The US and cyclical economic theory – Part 1
Based on the theories of the mentioned economic
thinkers, economical models were developed. The only country though that
understood the importance of switching economic model based on cyclical theory
has been, in my opinion, the US. We will take an overview of the last 200 years
of economic history. In the period of 1800s to 1887 the population had just
experienced massive changes in technology and business which gave way to social
economic changes which was caused by the 1st Industrial Revolution.
Agricultural advances, steam engines, railways and the factory system gave way
for cultural move away from agrarian lifestyle to urban lifestyles and in
addition increase the overall productivity of the Nation. Travel across oceans
and rivers became easier connecting markets like never before. America became
an exporter of cotton to Britain through the cheap expenses of slavery as
Britain was the first to enter the Industrial Age by opening textile mills,
which America was able to follow through. Financing the development of these
technologies was of the upmost importance to advance the industrialization of
the Nations. The Market Revolution (based on the the economic liberal ideology
of Adam Smith) shaped the way people think in the US. It saw many americans
move away from producing things by themselves largely on independent farms and
towards producing goods to sale to others. The first thing that enabled this
massive shift was new technology, specifically in transportation and
communication. In the 18th century is was difficult to bring things
to market and that meant that markets where local and small. New transportation
systems changed this, making in cheaper to transport goods. The government
build the National Railroad. The steamboat set up a mania for channel building,
causing cities like New York to flourish. But the most important innovation was
the factory, which more that just a technological development it was an
organization. The American system of manufacturing centered on mass production
of inter-exchangeable parts grew up steadily. Roads, channals, railroads,
factories, they all required massive upfront capital investment. The state also
had a big role in development, by passing laws to create corporations, issues
bonds for financing, offering good deals to companies that build railroads.
The market revolution changed the landscape of
work, which for most of the prior 200 years happened at home. Small scale
production of clothes and other goods had been done at home largely by woman,
and initially this is how industrial production was done as well. Factory
owners would produce some of the products like patterns for shoes and then
farmed the finishing out to people working in their houses. Eventually they
realized that it would be easier to gather the workers in one place. Americans
started “going to work” instead of working from home. Work is now regulated by
the clock, instead of by the daylight cycle. The nature of work changed. In the
farms, artisans worked for a price which was linked to what they produced. In a
factory, workers would be paid a wage according to the number of hours they
worked regardless of how much they produced. Migration flowed to the West, to
take new land. Since it was difficult to find enough workers for the factories,
those jobs where fill in by immigrants. Due to periods of booms and busts in
the economy, the workers created unions to protect themselves, calling for
higher wages and better conditions.
The Civil War helped boost industrialization by
giving massive contracts to army related businesses. Communications where also
improved significantly (the telegraph). Immigration flourished, New York City
becoming the center of finance and commerce. At the time, the US was seen by
Europe as a developing economy, and investments in the US had a much higher
return than in Europe. Railroad were one of the keys to the countries’ 19th
century success. Consider that, in the beginning of the 20th
century, 7 out of the 10 top companies in the Dow Jones where railroads. They
also developed organizational management systems to organize themselves.
Rockefeller established Standard Oil, becoming the richest person in the world.
Vertical integration was another innovation. Firms bought up all aspects of the
production process from raw material, to production to transport and
distribution. Horizontal integration was when big firms bought up small ones. Unions
flourished and organized themselves better. Unions continued to grow and fight
for better conditions, sometimes violently.
In the 1920s, there was large scale consumption
of relatively new consumer products which was good for American industry. But
much of this consumption was fueled by credit and instalment buying which was
unsustainable. When economic uncertainty increases, credit bubble burst. Signs
of economic slowdown already started to appear in the mid 1920s. The stock
market crash in 1929 and the Great Depression were not the same. People lost a
lot of money in the market crash, but it was massive unemployment which led the
main depression. In 1930 a wave of bank failures spread (due to the fact that
they did not have enough reserves) as depositors lined up to take the money out
before the banks went belly up, banks call in loans and sold assets. This meant
that credit froze up, what really destroyed the economy. A frozen credit system
meant that more money was in circulation and that led to deflation. When prices
drop businesses cut costs mainly by laying off workers. These workers then can’t
buy anything, inventories continue to build up and prices drop further. Banks
weren’t lending money so importers couldn’t borrow it to make payroll to pay
their workers, making more and more businesses go bankrupt, leaving more and
more workers unable to purchase the goods and services that would keep the
businesses open. Although no-one starved, people were forced to search
trash-cans for food and had to ask for unemployment relief.
The response to the Great Depression was called
“the New Deal”. The New Deal meant that it was the government’s responsibility
to guarantee every man the right to make a comfortable living but he didn’t say
how he meant to accomplish this. It meant a series of programs whose objevtive
was to fix the depression and prevent future depressions. The New Deal
consisted of: a relief program, gave money to people in need; recovery
programs, where intended to fix the economy on the short run, and put the
people back to work; and lastly, reform programs defined to regulate the economy
in the future to prevent future depressions. The National Recovery
Administratio was defined to be business leaders working together to create
industry standards for production, standard and working conditions. One section
of the NRA, the Public Works Administration employed 4 million people building
bridges, schools, and airports. The crisis has been caused by under consumption
and the best way to combat this was to raise workers wages, so that they could
buy lots of goods. The thinking was that if people experienced less economic
insecurity they would spend more of their money, so there were wide-spread
causes for public housing and universal health insurance. The crowning
achievement was the Social Security Act of 1935. Social security included
unemployment insurance, aid to poor families with children and of course
retirement benefits. This is funded by payroll taxes rather than general tax
revenue. This was a transformation between the federal government, and the
American citizen. Before the New Deal American did not expect them to help them
in times of trouble. After the New Deal, the question was not IF the government
was going to intervene, but HOW. This is Keynesian Economics, the idea that the
government should spend money even if it means going into deficits in order to
prop up demand. The State was now much more present in people’s lives. For some
people it meant relief and social plans, for others it meant jobs and
employment programs. It paid paintors to make murals, it paid actors and
writers to put together plays, it employed 3 million Americans until it ended
in 1943. The program got the support from most of the population bringing the
people from different social classes together.
The New Deal changed the way of thinking about
economics. Liberalism in the 19th century meant limited government
and free-market economics. The New Deal changed the people’s expectation about
the government. Now when things go sour we expect the government to do
something. The New Deal made the government an institution directly experienced
in american’s daily lives and directly concerned with their welfare.
More American history and economy to come in
our next chapter.
Your friendly economist,
Cristian “Nash” Bøhnsdalen.
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