Did Entrepreneurial Culture Drive America's Success?

The growth of America’s manufacturing economy owed its success to an entrepreneurial culture that could be quite ruthless when it came to financial opportunity and change. Like England before it, America benefited from a strong internal market. Land purchases and conquests from France, Spain, Mexico, and Native Americans gave the United States a continental-sized market by the middle of the nineteenth century. Of course, other nations in the Americas also have lots of land and a big geographical market space, but that alone does not make for a strong internal market. Here U.S. government policy helped. The United States Constitution, through its commerce clause, prevented any state, territory, region, or city from stopping or inhibiting the flow of trade and commerce. Any purely local protection that was designed to favor, say, St. Louis over Kansas City or to prevent products from Massachusetts from reaching consumers in Alabama would be struck down by the courts. While the national government did institute tariffs to protect American manufacturing from external competitors, it did not prevent the internal flow of trade, capital, labor, and goods, assuring that competition between places would be quite fierce. One consequence was that demand for goods was homogeneous in America. That is, for many products, consumers in the Northeast, South, or Far West did not demand or expect distinctive versions or exhibit unique patterns of consumption. Any producer, therefore, could pretty much be assured of reaching the entire population. Add to that the strong commitment on internal improvements that reduced transportation costs, and you had an America that even by the mid-nineteenth century constituted a market that few other nations could match.

Government policy also aided this process in another way. As we have seen in the seventeenth and eighteenth centuries, America was land and resource rich but capital and labor poor. Encouragement of immigration and settlement (and also for the South, slavery) helped to overcome the labor constraint. An open and free immigration policy continued throughout the nineteenth and early twentieth centuries. There were essentially no laws governing who could come or how they could come, with one exception: The Chinese after the passage of the Chinese Exclusion Act in 1882. While nineteenth-century Americans had as many prejudices against aliens and neighbors practicing different ways and different religions as any other people, this did not stop or even slow the stream of immigration. The need for labor, both manual and skilled, overcame most prejudice against people. By 1850, annual immigration had risen fast, reaching about 1.5 percent of the U.S. population, the highest level in the nation’s history. Over the next half century, the absolute number of foreign-born residents would rise significantly, hovering around 14-15 percent of the total population, trailing off after immigration restrictions were imposed after 1920.

The strength of the American System, following the model laid down by England, was the close relationship between communities of technologists, skilled mechanics, inventors, and firms that actually produced and executed their innovations. Even more so than England, America’s vast and diversified economic geography created places of networking and innovation, well in advance of Silicon Valley. There was brass valley around Waterbury, Connecticut, where specialist firms made all manner of brass fixtures and hardware. Nearby lay precision valley in the vicinity of Springfield, Vermont, where many of America’s machinists and machine tool makers congregated. Providence, Rhode Island housed the American jewelry industry, especially mass-produced and semiprecious jewelry. Trenton, New Jersey and upstate New York served as the pottery sheds of the nation. The American landscape offered many such opportunities for innovators to set up shop and share information and knowledge with others doing the same thing. Through these networks, they learned about markets, technologies, demand, sources of supply, skilled labor, and the like. They could also draw on needed services and inputs to the final goods, creating a localized and very efficient production chain. It was this pattern that America would repeat again and again, from Detroit’s rise as the center of automobiles and automobile supply firms to the late twentieth-century emergence of the Bronx as the headquarters of the new hip-hop music scene.

By the late nineteenth century, the United States had developed a formidable ability to innovate in all sorts of industries and sectors. It had connected its dynamic financial sector with its high level of human capital and state and federal policies that encouraged innovation and market integration. Innovation valleys and innovation cities provided crucial connections that stimulated competition among firms. It was a Darwinian struggle that only the best could survive, but it also replicated Darwin’s other important concept, the tangled bank of mutually supportive firms, customers, suppliers, and labor. There was also one final ingredient in this heady innovation culture, one that distinguished the United States from its former parent model of England—strong property rights for innovators.

While patents had not proved substantially important to England as the breakthrough industrial nation, the United States exploited a strong patent system that had existed from the ratification of the Constitution. Whereas most of the innovations in England had been made by first movers who reckoned that patenting only revealed valued information and trade secrets to the public, American innovators were a much more diverse and entrepreneurial lot. English innovation drew heavily upon the skills of employed fitters, mechanics, and technicians, who worked in established enterprises. America established a similar model, as did all follower nations. But America also had a strong group of independent inventors who made use of patent and property rights to protect what they created and earn a profit from it. Not only was patenting relatively inexpensive in the United States, but a number of support mechanisms arose in order to aid in the process. In the early nineteenth century, Philadelphia founded The Franklin Institute. Like other mechanics and institutes found in Europe and the United States, it had an educational and informational mission, helping to spread knowledge of breakthroughs in science and technology to would-be inventors, especially those who lacked formal education. But it also encouraged those inventors by examining worthy discoveries, holding contests, and awarding prizes to the most meritorious new ideas. Besides offering cash bonuses, the prizes and medals helped to draw the public’s attention, and often financial capital, to the independent inventor.

By the 1880s and 90s, patent lawyers and professional patent agents both helped inventors gain patent protection and also promoted a trade and market in intellectual property that diffused innovations and provided a source of profit to inventors. Indeed, U.S. inventors had, in some ways, the best of both worlds. While the nation’s patent system protected them from imitators and copiers, it did not work especially hard to protect holders of foreign patents from U.S. imitators. So, Americans could, on the one hand, gain access to innovations made elsewhere, as in the manner of Samuel Slater or Frances Cabot Lowell. But then American inventors could take their improvements or inventions to the U.S. patent office to secure protection in the American market. This same pattern, of catching up by copying until an indigenous inventive sector is well established, is very much in line with how China has progressed over the past several decades.