How did the United States rise to economic and industrial predominance in the world? First, the North American continent held a vast trove of natural resources of many kinds. All that was needed was finding ways to extract and transform those resources. Second, the country suffered from a perennial labor-scarcity. Even massive immigration in the “long 19th Century” could not fill the breach, so Americans turned to technological and organizational innovations to increase productivity. Third, all this took a great deal of capital. The “Founders” created a pro-business environment that both helped generate American capital and attracted foreign (especially British) capital. By the dawn of the 20th Century, the United States had the greatest industrial economy in the world. The two World Wars laid low every other industrial country, while they strengthened that of the United States. By mid-century, American industry (and agriculture, and finance, and science and technology) bestrode the world. In one symbol of both the industrial power and the diversity of the American economy, about a third (35 percent) of all private-sector jobs were in manufacturing.[1] This situation lasted through the end of the 1950s.
What were some results of that rise to predominance?
In the wake of the Second World War, the United States held a uniquely favorable position. All of the other major industrial nations were either bankrupt or war-ravaged and bankrupt. The Stalinist command-economy could compel Russians and conquered Eastern Europeans to make painful sacrifices to rebuild their economies without American aid. Elsewhere (Western Europe, Japan) relied upon American assistance. Later, the Americans added military protection against Soviet aggression.
The Americans used their leverage to remake the international economic system. The “Bretton Woods System” (International Monetary Fund, World Bank); the first steps that would lead to the European Union; and the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO) all came from American designs. A progressively more “open” world economy came about between 1945 and 2025.
The Western European and Japanese economies revived with a speed that astonished people who had seen the wrecked economies and societies at war’s end. They not only recovered, but generated an unprecedented and widespread prosperity. It should be obvious, but may not be to most Americans, that the vast majority of this recovery and progress sprang from the hard work of the people who received American aid. Especially in Germany and Japan, hard work, ready adaptation to new circumstances, and self-restraint became cultural values and not merely the harsh necessities of the moment. These countries also built government systems of “social provision” that shocked many Americans.
How did the United States fall from that predominant position?
The economies that the United States had helped to revive began to become competitors. This had always been expected, if only in some misty future. First, they began to supply many of their own needs, then they began to compete in “third markets” (neither Western Europe, not America). In Asia and Latin America, countries began to emulate the earlier industrializing countries. Their initial advantage lay in very cheap labor. They began by producing simple, non-durable goods at a very low cost for export to foreign markets, especially the American market.
At the same time, from the mid-1960s onward, the American economy began to shift its center of gravity. The service sector[2] began to grow rapidly. Manufacturing held steady in numbers of employees until about 1980. At the same time, manufacturers began the long trend toward shifting new production to the “Sun Belt,” especially the Southern states.[3]
With an expanding service sector, Americans seem to have been ready to surrender the lowest level of manufacturing to foreigners in return for more stuff bought cheaper. Those countries didn’t stay at the lowest level. Having earned and learned from low-level industrialization, many of them sought to move up the food-chain. South Korea, for example, developed a steel industry and a ship-building industry.
Then, beginning in 2001, China was admitted to the World Trade Organization. China has an immense population. Through the end of the Mao Zedong period, they were mostly trapped in low-productivity farming. Post-Mao governments set out to change China in a more revolutionary and constructive way than Mao had ever imagined. China would open its markets to foreign business, draw in foreign investment, shift its population from “the idiocy of rural life” to the “dark, Satanic mills” of new industrial cities, and conquer foreign markets for manufactured goods. It took China less that a decade to surpass the United States as the world’s leading exporter of manufactured goods. What the United States has retained and developed is its role as the leading exporter of services, including intellectual property.[4]
In this account, the American economy shifted its chief function from extracting primary products (so, primary sector) to transforming them into finished goods (secondary sector) to providing diverse services (tertiary sector). It’s easy to see this as a normative evolution of all capitalist economies. American aid to Western Europe and Japan after the Second World War helped those places get back on track. Similarly, American development aid assisted developing economies begin the path on which others were well-advanced. Over the years, America shedding low-value industrial jobs and shifting people up the hierarchy into high value service jobs facilitated the global rise in development and living standards.
Only in the case of post-Mao China did the institutions and policies created by the United States after the Second World War succeed all too well. The “China Shock” wreaked havoc on American industry (and not only American industry). That had painful social and economic consequences. From one point of view, it had been impossible to foresee the scale and rapidity of China’s growth in manufacturing power. So, is the problem how to return China to the old post-war model through practicing self-restraint and focusing on domestic consumers? To become a “normal” nation in American terms?
[1] Justin Lahart, “How the U.S. Slipped From Top Manufacturing Perch,” WSJ, 14 April 2025.
[2] Doctors, lawyers, bankers, teachers, and so on, rather than just people “flipping hamburgers” as Mike Dukakis seemed to imagine.
[3] In a sense, the Southern states were “developing economies” within America’s own borders. Wages were lower, labor unions weren’t well-established, and state governments were pro-development. For more, see: American Union, stay away from me uh. | waroftheworldblog
[4] Justin Lahart, “How the U.S. Slipped From Top Manufacturing Perch,” WSJ, 14 April 2025.
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