Saturday, August 4, 2012

American Exceptionalism, Then and Now

I am currently studying for my field exams in macroeconomics and economic history, which are on August 13 and 15. At Berkeley, we take field exams after our first two years in the PhD program, in two fields of our choice. Each field exam is a three hour written exam and can cover any of the papers, books, models, and techniques from your courses in that field as well as general knowledge associated with that field. So I have been revisiting the reading list from 210A, the economic history course taught to first years by professors Barry Eichengreen and Brad DeLong. The course was structured to cover a different theme each week. One week, the theme was "American Exceptionalism." In honor of the Olympics, let's have at it!

The phrase "American Exceptionalism," originally coined by Stalin in derision, carries a variety of connotations depending on who says it and in what context. In 2009, at the NATO Summit in Strasbourg, France, President Obama said, "I believe in American exceptionalism, just as I suspect that the Brits believe in British exceptionalism and the Greeks believe in Greek exceptionalism." This provoked outrages from the likes of Herman Cain, who wrote:
"Let me be clear," President Obama: America is the greatest nation on Earth. We are not just any other nation, and we are certainly not analogous to our friends in Europe and elsewhere.
For economists, American exceptionalism means something a little more precise than how much you love America. In the context of the history course, American exceptionalism refers to the differences in American industry and manufacturing, particularly compared to Western Europe, that arose in the mid-nineteenth century. In the eighteenth century, Britain was far ahead in terms of industrialization and productivity, but the U.S. accelerated in the nineteenth, and by the end of the world wars was the global leader. In 1853 and 1854, two small groups of British men visited the United States and reported back to Parliament on American industrial establishments, manufactures, and machinery. They were quite impressed with the efficiency and all the "labour-saving" machinery they saw.

The visitors gave four possible explanations for the differences of the American system: (1) labor scarcity in the U.S., (2) the extent of the American market and the introduction of railroads, (3) the education of the American workman, and (4) the energy of the American people.

The first explanation, labor scarcity, was also the first to appeal to economists studying the issue. At first it seems pretty obvious that since labor was relatively scarce and land abundant in America in those days, the real wage was high, so labor-saving technology was be used. This is essentially what Erwin Rothbard claimed in his article "Causes of the Superior Efficiency of U.S.A. Industry as Compared with British Industry," published posthumously in 1946. H.J. Habakkuk formalized the argument somewhat in 1962. The "Habakkuk hypothesis" is that labor scarcity induced mechanization, the adoption of labor-saving technologies, and innovation. Then in 1966, Peter Temin showed that the hypothesis didn't hold up to scrutiny. (I got to have lunch with him last year. Cool, huh?)

Other economists have taken on the second explanation: the extent of the American market and railway. Alfred Chandler (1990) says that the U.S. was able to become the "seedbed of modern managerial capitalism" prior to World War I because its large geographic size and rapidly growing domestic market allowed economies of scale and scope. But Leslie Hannah (2008) argues that Europe, especially northwest Europe, was a larger and more integrated market at the turn of the 20th century than the U.S. The U.S. used rail much more than Europe, but Europe had more ships, especially for intra-European trade, and lower long-haul costs per tonne-km. Road transport was the main bottleneck, and for this Europe had an advantage by having less average distance between railheads. Americans were more dependent on horses. Tariffs in Europe were low, and there was an enormous volume of intra-European trade before World War I. Moreover, Hannah finds that giant plants (with 1000 or more workers) were basically as common in parts of Europe as they were in the United States. So the explanation that the U.S. had scale advantages may not hold up.

So far we have seen a supply-side view (based on factor endowments: land, labor, and capital) and a demand-side view (based on market size). Neither is "case closed" yet. In fact, the papers I have read only leave me more confused. The British visitors' third explanation, American education, would fall under the category of institutions, while the fourth explanation, American "energy," would fall under the more vague (to economists) category of culture or "other." These are the big four. Supply, demand, institutions, and culture. Explanations for most phenomena in economic history fall into one of these four categories. And from what I've seen, the fourth is the least accepted among economists and the most accepted among "laypeople." For an economist, it seems like cheating to explain anything by cultural differences, unless you in turn explain the cultural differences (a la Greg Clark's controversial hypothesis of genetic superiority in the countries that were earliest to industrialize). But culture really resonates with people. Bringing us back to Herman Cain:
We are blessed with unparalleled freedoms and boundless prosperity that for generations have inspired an innovative and industrious people. America is exceptional.
Or see Newt Gingrich's book, A Nation Like No Other: Why American Exceptionalism Matters.

Exceptional character, innate exceptional energy and drive, is the one kind of exceptionalism that can last. If either factor endowments or market size explains American exceptionalism, well, globalization means that factors flow and markets get integrated, which means nobody gets to be too exceptional for too long. That's not necessarily a bad thing. It's good for everyone if the rest of the world also becomes more productive. In fact, the freer the market, the faster the flow. So if you're a politician who's staunchly free market and wants America to maintain a huge productivity lead, to avoid a contradiction in terms, you've got to pray that there is something exceptional innate in the American culture and spirit. Maybe that's why talk of American exceptionalism had a huge surge under Reagan (wow, speeches used to be much better written!)

Most Americans believe this too-- 80%, according to a 2010 Gallup poll, believe that "the U.S. has a unique character that makes it the greatest country in the world." The dismal scientist in me sighs.

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