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Blog #3
by Dr. Lawrence Nannery
2012-02-28 07:45:16
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What has been shown in the two previous blogs (blog 1 & blog 2 ) is some of the history of the development of one country’s version of capitalism, up to the near present.  In this blog I intend to show the secret of that success, something that seems hidden from view in the political debates over economic policy.
But first I should mention the basic elements of capitalist production, something continuously subject to great and frequent instabilities:
1.  The Calvinist work ethic
2.  The extent of the market
3.  An innovative spirit that increases productivity, defined as the relation between the amount of goods produced per unit of work expended.

The history of the economy of the USA, particularly in the northern colonies, has always been a boom – or – bust one, even in agriculture, this last being the result of the fact that the average Puritan or commercial farmer, from the earliest days, was more an entrepreneur than a peasant. Fluctuations in agriculture were usually due to speculations in the price of land.  This occurred as late as the 1980’s, it should be noted. 

I shall confine myself here to serious industrial downturns after 1840 in what follows.
In 1837 there was a prolonged downturn caused by multiple factors, including bank failures.
From 1873 to 1878 there was another severe downturn following a lesser one that had followed the ending of the Civil War in 1865.  A banking failure set off the crisis.
Financial crises caused sharp downturns in 1897, 1903, 1907, 1910 and 1913.
In 1920 a very sharp drop in prices caused a serious downturn.  It lasted more than a year.
In 1928 there was again a crisis caused by securities speculation.
1929 saw the onset of the Great Depression, which was alleviated somewhat by the policies of the New Deal, but which was not overcome until the advent of World War II in 1941. 

After that, there was no serious downturn in the American economy until 2008.  The lesson is clear.  The policies of Franklin Delano Roosevelt protected the economy by regulating banking and industry, and by empowering labor unions to keep wages high, increasing consumption.  Before that time it was often the case that industrial workers could not afford to buy the very products they produced. 

This combination of events — the solving of the dilemma of capitalism’s Achilles heel  —  shows the way to what the secret behind the general prosperity was and remains: (1) effective legislation and policies to curtail speculation — and (2) to ensure high levels of consumption.  And so, the secret of the success of capitalism can be seen clearly: it is a form of socialism that mandates that producers must be encouraged, given advantages, and held harmless, but at the same time policies that enable labor to be an effective countervailing power that can protect itself and thereby ensure that income and therefore consumption remain high. Until 1933, all government help went to the producers and investors, but nowhere else, and that one-eyed version of socialism made the economy fragile.

From very early on, the national will to success and expansion to the Pacific Ocean (“Manifest Destiny”) demanded policies of national development, even though this top-down approach was a form of government favoritism, i.e., socialism. 

So, we find that in 1816-17 the Senator from South Carolina, later Vice President, John Calhoun, submitted a bill for the construction of a national road to facilitate commerce from the Atlantic regions to the new Western lands.  It was vetoed by President Madison.  In the same year, work was begun on the Erie Canal, funded by the State of New York.  When completed, it bound the farming regions of the Midwest to the Mohawk and Hudson rivers in New York, making of New York the greatest city in the nation.
Again, beginning in 1849 the Federal Government allows states to give rights-of-way of public lands to the railroad industry to give them incentives to lay track all across the nation.  Between 1850 and 1857, 21 million acres of such lands, and also those under Federal jurisdiction were ceded to the railroads along the Mississippi Valley alone.  Over time, these land grants totaled 131,350,500 acres.

The policy never ceased.  It continues to this day.  Here are three more examples of such free gifts to private interests by the state and federal governments.  Comsat is a very good example.  Communication by means of satellites instead of wires was a long-sought-for goal, and the resources of research and development by government agencies successfully developed the technical elements of this industry out of nothing over the period of the 1940’s and 1950’s.  But, in 1962, Congress passed an Act founding a new institution called Comsat (for “communications satellite”) and shares were sold on the stock market immediately.  Needless to say, investors did very well, since there was no risk in the venture. 
The Cold War added a second item: companies that made military hardware had only one customer, namely, the Federal government.  These appendages to the government were run as private enterprises even though they really were part of “the military-industrial complex,” a phrase used as a criticism by President Eisenhower in his farewell address to the nation in 1961.
State governments were rather more active in the pursuit of luring companies to abandon their current locations and to take up residence in the state concerned.  A bidding war between states has been going on for 60 years, and the states that bar labor unions seem to win most of these contests.  Many other benefits are also added to the packages.  In this way, over the long-term national income (a form of extent of the market) has risen very slowly and damaged the overall economic performance of the nation.

The New Deal legacy was a socialism that protected both investors and workers.  All the debates over economic policies in the current day are between these two positions, and not over freedom or free enterprise or rugged individualism vs. tyranny.  It is clear: for the entire history of the nation up until 1933 the top-down version worked well enough by the standards of those brutal times, but eventually fell apart; and after 1933 the second paradigm was used and there was relative stability and wide-spread prosperity in the economy for decades.  The final proof of who wins the argument came after 2001, when policies similar to the top-down version were reintroduced.  The result was a major downturn in the fortunes of the nation, as could easily have been predicted. 

Keynes was correct in his prescriptions. This was proven once and again from 1933 through 2000.  But that does not deter many backward-looking parties from willfully denying this obvious truth.  As a footnote, it also seems to be rejected by the current powers that be in the European Union, which seems to augur ill for the future in that region, and thus also in the world at large. 


Read Blog 1 & Blog 2

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