There were two flows of people in America in late 18. and early 19. Century: first from East to West and second from rural to urban area. Culture of America was influenced by four distinct British “folkways” – Puritans shaped Northeast. Quakers shaped Pennsylvania and Delaware. Cavaliers shaped Virginia and Maryland and by extension South. The Scotch Irish laid claim to frontier.

Fight for true America between Jefferson and Hamilton vision was in full motion from the birth of new nation. Jefferson had strong role in government and also served as president, but he realised in his inaugural address in 1801 that Hamilton’s idea has won, and that America economy is developing outside agrarian environment. Hamilton as treasury minister was able to introduce nations credit and finance economy growth + war efforts. In 1803 when Jefferson bought Louisiana from France, he realised that America needs additional money and use Hamilton credit system to get it. James Madison and Andrew Jackson were successor of Jefferson and they belong to his circle, but they were the ones that finally finish dilemma of agrarian towards industrial and lead America into industrial economy. Madison chartered second national bank in 1812 to credit war efforts against Britain and Jackson, who come from Scotch Irish hard environment and believe in self-made individuals moved America into populist democracy with strong financial conservatism. In his time America was without debt for the last time.

In beginning of 19. Century it was North that lead American development, with main innovation and new industrial techniques coming from North countries, mainly New England. Some of them copied from British examples, but some of them driven with demand for mass production. Samuel Colt, Eli Whitney in the weapon industry, McCormick helping farmers with reaper. South on the other hand was led by “King Cotton”. After Eli Whitnery retuned to Savanah from Yale, he invented cotton gin (engine) that separated seed from strings and enable growth of land-based cotton breading since before this bread was not suitable for further exploitation. Before plantage products were sugar, tobacco, indigo and rice, after that cotton grew from 5 million pounds to 63 per year.

When Civil War started North possessing 70 of nation wealth and 80 of banking capital. War cost was heavy, especially for South, since they lost slave workforce and their production felt so much, that it took 30 years for it to return to pre-war levels. When South lost slave labour they needed to turn to some other solutions. One of them being prison work, that was even more brutal then slave work, since slaves represented assets to them, prisoners not. After North attempt to forced South into same rights status run out of steam, South continue with segregation practices and even develop one wing of Democratic party into Ku-Klux Klan.

Even though Civil War deepen difference between North and South it did represent important step, since it resolve once and for all way forward for America as one single capitalist country build on industrial production, powered by factories, spanned by steel rails, sprinkled with schools and crowned by great cities. Government wasn’t strong at that time, it had limited ability to collect tax, but they owned vast lands and they were able to sell it.

From 1865 until 1914 American growth propelled it into biggest world super power. Growth build on innovation, vast resources of land, strong industrial growth, strong population growth build on natural growth plus immigration. From 1865 to 1914 it was a period of astonishing innovations: new basic material (steel), new basic fuel (oil), new power source (electricity), a new personal mobility device (motorcar), new communication device (telephone). In this period America acquire Aljaska in 1867 and Hawaii in 1898. America’s share in world manufacturing increased from 23.3. percent to 35.3 from 1870 to 1910. Population grow from 40 in 1870 to 99 million in 1914. Its surpassed Britain’s population in 1857. Immigrants were plus for economy, they brought skills like farmers from Scandinavia, merchants and traders Jews from East Europe and people from Britain brought industrial skills and secrets with them.

Development come from two sets of changes:

  • Technological transformation: new materials (steel and oil), new technologies (cars and electricity)
  • Geographical transformation: West integrated in American (and global) economy

America was built on cheap oil. Oil fields in Pennsylvania started in 1858 by Edwin Drake. When they dry out new fields in Texas and California emerged. First it was used for lighting and then for all other purposes, enable America to grow into consumer-oriented economy.

In 1880 two revolutionary new technologies were introduces: electric power and internal combustion engine. They were general purpose technologies since they influenced larger field than just functionality they represent. America can’t claim those inventions, but it democratized them most successfully.

America did better than just invent them:

  • it was able of making innovations more user friendly,
  • producing companies that can commercialize these innovations
  • and developing techniques for running these companies successfully

Thomas Edison was more than just investor, he was more a systematiser of invention. He established first industrial laboratory at Menlo Park, New Jersey in 1876. With his invention of lightbulb for mass production and power generators he enabled mass electrification of country. And when AC (alternating current) replaced DC (direct current), electricity started to enter into every home.

Transportation revolution brought America cars and with Henry Ford they were available to mass and not only rich individuals. Spread of cars also led to spread of cities and their growth. Second area of transport revolution was flying in the beginning of 20. Century.

Telephone was at least revolutionary of these three technologies. Graham Bell invention was hard to spread around country, but his private monopoly was still more efficient then government led activities around the world.

Integrating West into global economy was based on populating wild West, setting up proper transportation lines, mainly with railroads (America was connected in 1869 from East to West), cultivating vast lands and building big cattle raising farms. West was developed from image of wild country, full of fighting, land of gold and silver that created Gold and Silver rush that started migration in 1848 and 1860s and 1870s, to country were settlers were offered opportunity to acquire cheap land if they work on it. In order to improve agriculture efficiency both farming and animal raising, industrial approach was needed. Economy of scope and logistic improvement brought down cost and provided connection to East for West and Midwest farmers and cattle barons. Cattle industry was based on cowboys and barbwire and farmers needed to solve labour deficiency issues by using technological innovation to lower needed man hours for doing the same job. By improving performance in raising animals and food, other industries like food preparation and conservation also achieved great innovation breakthroughs like using ice for conservation, using iced-cooled transportation, canned goods. The productivity revolution changed the face of rural America. Women and children were liberated from backbreaking toil: women focus on domestic economy and children on education.

Improvements of technology and growth of population and industry brought new breed of entrepreneurs, so called robben barons, who integrated different areas and made them efficient, mostly build on thin line between business efficiency improvement and monopoly-based activities. People like Andrew Carnegie (Steel), John D. Rockefeller (Oil), J.P. Morgan (Finance), they control industries and provide America with cost effective solutions that supported America growth, but they did that in ruthless way, that most of the times meant eliminating or merging their competition. But they also put their money into charities supporting development of education and helping development of country. These great entrepreneurs earned their place in history not by inventing new things but by organizing them. This involved three elements:

  • Spotting innovations that had potential to revolutionize industries
  • Bringing distant factors of production together, often moving materiel huge distances
  • Integrating previously discrete economic activities, from production of raw materials to the sale of finished products.

But probably the most important development of this time was establishment of limited liability companies, that allowed business to move from partnership or chartered organisations to a from that allowed efficient business development and actions, that were separated from owners and their liability. Companies were able to organize work better with managerial hierarchy and they could shape future by allowing entrepreneurs to make big bets on particular products or processes. Railways where the biggest companies that needed such sort of organisation in order to gain substantial capital even though their business model was betting on something that at the time of establishment didn’t exist yet. But other industries also saw rise of big corporation – AT&T, Kodak, General Electrics where all set up by the end of 19. Century and retail companies follow soon Macy and Sears as big representative.

From 1895 to 1905 it was a period of mergers that brought also horizontal integration not only vertical as it was known before. Sherman Antitrust Law was reply on growing power of new enormous corporation prohibiting combinations that restrain trade, but New Jersey created legislation that enabled holdings companies. Delaware followed closely and by 1930 majority of companies had their headquarters in Delaware. Main drive in consolidation of American corporate structure was J.P. Morgan and his partners, they created conglomerate like General Electrics, AT&T, Pulman Company, Nabisco, International Harvester and U.S. Steel. This was an era where big companies usually controlled by owners evolved into publicly traded corporation, controlled by board of directors and managed by professional managers. Ownership was separated from management and Ford Motor Company was one of the very few big private companies that survive by 1914. Company that put mass production on map, was lone rider in individual ownership. Ferderick Taylor wrote in his Principles of Scientific Management in 1911, “the man has been first; in the future the system must be first.”

Giant companies, owned by public, dominated by professional managers, bent on producing ever larger quantities of standardized products and determined to produce as much as possible in-house, including ideas, now sat at the heart of American economy. Not everybody was happy about it.

America laissez-faire approach wasn’t supported by everybody. Jennings Bryan in his speech “Cross of Gold” on democratic convention in Chicago in 1896, was attacking gold standard. Before second world war American federal government was small and from 1836, when Second Bank’s charter run out until 1913, when Woodrow Wilson created Federal Reserve America was without central bank. Americans believed that all you need to create a good society was sound currency and Bill of Rights and the free market could do the rest. In second half of 19. Century America was under leadership of passive presidents and divided political power and government was weak because of that. Even supreme court was regular defending individuals and corporative rights against government. American understand importance of solid currency since commercial societies need to have a solid store of value that everybody can trust if they are to operate efficiently. They choose in 1834 silver parity for dollar, but silver value was also locked to gold. It was also this period when lassiez-faire mentality found strong backing for its ideas in Social Darwinism and survives of the fittest moto. Herbert Spencer was known and appreciated in America. But laissez-faire approach was becoming less suitable in the world of enormous corporation going over state and nations borders. It was railroads again that started to bring politics into business since they were simple to big, crossing state borders, representing common good in a way that affects public and other businesses. They become first great crony capitalists. From 1880 capitalism of laissez-faire was tested by big corporation and so we saw rise of political protest against status quo and Progressive intellectual movement and Teddy Roosevelt and Woodrow Wilson played a leading role in translating America’s changed mood into policy.

Rise of capitalism brought pollution problems and inequality. First revolts against inequality and development of America in industrial power where monopolies created rich elite and moved working force from agriculture to industry from country-side to towns, started with farmers, protesting against railroads monopolies and decline of farming. In 1892 Populist party was established. Workers in towns followed quickly. The most important cause of this protest was deflation. Burden of deflation fall on little men and industries with high fix cost since repayment of debts was becoming a challenge. But it was sheer scale of change that brought anxiety to society. The Progressive intellectuals brought organisation and guidance to rural and urban protest, they were able to change attitude towards government in order to move from 18. Century check and balance approaches and those changes allowed Progressive presidents like Woodrow Wilson and Republican Teddy Roosevelt to strengthen government role. Role of government become more resembled European governments. In parallel with growth of strong corporations Americas was struck with closing of the Frontier, West was getting populated and playing field for strong individualism was gone. America had begun its long transformation from a land of infinite possibility to a land of limits and trade-offs. T. Roosevelt started this term in 1901 after William McKinley was assassinated. He started with law-suits against big corporations. In 1905 he started his own term and introduce measures to improve government power, to control railroad rates, food quality, he introduces income and inheritance taxes and prohibition of corporate political funds. He wanted government mediating between aggressive businessmen on one side and angry mob on other. He was by more conventional Republican William Howard Taft. If Roosevelt was patrician face of disdain for business, Wilson represented the academic-bureaucratic face. His measures to strengthen government were helped by America going into war in 1917, he established Federal Reserve banking system with 12 banks act as central bankers. Connection to gold standard was not abolish until Nixon and 1968, but they put limit to credit expansion to 40% of gold reserve and 35% backing by member bank deposits at the Federal Reserve Bank. But even if majority of laws that was introduced during War in order to nationalize important sectors of industry, were annulated after the war, America moved significantly to the left: the America of 1918 had income tax, a central bank and a swelling bureaucracy.

After Wilson two presidents Harding and Coolridge step back into progressiveness of government. Andrew Mellon (third richest mean in America after Rockefeller and Ford) was secretary of treasury from 1921-32 and he rolled back taxes on excess profit, cut in half estate tax and reduce national debt. In the decade after the war, America returned to growth after short deflation period in 1920, but new pattern of protectionism emerged. Coolridge impose tariffs for foreign products and immigration restriction was introduced. Even with those measures America still had 15% people born outside America and 36% of people with at least one parent being born outside America. By 1930 America’s share in world manufacture was 42% up 6% from 1914. Decade was dominated by three themes, rapid improvement in productivity, modernization of economy (rise of service sector and cities) and democratization and dissemination of the great innovations of laissez-faire era: electricity, cars and aeroplanes and, at more abstract level, the business corporation itself. Masses got access to everything from electricity to shares. 80% of all world cars in 1920’s was in America. The automobile industry revolutionized the distribution of wealth. Electricity provided even bigger productivity boost, by enabling each machine to work independently. Use of electricity in industrial environment was made possible by construction of large central stations and development of transition networks. Paul David has identified electrification as an example of an innovation that only has its full effect when it is accompanied by other changes such as reorganization of work. You don’t just need to add electricity to old production process. You have to shift from “group” drive to “unit” drive. Radio and cinema were two technologies that took their role as media entertainers and create more passive consumers who were entertained instead of doing entertainment for them self. Decade was an era when Americans started to live like consumers instead of only from hand to mouth. Masses started to benefit from previous development of business. Not only that they benefit, but by development of large corporations into public companies, that sell stocks on open market, ownership was also available to masses. But disperse ownership brought bigger division in owners towards managers. Some of the managers using this division for their own gains, some using it to focus on long term strategies. Those professionally managed companies started to experiment with people management systems, social welfare, started to build public image, use more money in advertising (this was actually a period when advertising spending as % of GDP was the highest in history). This transition was actually represented in difference between Henry Ford and Alfred Sloan approach. By the end of decade Sloan’s GM was successful mainly due to Sloan management approach of multidivisional company. Multidivisional companies were well suited to an age of giant organizations: they allowed companies to combine virtue of size with focus. They were also well suited to an age of consumer capitalism, allowing companies to generate specialized divisions that focused on producing and servicing particular products. Division were close to market to respond to it and tied to company in order to use its vast resources. It was actually DuPont that first started with multidivisional approach, but with GM it got real success. This was also decade when South joined North in creating single America especially after introduction of air-condition machines that enabled South industrial work even in hot humid conditions, that prevented South industrial development before. With advantages in labour price and not being under heavy union mark, some of the North companies even started their production in South. With decreasing immigration labour intensity in north was increasing and some of the black population finally started to move north. But even with all that expansion and golden age of consumerism, there were some dark clouds coming, debt level of individuals was high, immigration act stopped influx of foreign working force and put additional strain on business. Even though Herbert Hoover was seen as one of the most competent American presidents, he would soon to face big challenge.

In 1929 stock market crash and so did industry that went into The Great Depression. Actually, it was two depressions one after another all the way to second world war. Unemployment was over 50% in some areas, 25% generally and from 1932-1935 it was the first time in America’s history that more people went out of the country then in. The reason for such a great depression was unstable economic world that emerged after I. World War. Power of financial centre went from England and London to America. But situation was so uneven after the European countries bleed so much in the world, that America accumulated enormous amount of gold, but by doing so break the system and didn’t introduce new one. Since gold standard was dying since reality of pre-war value of currencies towards gold and dollar disappear, but European pride didn’t allow government to adjust their currency value to this new reality. After England gone as conductor of global trade and finance, America didn’t want to fully take that role, since isolationism was one of strong opinion builders in America at that time, with only few individuals pushing for more active global role. Woodrow Wilson, being one of them. The Tariff Act from 1930 was one example how America felt at that time – 3.300 items were put under special duties regime. With deflation starting to take its tool, debt servicing becoming major problem for home owners in America, with more than one third being late on payments. Global trade collapsed because of tariff war. Banking system wasn’t equipped for such a high default ration of debts, since spread of banks in golden era produced almost 25.000 under-capitalized banks in America. 40% of them went bankrupt. One of the victims of depression was also president Hoover, he tried to actively address challenges, but was unable to do so. He was not a leader and inspirer and he was not able to move people behind him. Franklin Delano Roosevelt was on the other hand good speaker, people choice and he moved in different direction. He was aristocratic with a common touch. Much like Winston Churchill on the other side of Atlantic. His team believed in power of government above all. First major task was how to handle banking system since closing them was much easier then reopening them without run for money would cause liquidity crisis. He declared 100% government guarantee for deposits, he pushed for establishment of deposit funds that would be used for payment up to 5.000 dollars of deposit (this number was raised many times), he also made sure that business started to publish more data about their financial status. With NRA – National Recovery Act, he sets stage for government mandated trusts in certain industries. In 1935 he introduced The Social Security Bill and by doing so America joined other countries in providing social security framework for his citizens. The New Deal permanently increase power of American government. FDR suffered in his second terms. Supreme Court had declared NRA and Agricultural Adjustment Act were both declared unconstitutional. He was still able to improve government position, Washington started to grow. FDR inherited a highly decentralized political economy committed to flexible markets and transformed it into a Washington-dominated political economy committed to demand management, national welfare programs and compulsory collective bargaining. But success rate of FDR presidency in fight against depression was not that high. It is believed that he was actually responsible for depression to last longer than it would without governmental stimulus. NRA wanted to control production and prices but instead offered framework for big firms to squeeze out smaller who were unable to compete with them. Uncertainty of constant changes also had devastated effect on business. FDR attack business and business people and tied strong bond with labour, especially union. In 1939 still 17.2 % of Americans were unemployed, compared to 16.3% in the last year of Hoover administration and 1.0 % in 1929. But even in Depression times American economy was still strong compared to others, still growing between 1936 and 1940, retail stores grow from 1.5 million to 1.8 million, IBM capitalized on growing bureaucracies, discount companies boomed, new planes carried people further than ever before, P&G invested heavily into brand building. Marvin Bower meet James McKinsey and persuaded them that Americas need professionals that would know how to manage companies in order not to get into trouble, not only consult them after they get into it. Gambling, movies, female beauty products all flourish. Chemical industry invented synthetic fibre, nylon, fibre-glass. It was war that pulled America out of depression more than New Deal. America spend 24.6 % of its time in war. War spending provided stimulus that the economy needed. It was time when big companies worked for government with extreme productivity. The biggest two being Henry Ford’s and Henry Kaiser’s. The wartime boom laid foundation of golden age of 1950s and 1960s. But there was flaw in this transformation of production into mass-production with focus on quantity more than quality. With using simple organization systems Americans achieved great result, but since unions power came back after war, this mass production systems were very fragile towards disruptions and also very resistant to introduction of clever new ideas such as total quality management.

After the war America entered into golden age, with growth averaging 3.8 % from 1946 to 1973. With families buying new homes with garage and inside that garage brand new car. Population grew, around 4 million people being born each year. Governments embraced a Keynesian policy of demand management and every industry from farming to housing grew. Two decisions were important for Americas growth. First it was wary of socialism and its approach, although they were quite some advocates of New Deal approach, Harry Truman and Dwight Eisenhower choose different roads. And second America choose the rest of the world as its market. America step out of isolation. With slashing tariffs and establishing international organizations America set up environment for free liberal international trade environment. After the war America was still manufacturing country with almost 30% people working as blue-collar workers, but that changed quickly and rise of white collar started in 1950s. Post-war America led the world in creating a knowledge economy. American education system was cornerstone of this led. People enrolled in higher education rose to 15.2 % of people between 19 and 24. Education system focus on research. One of the persons that stood out in his fight for improving American science and education community was Vannear Bush. His vision was that basic science is needed for economy and military success of America. Areas such as space exploration, atomic energy, health industry was backed strongly by research money. 1950s and 1960s also saw development in transportation. Highways were built. Air-transport grew. And western countries like California grew with them. By 1963 it replaced New York as most populated in America. After the war America was run by managerial capitalism. Industry was dominated by big firms. Managers run them quite independently. But they had to play ball with big government and big labour. Science was getting into business through managerial education, consumer research, standardization. Malcolm McLean use standardization to revolutionize logistic. Transporting goods in identical containers was a simple and beautiful idea. Sam Walton revolutionize retail with scale and standardization that reflected in big superstores on the edge of towns. Standardization find his expression also in business model of franchising. Franchising is business by template. American companies expand quickly. They mastered tools of organization that held the key to their prosperity. America was at that time land of abundance and suburbs. The country’s core institutions vigorously promoted “American way of life”: competitive sports, anodyne religiosity and reverence for the flag. It was time when nation become more and more homogeneous, with less and less people being born outside America only 4.7 % in 1970. Age of optimism was full of success stories but beneath all them was threat of un-competitive industry that was burden by high labour cost and benefits and federal government that learn to spend money that it didn’t have.

Troubles come in decades after 1970. From 1973 to 1986 we saw sharp decline in the growth of productivity. Key figure in transition from gold to lead age was Lyndon Baines Johnson, who wanted to create the Great Society. The Great Society involved a massive expansion of the entitlement state. Medicare and Medicaid were presented then, two large increases in Social Security benefits. Johnson’s government didn’t spend only on Social benefits but also on war expenses. Nixon continue with politics of benefit expansion and overburden budget even more. On 15. August 1971 Nixon announced New Economic Plan. Bringing to life wording of socialism, he introduced system of price and income controls. He also took USD from gold standard. When in 1934 FDR set gold value to 35 USD for ounce, which was 70% higher than real price at that time, America started to gather gold from around the world paying it with USD that represented bigger value at that moment. But from 1958 onward, when American inflation grow and shadow price of gold exceeded 35 USD, other central banks started to use their USD to buy gold from America. America gold reserve dropped from 700 million ounces in 1949 to around 270 million ounces in 1979. Oil shock was another crisis for America. America oil field wasn’t enough anymore. Import grow in 1973 to 36% and when OAPEC decided to embargo America for her support of Israel, oil run out for America. This coupled with stagflation – inflation + high unemployment, means trouble. America in 1970 was much like Britain in 1900, but now Germans and Japanese were doing to America, what America was doing to Britain in 1900, taking over here prime industries. Old industries like steel and car and new technological ones. Americas world share in production of steel, cars, electronic, chips, textile, footwear felt dramatically. Managerial practices that help America get its leading position also decline in America. Managers didn’t adapt to worldwide competition quickly enough. Housing market follow with drop of new housing per year. Industrial cities started to lose their power and people from workers to managers started to leave them. The ones who stayed weren’t the best citizens. Rise in suburbs on the other hand continue. Light on horizon was new industries, technological wonderkids like Gates and Jobs were starting their journey, Pfizer was starting to capitalise on its investment into R&D, consumer economy was area of new business models. Government also started to play more active role, stepping back from regulation and budget growth. America looked for right president to tackle economic revival and found it in Ronald Reagan.

Reagan destroyed post-war social contract. He broke power of unions. He moved economy in a pro-market direction. And he introduced the biggest tax changes since first WW.  By cutting top earnings tax, capital tax, corporate tax, he established conditions for business revival. He believed that business of America is business. But he also created biggest national debt then all his precedors combined.

Bush and Clinton tried to address fiscal flaw. It was Clinton who was more successful. He believed in balanced budget and he embrace globalization. His time was marked by deregulation of financial capitalism, revival of entrepreneurialism, advance of globalization and the high-tech revolution. Entrepreneurialism should be spirit of capitalism. But after the rise of big corporations it looked like they are leading development capitalism. After stagnation in 1970s and 1980s people wanted fewer corporate bureaucracies in the name of flexibility and innovation. They were looking for that entrepreneurialism spirit again. Tech companies from garage, Starbucks coffee shops, FedEx delivery trucks, venture capital, science parks, business incubators were concepts that saw their chance in new conditions. It was also time of reengineering big companies in order for them to move capital and resource into healthy business and focus on integration and not diversification. It was time of people like Jack Welsh that restructured and optimised businesses in the most brutal way. It was also time when money moved from saving accounts to shares and financial industry become strong again. Retirement act created mutual funds and managers of money become much more careful about what managers are doing. Because banks were so regulated other financial institutions started to profit and new products emerged. Securitization transformed non-market assets to marketable securities. With new way of raising money we seen growth in leverage buy out, management buyout, high-yield stocks used for share buying. Venture capital was next in line with focus on start-up companies. As America’s financial wizards worked their magic, Wall Street boomed. And even mainstream bank received present in the form of deregulation. In 1980s globalization was moving force in American economy. American management learnt foreign management practices especially from Japanese. Introducing total quality management (every worker is responsible for quality of products), continuous improvement, just-in-time manufacturing and self-governing teams. This was also time of new immigration waves, this time mostly from Americas and Asia and not Europe. Providing human resources – cheap labour for fast food restaurants and skilled workers for Silicon Valley. It was also time for big corporation to go global not only from sales perspective but also from production and sometimes development perspective.

America was in the front of another revolution, revolution of information. They weren’t the first into it, but they were able to commercialize IT development in the most successful way. Using strong military-industrial-academic complex and good business practice of some big IT companies (IBM, Xerox, Bell Laboratories) that invest heavily into R&D that started to pay off. It was a time of Silicon Valley and rise of Stanford University that helped this development. Internet enable business to revolutionize business models as railways did one hundred years before. But it was not only technological revolution that took place but also social revolution. Creation of post-industrial society where blue-collar workers were replaced by white-collar ones, especially with industries like IT and finance. Even gender composition changed since more and more women were entering labour force.

Entering 21. Century America was in a good shape. But some corporate scandals – Enron and tightening of world economy after 2001 terrorist attacks showed that global system is not that stable. And America realised that they are getting serious competitor for world supremacy in China, that embraced capitalism with communist political governance. At home Bush increased deficit with tax cuts and some additional government spending in Healthcare and Social benefits. And then in 2008 Lehman Brothers went into bankruptcy and financial crisis started. Toxic assets – credits for houses and enormous leverage that companies offering them had created conditions that led to financial crisis that spread into other industries, because whole financial system shrinked so much, that access to liquidity was hard for all investments. Consumers borrowed against value of appreciating assets such as houses. Quants developed complex financial instruments that were supposed to reduce risk but ended up shifting and concentrating it. And financial institution ignored warning signs since they worried that if they retrenched too quickly, they would give market share to others. Crisis its self was contained quite quickly, but recovery after it lasted long. Problems with economy growth started before crisis. America is looking less like an exceptional nation and more like a typical mature economy: overburden by big government, mired in slow growth and fearful of the future.

America’s greatest comparative advantage has been its talent for creative destruction. Americans were always on the move in pursuit of new opportunities while Europeans build citadels to protect what they already had. In America there is no higher aristocracy then aristocracy of entrepreneurs. America is still leading in tech companies, universities, patents. Strong companies are following advices of two strong individuals Jack Welch and Warren Buffet. Welch advised companies to leave markets that they didn’t dominate, and Buffet is advising them to have “moat” around them – a barrier that offers stability and pricing power. But mobility is still falling. Americans don’t move as much as they did, upward mobility is also becoming more difficult. Infrastructure investments decreased and Americas infrastructure is falling behind some other countries. Consolidated industries with strong companies offer less room for innovation and spreading of new ideas.

There are three explanations why America losing its dynamism:

  • America is losing its long-standing sources of economic leadership. America led the world in three great revolutions in education, creating mass education. But from 1980 it lost its pedagogical edge. And it lost it edge in acquiring talent from all over the world.
  • Second argument is that IT revolution is disappointing compared with previous technology-driven revolutions. And that service sector productivity growth is harder to achieve then manufacturing sector. The IT revolution may only be starting when it comes to productivity, particularly when it comes to the productivity of the service sector.
  • Third is that growth rate of the workforce is decelerating.

But authors believed that those arguments aren’t providing full picture. They believe that growth of productivity is suppressed by rise of entitlements, since funding of benefits require additional money, budget deficits and debt are rising (and company are investing less in long-term initiatives since they fell uncertainty) and with additional regulation overhead innovation and entrepreneurship are not developing with the same speed as before.

Trump was elected as president with slogan “Let’s make America great again”. He builds his program on lowering corporate tax, increased spending for infrastructure, protectionism and on short term those policies are bringing results, but since nobody is addressing issues mentioned above on a long-term Americas debt will probably grow and this can represent long-term problems.

Creative destruction is leading force of progress and entrepreneurs are never at rest, always building and innovating in order to survive. America produced those great mans on a regular basis. But this creative destruction is hard to sell, since the cost of creative destruction are often more obvious then benefits, it can become self-negating and can sometimes be all destruction and no creation.

American changing social structure can be divided into five time points:

  • 1800 – agricultural economy
  • 1860 – sharp division between northern economy that was a model of progressive civilization and the South that belong to a different historical era with its slave-based economy model
  • 1910 – end of slavery, industry expansion, immigration growing
  • 1950 – biggest world’s economy, highest standard of living, integration of northern and southern labour markets, decrease in immigration
  • 2000 – brain work is taking over hand work, contraction of old industries, gender position in workforce is changing in favour of women, new immigration wave

America still has great entrepreneurs – people able to exercise “madness of great man”. Their problems lie elsewhere in the rise of entitlements and the instability of the financial system. When benefits are defined instead being linked to contribution then situation when more is coming out the coming in could arise and that can cause problems. Regarding financial systems, strong capital structure can actually prevent banks taking too much risk, since any lose can be absorbed by shareholders and not taxpayers.

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