DRI-306 for week of 6-2-13: What Is (Or Was) ‘American Exceptionalism’?

An Access Advertising EconBrief:

What Is (Or Was) ‘American Exceptionalism’?

Ever since the 1970s, but increasingly since the financial crisis of 2008 and ensuing Great Recession, eulogies have been read for American cultural and economic preeminence. If accurate, this valedictory chorus would mark one of the shortest reigns of any world power, albeit also the fastest rise to supremacy. Even while pronouncing last rites on American dominance, however, commentators unanimously acknowledge our uniqueness. They dub this quality “American exceptionalism.”

This makes sense, since you can’t very well declare America’s superpower status figuratively dead without having some idea of what gave it life in the first place. And by using the principles of political economy, we can identify the animating features of national greatness. This allows us to perform our own check of national vital signs, to find out if American exceptionalism is really dead or only in the emergency room.

Several key features of the American experience stand out.

Free Immigration

Immigration (in-migration) fueled the extraordinary growth in U.S. population throughout its history. Immigration was mostly uncontrolled until the 1920s. (The exception was Chinese immigration, which was subject to controls in the late 19th century.) Federal legislation in the 1920s introduced the concept of immigration quotas determined by nation of origin. These were eventually loosened in the 1960s.

From the beginning of European settlement in the English colonies, inhabitants came not only from the mother country but also from Scotland, Ireland, Wales, the Netherlands, Spain, France, Germany and Africa. Scandinavia soon contributed to the influx. Some of the earliest settlers were indentured servants; slaves were introduced in the middle of the 17th century.

Today it is widely assumed that immigrants withdraw value from the U.S. rather than enhancing it, but this could hardly have been true during colonial times when there was little or no developed economy to exploit. Immigrants originally provided the only source of labor and have continued to augment the native labor supply down to the present day. For most of American history, workers were drawn to this country by wages that were probably the highest in the world. This was due not just to labor’s relative scarcity but also to its productivity. Immigrants not only increased the supply of labor (in and of itself, tending to push wages down) but also complemented native labor and made it more productive (tending to push wages up). The steady improvements in technology during the Industrial Revolution drove up productivity and the demand for labor faster than the supply of labor increased, thereby increasing real wages and continually drawing new immigrants.

Economists have traditionally underrated the importance of entrepreneurship in economic development, but historians have noted the unusual role played by Scottish entrepreneurs like Andrew Carnegie in U.S. economic history. At the turn of the 20th century, the business that became the motion-picture industry was founded almost entirely by immigrants. Most of them were Jews from Eastern Europe who stepped on dry land in the U.S. with no income or assets. They built the movie business into the country’s leading export industry by the end of the century. In recent years, Asians and Hispanics have taken up the entrepreneurial slack left by the native population.

An inexplicably ignored chapter in U.S. economic history is the culinary (and gastronomic) tradition linked to immigration. Early American menus were heavily weighted with traditional English dishes like roast beef, breads and puddings. Soon, however, immigrants brought their native cuisines with them. At first, each ethnic enclave fed its own appetites. Then immigrants opened up restaurants serving their own. Gradually, these establishments attracted native customers. Over decades, immigrant dishes and menus became assimilated into the native U.S. diet.

Germans were perhaps the first immigrants to make a powerful impression on American cuisine. Many Germans fought on the American side in the Revolution. After independence was won, a large percentage of opposing Hessian mercenaries stayed on to make America their home. Large German populations inhabited Pennsylvania, Illinois and Missouri. The so-called Pennsylvania Dutch, whose cooking won lasting fame, were German (“Deutsch”).

In the 19th century, hundreds of thousands of Chinese laborers came to the U.S., many to work on western railroad construction. They formed Chinese enclaves, the largest one located in San Francisco. Restaurants serving regional Chinese cuisines sprang up to serve these immigrants. When Americans displayed a taste for Chinese food, restaurateurs discovered that they had to tailor the cooking to American tastes, and these “Chinese restaurants” served Americanized Chinese food in the restaurant and authentic Chinese food in the kitchen for immigrants. Today, this evolutionary cycle is complete; American Chinese restaurants proudly advertise authentic dishes specialized along Mandarin, Szechuan and Cantonese lines.

Meanwhile, back in the 1800s, Italians were emigrating to America. Italian food was also geographically specialized and subsequently modified for American tastes. Today, Italian food is as American as apple pie and as geographically authentic as its Chinese counterpart. The Irish brought with them a simple but satisfying mix of recipes for starches and stews. Although long restricted to cosmopolitan coastal centers, French cooking eventually made its way into the American diet.

Mexicans began crossing the Rio Grande into the U.S. during the Great Depression. Their numbers increased in the 1950s, and this coincided with the advent of Mexican food as the next great ethnic specialty. Beginning in the late 1960s and coinciding with the rise of franchising as the dominant form of food retailing, Mexican food took the U.S. palate by storm. It followed the familiar pattern, beginning with Americanized “Tex-Mex” and culminating with niche Mexican restaurants catering to authentic regional Mexican cuisines.

Today, restaurant dining in America is an exercise in gastronomic globe-trotting. Medium-size American cities offer restaurants flying the ethnic banners of a dozen, fifteen or twenty nations – not just Italian, Chinese and Mexican food, but the dishes of Spain, Ethiopia, Thailand, Vietnam, Ireland, India, Greece, Denmark, the Philippines, Germany and more.

Immigration was absolutely necessary to all this development. As any experienced cook can attest, simple copying of recipes could not have reproduced the true flavor of these dishes, nor could non-natives have accomplished the delicate task of modifying them for the American palate while keeping the original versions alive until they eventually found favor with the U.S. market.

It is ironic that so much debate focuses on the alleged need for immigrants to assimilate U.S. culture. This single example shows how America has assimilated immigrant culture to a far greater degree. Indeed, American culture didn’t exist prior to immigration and has been created by this very assimilation process. Now, apart from learning English, it is not clear how much is left for immigrants to assimilate. For example, consumer products like Coca-Cola and McDonald’s hamburgers have become familiar to immigrants before they set foot here through U.S. exports.

Cultural Heterogeneity

Many of the great powers of the past were trading civilizations, like the Phoenicians and the Egyptians. By trading in the goods and languages of many nations, they developed a cosmopolitan culture.

In contrast, physical trade formed a fairly modest fraction of economic activity in the U.S. until well into the 20th century. The U.S. achieved its cultural heterogeneity less through trade in goods and services than via trade in people. The knowledge and experience shared by immigrants with natives produced a similar result.

Economists have long known that these two forms of trade substitute for each other in useful ways. For example, efficient use of a production input – whether labor, raw material or machine – requires that its price in different locations be equal. Where prices are not equal, equalization can be accomplished directly by movements of the input from its low-priced location to its high-priced location, which tends to raise the input’s price in the former location and lower it in the latter location. Or, it can be accomplished indirectly by trade in goods produced using the input; since the good will tend to be cheaper in the input’s low-priced location, exports to the high-priced location will tend to raise the good’s price, the demand for the input and the input’s price in that location.

Input-price equalization is a famous case of trade in goods obviating the necessity for trade in (movement of) people. Cultural heterogeneity is a much less well-known case of the reverse phenomenon – immigration substituting for trade in goods.

The importance of cultural heterogeneity has been almost completely overshadowed by the modern obsession with “diversity,” which might be concisely described as “difference for difference’s sake.” Unlike mindless diversity, cultural heterogeneity is rooted in economic logic. Migration is governed by the logic of productivity; people move from one place to another because they are more productive in their new location. Estimates indicate, for example, that some low-skilled Mexican workers are as much as five times more productive in the U.S. than in Mexico.

That is only the beginning of the benefits of migration. Because workers often complement the efforts of other workers, immigration also raises the productivity (and wages) of native workers as well. And there is another type of benefit that is seldom, if ever, noticed.

The late, great Nobel laureate F.A. Hayek defined the “economic problem” more broadly than merely the efficient deployment of known inputs for given purposes. He recognized that all individuals are limited in their power to store, collate and analyze information. Consumers do not recognize all choices available to them; producers do not know all available resources, production technologies or consumer wants. The sum of available knowledge is not a given; it is locked up in the minds of billions of individuals. The economic problem is how to unlock it in usable form. That is what free markets do.

Our previous extended example involving immigration and the evolution of American cuisine illustrates exactly this market information process at work. The free market made it efficient and attractive for immigrants to come to the U.S. U.S. consumers became acquainted with a vast new storehouse of potential consumption opportunities – eventually, U.S. entrepreneurs could also mine this trove of opportunity. Immigrant producers became aware of a new source of demand and new inputs with which to meet it. And the resulting knowledge became embedded in the mosaic of American culture, making our cuisine the most cosmopolitan in the world.

The upshot is that, without consciously realizing it, Americans have had access to vast amounts of knowledge, expertise and experience. This store of culture has acted as a kind of pre-cybernetic Internet, the difference being that culture operates outside our conscious perception. At best, we can observe its residue without directly measuring its input. One way of appreciating its impact is to compare the progress of open societies like the U.S. with civilizations that were long closed to outside influence, like Japan and China. Isolation fearfully retarded economic development.

Status Mobility

In his recent book, Unintended Consequences, financial economist Edward Conard stresses the necessity of risk-taking entrepreneurial behavior as a source of economic growth. The risks must be organically generated by markets rather than artificially created by politicians; the latter were the source of the recent financial crisis and ensuing Great Recession.

According to Conard, it is the striving for status that drives entrepreneurs run big risks in search of huge rewards that few will ultimately attain. Status may take various forms – social, occupational or economic. Its attraction derives from the human craving to distinguish oneself. It is this need for disproportionate reward – whether measured in esteem, dollars or professional recognition – that balances the high risk of failure associated with big-league entrepreneurship.

In the U.S., status striving has long been ridiculed by sociologists and psychologists. “Keeping up with the Joneses” has been stigmatized as a neurotic preoccupation. Yet the American version of status compares favorably with its ancient European ancestor.

England is famous for its class stratification. A half-century ago, its “angry young men” revolted against a stifling class system that defined status at birth and sharply limited upward mobility. Elsewhere in Europe, lingering remnants of the feudal system remained in place for centuries.

But the U.S. was comparatively classless. Economics defined its classes, and the economic categories embodied a high degree of mobility. Even those who started on the bottom rung usually climbed to the higher ones, where the rarefied climate proved difficult to endure for more than a generation or two.

The best feature of the status-striving U.S. class system has been the broad distribution of its benefits. The unimaginable fortunes acquired by titans of Industry like Carnegie, Rockefeller, Gates, Buffett, et al have made thousands of people rich while building a floor of real income under the nation. Our working lives and leisure have been defined by these men. The value created by a Bill Gates, say, is almost beyond enumeration.

Thus, it is not the striving for status per se that makes a national economy exceptional. It is the mobility that accompanies status. This will determine the form taken by the status striving process.

Before free markets rose to prominence, wealth was gained primarily through plunder. Seekers after status were warlords, kings or politicians. They gained their status at the expense of others. Today, plunder is the exception rather than the rule. Drug cartel bosses are the vestige of Prohibition; they profit purely from the illegalization of a good. Politicians are their counterpart in the straight world.

When status is accompanied by mobility, anybody can gain status. But they cannot have it without increasing the real incomes of large numbers of people. Ironically, the biggest complaint lodged against the American version of capitalism – that it promotes greed and income inequality – turns out to be both dead wrong and inaccurate. Mobility is achieved through competition and free markets, which absolutely demand that in order to get rich the status-striver must satisfy the wants of other people en masse. And income inequality is the inevitable concomitant of risk-taking entrepreneurship – somebody must bear the risks of ferreting out the dispersed information about wants, resources and technologies lodged in billions of human brains. If we don’t reward the person who succeeds in doing the job, the billions of people who gain from the process don’t get their real-income gains.

Free Markets

You might suppose that bureaucracy was invented by the New Deal. In fact, Elizabethan England knew it well. Price controls date back at least to the Roman emperor Diocletian. Prior to Adam Smith’s lesson on the virtues of trade and David Ricardo’s demonstration of the principle of comparative advantage, the philosophy of mercantilism held that government must tightly regulate economic activity lest it burst its bonds. Thus, free markets are a historical rarity.

England’s abolition of the Corn Laws in the mid-1800s provides a brief historical window on a world of free international trade, but the U.S. prior to 1913 probably best approximates the case of a world power living under free markets. Immigration was uncontrolled and tariffs were low; both goods and people flowed freely across political boundary lines.

Prices coordinate the flow of goods and services in the “present;” that is, over short time spans. Production and consumption over time are coordinated by markets developed to handle the future delivery of goods (futures and forward markets) and by prices that modify the structure of production and consumption in accord with our needs and wants for consumption and saving in the present and the future. For the most part, these prices are called interest rates.

Interest rates reflect consumers’ desires to save for future consumption and producers’ desires to invest to augment productive capabilities for the future. Just as a price tends to equalize the amount of a good producers want to produce and consumers want to purchase in a spot market, an interest rate tends to equalize the flow of saving by consumers with the investment in productive capital by producers. Without interest rates, how would we know that the amounts of goods wanted by consumers in the future would correspond to what producers will have waiting for them? As it happens, we are now experiencing first hand the answer to that question under the Federal Reserve’s “zero-interest-rate policy,” which substitutes artificial Federal Reserve-determined interest rates for interest rates determined by the interaction of consumers and producers.

Without knowing what policies were followed, we can scrutinize development outcomes in countries like China, India, Southeast Asia and Africa and draw appropriate inferences about departures from free-markets. High hopes and failure were associated with statism and market interference in China, India and Africa for over a half-century. Successful development has followed free markets like pigs follow truffles. But the obstacles to free markets are formidable, and no country has as yet found the recipe for keeping them in force over time.

What About Political Freedom?

Discussions of American exceptionalism invariably revolve around America’s unique political and constitutional history and its heritage of political freedom. Yet the preceding definition of exceptionalism has leaned heavily on economics. The world does not lack for political protestations and formal declarations of freedom and justice. Many of these are modeled on our own U.S. Constitution. History shows, though, that only a reasonably well-fed, prosperous population is willing to fight to preserve its political rights. Time and again, economic freedom has preceded political freedom.

When the level of economic development is not sufficient and free markets are not in place, the populace is not willing to sacrifice material real income to gain political freedom because it is too close to the subsistence level of existence already. And even in the exceptional case (usually in Africa or Latin America) in which a charismatic, status-striving leader heads a successful political movement, the leader will not surrender leadership status – even though the ostensible purpose of the independence movement was precisely to gain political freedom. Instead, he or she preserves that status by cementing political power for life. Why? Because there is no substitute status reward to fall back on; his or her economic and social status depends on wielding political power. This is the fault of the political Left, which has demanded that “mere” economic rights be subrogated to claims of equality, with the result that neither equality nor wealth has been realized.

Observation shows that when economic growth begins – but not before that – people begin to sacrifice consumption to control pollution and improve health. Similar considerations apply to political freedom. Expressing the relationship in the jargon of economics, we would say that political freedom is a normal good. This means that we “purchase” more of it as our real incomes increase. In this context, the word “purchase” does not imply acquisition with money as the medium of exchange; it means that we must sacrifice our time and effort to get political freedom, leaving less leisure time available for consumption purposes.

The U.S. was the exception because its economic freedom and real income was well advanced before the Revolution. Enough Americans were willing to oppose the British Crown to achieve independence because colonial America was living well above the subsistence level – at that, the ratio of rebels to Tories was close to even. George Washington was offered a crown rather than a Presidency, but he declined – and declined again when offered a third Presidential term. His Virginia plantation offered a substitute status reward; he did not need to hold office to maintain his economic status or social esteem. It is interesting to speculate about the content of the Constitution and the course of U.S. history had the U.S. lacked the firm economic foundation laid by its colonial history and favorable circumstances.