The Social Effects of Economic Thinking

Kenneth A. Loparo

• Publisher: Palgrave Pivot
• Year: 2014
• ISBN:
  9781137494016
• Topic: Politics & International Relations
• Subtopic: European Politics
• Index: Politics & International Relations

The book explains how social outcomes result from the influence of economic ideas which are themselves strongly impacted by the distribution of power in society. The book examines policies and programs of contending interests, emphasizing the importance of socio-economic issues stemming from quasi-economic stagnation.

1

A Political-Economic History of the U.S.

Abstract: This opening chapter reviews many of the important factors that brought about the capitalist economic system that developed in the U.S. It then provides a view of economic evolution, and covers important policy and economic developments that shaped American society. The history is contextualized by seeing the economy evolve through several industrial eras and eras noted for the development of important economic institutions. The particular problems and ideologies of these eras are described. Major reform eras are followed by a modern period of reaction that is attempting to reverse the reforms. This modern period is one of division between conservatives and progressives over economic distribution and the social hierarchy. The chapter ends by examining some recent research on economic performance, politics, policy, and inequality.

Keywords: Antecedents of capitalism; business cycles; classical ideology; concentration; counter-revolution; industrialization; reform eras; stratification

Van Lear, William. The Social Effects of Economic Thinking. New York: Palgrave Macmillan, 2014. DOI: 10.1057/9781137494016.0006.

The antecedents of capitalism

The antecedents to American capitalism can be found in what historians refer to as the early modern period of western history running from about 1500 to around 1750. European history provides what became stimulants to its own economic development as well as to the development of the U.S. system. Americans imported both a philosophical foundation for capitalism and benefited from Europe’s transition out of Feudalism to a commercial-based economy.¹

The philosophical antecedent combined Protestant theology with Classical economics. Protestantism overturned Catholic prohibition of economic gain into the path by which people earn salvation. Economic gain meant good works that glorified God. Classical economists argued that wealth did not come from plunder but from productive activity built on the division of labor. Free competition allows for enterprising people, driven by self-interest, to benefit society from their innovations and the goods they make. If such an economy was buffeted by a downturn, Classicals claimed that free markets would re-equilibrate or re-balance the system.²

Working in conjunction with markets was a new concept of private property. Property became the combination of resources brought together to form an enterprise. People should have the right to all of the proceeds produced with this property. This conception helped to stimulate the ideas of individualism and self-interest, and to promote risk-taking. The labor force to supply enterprise came from the enclosure movement and the slow decline of agriculture. The enclosure movement in Europe turned what was communally owned land to private property, forcing workers off of the land. Productivity increases in farming led to an exit of people looking for work in industry. The profit motive replaced feudal conventions of work.

Another set of stimulants came from the nation-state and exploration. The nation-state allowed for the bringing together of vast unconnected jurisdictions into a cohesive large marketplace. This encouraged trade and profit seeking. Exploration by the European powers also connected vast geographic areas bringing more people into commercial connection. National governments taxed their people to support foreign ventures. Taxation led to the monetization of economies which further facilitated trade. People paid their tax liabilities by using what the government recognized as money.

A critical factor to the institutionalization of business required a prolonged successful experience in private profit making. This stimulus was provided by the price inflation of the 15th and 16th centuries in Europe.³ Historians place the rise in prices as starting around 1520, persisting until the end of the 16th century, and then resuming their upward trend well into the 17th century. A combination of demand factors created profitable business opportunities. Population growth and urbanization raised spending, and so did wars. And importantly, inflationary pressures arose from an inflow of new money from precious metal discoveries in Latin America and Africa and from silver mining productivity increases.

Additional stimulants for economic activity came from rises in the velocity of money⁴ and from the development of modern banking. A quicker pace of transactions meant that money was more rapidly changing hands. In effect, higher velocity created more demand for goods and more profit. Modern banking fueled demand further by creating additions to the money supply. This was accomplished through the use of fractional reserve banking. By maintaining only a portion of deposits on hand (as reserves) to meet customer money demands, the remaining portion of funds were lent to earn a return. The notes provided to borrowers circulated as money, enhancing spending and economic activity.⁵

The founding of the American Republic provided a further stimulant to what became the industrial capitalist economy of the 19th century. Not only did the constitution of the United States provide America with rather unique political institutions but provided an economic framework as well. Through a system of checks and balances, the governmental structure created political stability, an important requirement in the promotion of risk-taking and commerce. While the ability of government to intervene economically was limited, it was empowered with the right to tax, spend, coin money, and to foster international trade. By securing property rights, protecting contracts, and having federal authority over interstate commerce, the constitution enabled a free market economy to grow.

American political-economic history

Capitalism is an economic system inclined toward growth. Rights to private property permit people to organize resources, finance, and workers to produce goods for profit. A generalized climate of freedom combines with entrepreneurial risk-taking to make for a dynamic, growth-oriented economic system. No other system in human history can match the system’s penchant for productivity, and for replacing scarcity with abundance.

Three great eras of industrialization in America have taken place. These eras, commencing shortly after the founding of the Republic, were brought about by massive business investment undertaken with a long-term view toward profitability and economic transformation. The first era runs from the early 19th century to the middle of the 19th century, highlighted by the development of canals, the telegraph, and railroads. The second era runs from the end of the civil war to the turn of the 20th century, known for its continued railroad investment but also for the ushering in of a whole new swath of manufacturing industries. This era of economic development is driven by the telephone, steel, and energy industries. Financial markets and modern banking developed to finance investment and allow for speculation in corporate securities. The third era begins with the 20th century and runs through the 1970s. This period of growth is centered on housing, autos, electric power, and further advances in communication. The great industrial fortunes made during the 19th century financed the creation and expansion of large corporations and corporate concentration, hallmarks of all modern economies.

Each of the industrial eras had one or more industries that promoted overall growth by its linkages to many other industries that supplied finance and inputs to them. Railroads provided this for the first era, rail and oil in the second era, and autos, housing, and energy in the third era. Economic growth and development is a symbiotic relationship among science, engineering, business investment, and finance.

The small, closely held firm gave way to the corporate form of business. Incorporation provided advantages of potentially infinite life and greater access to capital than what sole proprietorships offered. Corporate administration allowed for professional management and a divisional structure of profit centers; these innovations facilitated efficient administration and the concentration of assets under ownership. The law made a distinction between the owners and the controllers. These parties were seen as two distinct groups in which the owners bore no personal legal liability for corporate actions. This legal protection attracted public participation in business ownership and stock speculation but without the risk of lawsuits. The corporate form of business and corporate size were fostered as well by the very pro-business, non-regulating policy of 19th century government and from efficiencies known as economies of scale where costs could be spread over growing output volume.

The current period of development is a new post-industrial era. This fourth era is built around the computer and mobile communication technology, and the globalization of business and finance. Era four is much like the first half of era three where the financial and real estate sectors play an important role in innovation, economic stimulus, and speculation.

Post-civil war industrialization created many negative social effects that private business was unwilling and unable to correct. The rise of industry brought with it the decline of the agrarian economy. Industrialization made America less rural and more urban. The competitive and acquisitive precepts of capitalism differed from the more cooperative life on the farms.

Urbanization created congestion and attending issues of hygiene, housing, and transportation. Movement of people out of farming into the cities sometimes swamped the capacity to smoothly and humanely absorb urban population growth. Unemployment and concentrations of poverty existed. Mass immigration complicated the economic problems and brought with it the issue of assimilation.

Questions concerning the economic structure of industrialized capitalism arose. Of particular concern were the issues of money and banking, and of monopoly business. Money in the 19th century, as in previous centuries, was backed by precious metals. The limited supply of these metals kept the growth in the money supply limited and the costs of borrowing money high at times. Inadequate bank reserves inhibited the flow of credit between the rural areas and the cities, causing shifting credit conditions, impacting farms and businesses alike. The money supply seemed unable to meet business credit needs during times when money demand was high, precipitating financial crises and business downturns.⁶ The financial system seemed to favor creditor interests too much, undermining the general welfare.

The latter part of the 19th century saw the rise of large businesses or trusts and efforts to monopolize industries. These trusts limited competition, made efforts to raise prices, and created substantial inequality in income and opportunity. Aggressive competition led business owners to stabilize markets through concentration and to control public legislation. Corporate political influence kept government regulation at bay and bolstered unrestricted free enterprise. The economic system proved to be prone to both the concentration of property and to financial instability within a policy framework of government non-intervention known as laisse...

Table of contents

• Cover
• Title
• Introduction
• 1  A Political-Economic History of the U.S.
• 2  Ideas versus Vested Interests
• 3  Economic Growth and its Constraints
• 4  Stagnation, Employment, and Income Distribution
• 5  Public Policy in the 21st Century
• 6  Review and Conclusions1
• Bibliography
• Index