Put aside the periodic ups and downs in the economy--even the latest jump in oil prices and the horrible damage of Hurricane Katrina. The statistic that best reflects the prosperity of the average American is the growth in productivity--the output of goods and services divided by the amount of labor devoted to generating them. By this measure, I think it is safe to say that the companies on this year's Inc. 500 have been nothing short of revolutionary.
To understand why, let's go back to 1981, the year the Inc. 500 was first compiled. That summer, the U.S. entered a deep recession. Unemployment and inflation rose. But the worst part was that productivity had essentially remained flat since 1977. In fact, the U.S. was in the midst of a 20-year period (spanning 1973 to 1993) in which productivity grew at 1.5% a year, the slowest rate of the postwar era.
Even when the economy rebounded in the 1980s, political leaders and pundits were wringing their hands over concerns that America's economy would soon be surpassed by Japan's. The pessimism continued into the 1990s. After Japan's economy stalled, experts worried that the European Union would pass the U.S.
But then an apparent miracle: Productivity growth began to surge between 1995 and 2000, reaching an average annual rate of 2.5%. And then, even more remarkably, productivity growth picked up again after 9/11 and the recession. In fact, since 2000, the growth rate has been roughly 3.5%, far surpassing the gains recorded during the golden years of the postwar era. Given that companies on the Inc. 500 led all private companies and most public companies in revenue growth during these years, it stands to reason that they helped to raise our collective productivity. The data seems to bear this out: The average revenue per employee of companies on the Inc. 500 increased to $163,950 this year, up from $130,735 in 2000--25% in five years.
And keep in mind, these seemingly small differences have a tremendous effect over time. When productivity was growing at only 1.5% annually, Americans could look forward to a doubling of their living standards every 48 years. At 3.5% productivity growth, living standards double in only 20 years.
So what happened? The emerging consensus among economists is that the rise in productivity is an outgrowth of the revolution in information technology--fostered by ever-faster semiconductors (as Gordon Moore famously predicted) and continuing advances in how to use the principal technologies in which these chips are embedded (computers and cell phones) or for which they are used (software design).
But if much of the same technology is available in Asia and Europe, why have the productivity benefits appeared only in America? Economists will debate this question for years, but I believe part of the answer lies in the distinctive nature of capitalism in this country. In the past 10 years, entrepreneurs have consolidated their position as the key drivers of radical change in America, bringing to market ever more sophisticated personal computers, operating systems, software, and, most recently, e-commerce. Though not every Inc. 500 company is in the IT business per se, many of them are, and the majority of them certainly use information technology to manage their businesses as efficiently as possible.
A central job of policymakers over the next 25 years is to ensure that future Inc. 500 companies continue to propel the American economy so that it can meet its next great challenge--paying for the retirement of America's baby boomers. At a minimum, this will require a strong legal system that protects innovators from frivolous lawsuits. It will also require strengthened training of the next generation in math, science, and information technology.
Most important, people must recognize that designing policies that prop up large corporations will only hinder productivity growth and thus American prosperity. To be sure, large companies are important, for they standardize and mass-produce the radical innovations brought to market by entrepreneurs. But don't count on them for the big breakthroughs themselves. With few exceptions, corporations are afraid to take gambles that may make their current businesses obsolete. Entrepreneurs, on the other hand, are in the business of making current businesses obsolete.
Carl Schramm is CEO of the Ewing Marion Kauffman Foundation in Kansas City. Robert Litan is a vice president there.