American Capitalism – Toward a New History: The Entrepreneurial Multiplier

"The Entrepreneurial Multiplier" is part 1 of a 3-part series on "American Capitalism—toward a new history.”

Angus Burgin, Christy Chapin and I are developing a program at Johns Hopkins University that explores and will, we hope, help to reshape the history of American capitalism. 

My role in this venture is to ensure that entrepreneurship continues to play a central role in that history. My paradigm for this study uses a new form of the classical multiplier concept. The Keynesian multiplier works through consumption in an equilibrium model. 

The Entrepreneurial Multiplier (EM) works by forcing or incentivizing new investments in innovation in a dynamic, historical disequilibrium approach to capitalism. This approach enables us to bring together the two types of entrepreneurship most common in business and economic history, economics, and managerial studies. One branch involves startups; the other focuses on entrepreneurship within existing firms, which frequently are large, complex, and bureaucratic. The focus in the EM is on the sequence of innovations, large and small; that is what is multiplied.  

I have launched this study by re-examining events in the First Industrial Revolution in New England. The history of the early cotton-textile industry is well-understood, and I draw upon that literature to chart the innovations in water-powered spinning and then in the weaving of cloth. Emulation, á la Schumpeter, quickly followed, but there were even broader sequences of innovation:  these included the establishment of retail stores, bars, boarding houses, and a machine-tool industry that produced equipment for other mills, for wool manufacturers, and for the early railroad industry. 

The resulting waves of innovation had a significant impact on the regional economy and also on the culture and politics of the society. These sequences produced an environment friendly to change and less concerned than one might imagine about the destructive aspects of “creative destruction.” That culture and political economy were challenged by those who sought economic security and equity, but through the nineteenth century, Americans tended to lean decisively toward entrepreneurial capitalism.

Jumping forward, I survey the history of the new aluminum industry in the late nineteenth and early twentieth centuries. Again, the fundamental technological innovation prompted additional entrepreneurial sequences. Once again, these developments involved new businesses in local economies, as well as new enterprises making products from the metal. In this case, a patent monopoly dominated the early American aluminum industry, and the ensuing concentration of wealth and power, as well as environmental concerns, created more hostility to entrepreneurial capitalism than had been the case in cotton textiles. 

The political environment during the Progressive Era was increasingly hostile to firms like Alcoa. But the firm compromised with federal authority and meanwhile there were counter-impulses inside and outside of the industry that continued to favor entrepreneurship: these included the same types of material outcomes that had been important in the First Industrial Revolution and the expansion of the professions, all of which fostered change in their own domains and thus in the society’s culture.

My final effort to historicize the EM reaches into the Third Industrial Revolution, that is, the digital revolution of our time. Sweeping forward from the first development of the transistor, I look at the rapid spread of 3D manufacturing.  While it is still too early to chart all the secondary and tertiary entrepreneurial sequences flowing from so-called “additive manufacturing,” the growth pattern of the industry is similar to what we saw in the previous eras of industrial change. 

Again, we see the rapid expansion of investment in a new technology, accompanied by substantial media hype and new patterns of financial support (so-called “crowdfunding,” for instance). Although these changes are taking place in a setting that includes a formidable regulatory state and complex of non-governmental organizations that oppose change and favor economic security and equity, innovation has continued to generate the positive material sanctions for creativity that sustain the culture and political economy of entrepreneurial capitalism. 

My colleague, Professor Franco Amatori of Bocconi University, is currently adding a comparative perspective to the EM, a paradigm that we believe adds to the history of capitalism something important that Schumpeter did not analyze and that Alfred D. Chandler, the great historian of the corporation, did not think was important.                  

Louis Galambos, Department of History and the Institute for Applied Economics, Global Health, and the Study of Business Enterprise, Johns Hopkins University

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louis galambos

Louis Galambos

Louis Galambos is a professor of history and editor of The Papers of Dwight David Eisenhower at The Johns Hopkins University.

He's taught at Rice University, Rutgers University, and Yale University, and has served as president of the Business History Conference and the Economic History Association.

A former editor of The Journal of Economic History, Galambos has written extensively on U.S. business history, on business-government relations, on the economic aspects of modern institutional development in America, and on the rise of the bureaucratic state.