38. The Secret of American Prosperity

The United States is today the world’s most prosperous nation. There is no need to dwell upon this fact. Nobody contests it.

But, in the present-day political and ideological climate, riches are held in evil repute. By and large, people look upon the more prosperous with unconcealed envy and hatred. The New Deal philosophy assures that an individual’s fortune which exceeds that of the much talked-about common man is ill-gotten and that it is the task of government to equalize wealth and incomes by confiscatory taxation.

Foreigners View American Prosperity

Most Americans fail to realize that the same ideas that shape the anti-capitalistic bias of American domestic policies also determine foreign nations’ attitudes toward the United States. The average European?not to speak of the Asiatics and Africans?looks upon the United States with the same envy and hatred which the American “progressive” displays toward American business. He finds fault with the United States because it is more prosperous than his own country. In his opinion all Americans are bad for the simple reason that they enjoy a higher standard of living than he does. And just as the American “progressive” disparages as bribed “sycophants” of the exploiting bourgeoisie those few economists who have the courage to raise their voices against the New Deal, so the European “progressive” condemns as traitors all statesmen and writers supporting his government’s pro-American policy in the Cold War.

The many billions of dollars that the United States government has distributed all over the world have not tempered these anti-American sentiments. This aid, say the Socialists, is a mere pittance, a quite insufficient payment on the immense debt that America owes to the rest of mankind. By rights, all the wealth of the United States ought to be equally distributed among all nations. In the opinion of foreign radicals it is an infringement of divine and natural law that the average American lives in a nice gadget-equipped home and drives a car, while millions abroad lack the necessities of a decent existence. It is a shame, they say, that the scions of the peoples who have created Western civilization are living in straitened conditions, while the Americans, mere money makers, lead a luxurious life.

In the opinion of the typical foreign “intellectuals” mankind is divided into two classes: the exploiting Americans on the one side and the exploited have-nots on the other side. The communist “intellectuals” put all their hopes on “liberation” by the Soviets. The moderates expect that the United Nations will one day evolve into an effective world government that by means of a progressive world income tax will try to bring about more equality in the distribution of incomes all over the world, just as national income tax laws try to do within their respective countries. Both groups agree in rejecting what they call a pro-American policy on the part of their nation and favor neutralism as the first step toward the worldwide establishment of a fair social order.

This blend of anti-capitalistic and anti-American sentiments plays an ominous role in present-day world affairs. It excites sympathies for the cause of the Soviets and jeopardizes the best designed attempts to block the further advance of Russian power. It threatens to overthrow Europe’s civilization from within.

Rappard Views American Prosperity

Sober-minded European patriots are worried. They are aware of the dangers that the neutralist ideology generates. They would like to unmask its fallacies. But they are checked by the fact that the essential content of the anti-American doctrine fully agrees with the economic?or rather, pseudo-economic?theories that are taught at universities in their own countries and are accepted by all political parties. From the point of view of the ideas that determine the domestic policies of most European nations?and, for that matter, also those of the United States?a man’s penury is due to the fact that some people have appropriated too much to themselves. Hence the only efficacious remedy is to bring about by government interference a more equal distribution of what is called the national income. No argument whatever can be discovered to show that this doctrine and the practical conclusions derived from it ought to be limited to conditions within a nation and should not also be applied in international relations in order to equalize the distribution of world income.

The ideological obstacles that stand in the way of a European who wants to attack the prevailing anti-American mentality seem therefore almost insurmountable. The more remarkable is the fact that an eminent author, braving all these difficulties, has published an essay that goes to the heart of the matter.

Professor William E. Rappard [1883-1958] is not unknown to the American public. An outstanding historian and economist, this Genevese was born in New York, graduated from an American university and taught at Harvard. He is the world’s foremost expert in the field of international political and economic relations. His contributions to political philosophy, first of all those expounded in 1938 in his book The Crisis of Democracy, will be remembered in the history of ideas as the most powerful refutation of the doctrines of Communism and Nazism. There are but few authors whose judgment, competence, and impartiality enjoy a prestige equal to that of Rappard.

In his new book1  Professor Rappard is neither pro-American nor anti-American. With cool detachment he tries to bring out in full relief the factors that account for the economic superiority of the United States. He starts by marshaling the statistical data and proceeds with a critical examination of the explanations provided by some older and newer authors. Then comes his own analysis of the causes of American prosperity. As Professor Rappard sees it, these causes can be put together under four broad headings: mass production, the application of science to production, the passion for productivity, and the spirit of competition.

The political importance of Professor Rappard’s conclusions is to be seen in the fact that they ascribe American prosperity fully to factors operating within the United States. America’s present-day economic superiority is a purely American phenomenon. It is an achievement of Americans. It is in no way caused or furthered by anything that would harm foreign nations. There is no question of exploitation of the “have-nots.” No non-American is needy because there is well-being in America. Professor Rappard carefully avoids any allusion to the heated controversy concerning the European nations’ attitudes toward the United States. He does not even mention the exploitation doctrine and the complaints of the self-styled have-nots. But his book demolishes these counterfeit doctrines and, by implication, the political programs derived from them.

It can hardly be disputed, says Professor Rappard, “that the wealth of a country very largely depends on the will of the nation. Other things being equal, then, a country will be richer and its economy will be more productive in proportion as its inhabitants want it to be.” America is prosperous because its people wanted prosperity and resorted to policies fitted to the purpose.

Prosperity and Capital

The operation of the four factors to which Professor Rappard attributes the superior productivity of labor in the United States is certainly not confined to the United States. They are characteristic features of the capitalist mode of production that originated in Western Europe and only later came to the United States. Mass production was the essential innovation of the Industrial Revolution. In earlier ages craftsmen produced with primitive tools in small workshops almost exclusively for the needs of a limited number of well-to-do. The factory system inaugurated new methods of production as well as of marketing. Cheap goods for the many were and are its objective. It is this principle that, combined with the principle of competition, accounts for the expansion of the most efficient enterprises and the disappearance of inefficient ones.

It is true that these tendencies are today more powerful in the United States than in European countries this side of the Iron Curtain. But this is principally due to the fact that political antagonism to big business and its superior competitive power set in earlier and is more drastic in Europe than in the United States, and has therefore more vigorously curbed the “rugged individualism” of business. The difference which in this regard exists between Europe and the United States is a difference of degree, not of kind.

With regard to the application of science to production and the passion for productivity, there is little, if any, difference between America and Europe. There is no need to stress the fact that the passion to make his outfit as productive as possible is strong in every businessman. Concerning the application of science to production, Professor Rappard observes that the most knowledgeable and sincere American writers recognize “that the most fruitful investigations of recent years have nearly all been carried out by Europeans working either in their own countries or in American laboratories.” The industrial lead of the United States is explained, Monsieur Rappard goes on to say, not by the discovery of new theoretical truth but by the rapid and constantly improved application of discoveries of any origin whatsoever.

In enunciating this fact, Professor Rappard gives us the decisive answer to the problem he has investigated. America’s industrial superiority is due to the circumstance that its plants, workshops, farms, and mines are equipped with better and more efficient tools and machines. Therefore, the marginal productivity of labor and, consequently, wage rates are higher there than anywhere else. As the average quantity and quality of goods produced in the same period of time by the same number of hands is greater and better, more and better goods are available for consumption. Here we have the “secret” of American prosperity.

With some insignificant exceptions, there is no secrecy whatever about the best modern methods of production. They are taught at numerous technological universities and described in textbooks and technological magazines. Thousands of highly gifted youths from economically backward countries have acquired full knowledge of them at the educational institutions and in the workshops of the United States, Great Britain, France, Germany, and other Western countries. Besides, a great many American engineers, chemists, and agriculturists are prepared to offer their expert services to the businesses of the so-called underdeveloped nations.

Every intelligent businessman?not only in Western Europe, but no less in all other countries?is obsessed by the urge to furnish his enterprise with the most efficient modern equipment. How is it then that, in spite of all these facts, the American (and Canadian) firms alone make full use of modern technological achievements and by far outstrip the industries of all other countries?

It is the insufficient supply of capital that prevents the rest of the world from adjusting its industries to the most efficient ways of production. Technological “know how” and the “passion for productivity” are useless if the capital required for the acquisition of new equipment and the inauguration of new methods is lacking.

What made modern capitalism possible and enabled the nations, first of Western Europe and later of central Europe and North America, to eclipse the rest of mankind in productivity was the fact that they created the political, legal, and institutional conditions that made capital accumulation safe. What prevents India, for example, from replacing its host of inefficient cobblers with shoe factories is only the lack of capital. As the Indian government virtually expropriates foreign capitalists and obstructs capital formation by natives, there is no way to remedy this situation. The result is that millions are barefoot in India while the average American buys several pairs of shoes every year.

America’s present economic supremacy is due to the plentiful supply of capital. The allegedly “progressive” policies that slow down saving and capital accumulation, or even bring about dissaving and capital decumulation, came later to the United States than to most European countries. While Europe was being impoverished by excessive armaments, colonial adventures, anticapitalistic policies, and finally by wars and revolutions, the United States was committed to a free enterprise policy. At that time Europeans used to stigmatize American economic policies as socially backward. But it was precisely this alleged social backwardness that accounted for an amount of capital accumulation that surpassed by far the amount of capital available in other countries. When later the New Deal began to imitate the anticapitalistic policies of Europe, America had already acquired an advantage that it still retains today.

Wealth does not consist, as Marx said, in a collection of commodities, but in a collection of capital goods. Such a collection is the result of previous saving. The anti-saving doctrines of what is, paradoxically enough, called New Economics, first developed by Messrs. Foster and Catchings1  and then reshaped by Lord Keynes, are untenable.

If one wants to improve economic conditions, to raise the productivity of labor, wage rates and the peoples’ standard of living, one must accumulate more capital goods in order to invest more and more. There is no other way to increase the amount of capital available than to expand saving by doing away with all ideological and institutional factors that hinder saving or even directly make for dissaving and capital decumulation. This is what the “underdeveloped nations” need to learn.

Reprinted from The Freeman, November 1955.

• 1William E. Rappard, The Secret of American Prosperity, translated from the original French by Kenneth A. J. Dickson, with a Foreword by Henry Hazlitt (New York: Greenberg—A Corwin Book, 1955), 124 pp.
• 1College Professor William T. Foster (1879-1950) and businessman Waddill Catchings (1879-1967) joined forces to establish the Pollak Foundation for Economic Research and to co-author several books in the 1920s that considered saving harmful, advocated contra-cyclical public works, and “a constant flow of new money” to encourage consumer spending.