Despite all the nostalgia for the era when GM dominated the world's car industry, the heyday of American business may actually be now.
The dawn of this heyday came in 1995. In the two preceding decades, the productivity of American workers had grown more slowly than that of Japanese and European competitors. But in the decade since 1995, U.S. labor productivity growth has outstripped foreign rivals'. Meanwhile U.S. firms' return on equity -- that is, the efficiency with which they manage the capital entrusted to them -- has pulled away from that of Japan, France and Germany, according to data provided by Standard & Poor's Compustat.
Other measures tell a similar story. Up until the 1990s, management books were crammed with Japanese buzzwords, and the early Clinton administration was in awe of Germany's apprenticeship system. But today the United States provides most of the business role models, from Starbucks to Procter & Gamble, from Apple to Cisco. The (British) Financial Times publishes an annual list of the world's most respected companies. In 2004 and again in 2005, no fewer than 12 of the top 15 slots were occupied by American firms.
Or consider the database on management quality constructed by Nick Bloom and John Van Reenen of Stanford University and the London School of Economics. This duo organized a survey of 732 medium-sized American and European companies and measured their management procedures against benchmarks of best practice. The result: American firms, including the subsidiaries of American firms in Europe, are simply better managed than European rivals. In fact, superior American management accounts for more than half of the productivity gap between American and European firms.
Now comes the tribute to free and open markets one rarely sees in the mainstream media.
Whence this American superiority? The first answer is that competition is fiercer. The United States has relatively few trade and regulatory barriers for firms to hide behind, so bad companies either shape up quickly or go bust. In retailing, for example, firms such as Wal-Mart and Target have been able to spread their super-efficient logistics systems all across the country -- at least until lately, when a perverse anti-Wal-Mart campaign has sprung up. In Europe and Japan, by contrast, a web of zoning laws entangles efficient retailers, sheltering unproductive companies that overcharge consumers.
The next explanation for American superiority is a healthy indifference to first sons. Bloom and Van Reenen report that the practice of handing a family firm down from father to oldest son is five times more common in France and Britain than in the United States. Not surprisingly, this anti-meritocratic practice does not always produce good managers. So even though the best European companies are managed roughly as well as the best American ones, there's a fat tail of second-rate firms in Europe that's absent in the United States.
Competition and meritocracy cannot explain all of America's superiority, however. The U.S. economy has always had these advantages but hasn't always trounced overseas rivals. Nor is it enough to say that Americans work harder than Europeans, since the productivity numbers show that Americans are boosting what they achieve per hour. And anyone who explains America's superiority by saying that the country is more "dynamic" or "creative" is merely relabeling the mystery we're trying to solve.
The best guess about the "X factor" is that America's business culture is peculiarly well-suited to contemporary challenges. American business is not especially good at coaxing productivity out of factory workers: The era when this was all-important was the heyday of Germany and Japan. But American business excels at managing service workers and knowledge workers: at equipping these people with technology, empowering them with the right level of independence and paying for performance. So the era of decentralized "network" businesses is the American era.
Whence this American superiority? The first answer is that competition is fiercer. The United States has relatively few trade and regulatory barriers for firms to hide behind, so bad companies either shape up quickly or go bust. In retailing, for example, firms such as Wal-Mart and Target have been able to spread their super-efficient logistics systems all across the country -- at least until lately, when a perverse anti-Wal-Mart campaign has sprung up. In Europe and Japan, by contrast, a web of zoning laws entangles efficient retailers, sheltering unproductive companies that overcharge consumers.
The next explanation for American superiority is a healthy indifference to first sons. Bloom and Van Reenen report that the practice of handing a family firm down from father to oldest son is five times more common in France and Britain than in the United States. Not surprisingly, this anti-meritocratic practice does not always produce good managers. So even though the best European companies are managed roughly as well as the best American ones, there's a fat tail of second-rate firms in Europe that's absent in the United States.
Competition and meritocracy cannot explain all of America's superiority, however. The U.S. economy has always had these advantages but hasn't always trounced overseas rivals. Nor is it enough to say that Americans work harder than Europeans, since the productivity numbers show that Americans are boosting what they achieve per hour. And anyone who explains America's superiority by saying that the country is more "dynamic" or "creative" is merely relabeling the mystery we're trying to solve.
The best guess about the "X factor" is that America's business culture is peculiarly well-suited to contemporary challenges. American business is not especially good at coaxing productivity out of factory workers: The era when this was all-important was the heyday of Germany and Japan. But American business excels at managing service workers and knowledge workers: at equipping these people with technology, empowering them with the right level of independence and paying for performance. So the era of decentralized "network" businesses is the American era.
This column is so good I can forgive the one bad thought included:
And in the midst of American prosperity, rising inequality has prevented American workers from sharing in the success of American firms.
The American worker shares in the success of American firms, of course. I think the editors may have slipped that one in. Also, isn't this plagiarism? I've read this in every article about the economy since Bush took over.
Competition, meritocracy and specialization have made the U.S. the strongest business economy in the world (dare I say it, the history of the world). It's about time someone recognizes that fact.
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