Industrial Technology and Economic Impact Flashcards
The Impact of Industrial Technology and the Golden Age of Capitalism
The Pervasive Impact of Industrial Technology
Industrial technology has fundamentally reshaped the human environment, with effects that are not always benign.
This transformation is evident in vastly improved transportation and communication, more effective methods of agriculture, and significantly enhanced power application for tasks like lifting, hauling, shaping, binding, and cutting.
The Internal Combustion Engine: A Case Study
To understand the extensive reach of industrial technology, we can examine the repercussions of a single invention introduced over a century ago: the internal combustion engine.
The Paris Exposition of 1867: Visitors observed an exhibit featuring a small engine that combined illuminating gas and air in a combustion chamber, ignited by a spark. The resulting explosion pushed a piston, turning a wheel.
This early model had only one working stroke in every four and required a large flywheel for stable movement.
Historian Allan Nevins described its impact as comparable to "the sudden snapping on of an electric globe in a room men had been trying to light with smoky candles."
Adaptation and Integration: The engine, invented by Dr. N. A. Otto of Germany, quickly became common in America.
When adapted to run on gasoline, a byproduct of kerosene manufacturing previously considered uninteresting, it served as an ideal stationary power plant.
By 1900, there were more than 18,500 internal combustion engines in the United States, used on farms, in shops, and feed-mills for various tasks like pumping water, sawing wood, and grinding meal.
The power of these engines grew exponentially: the most powerful model at the Chicago World's Fair in 1893 was 35 horsepower, while at the Paris Exposition seven years later, it reached 1,000 horsepower.
The Automobilization of America: The internal combustion engine was vital for increasing, diffusing, and mobilizing power, a fundamental requirement for material progress.
Early Development: In 1886, Charles E. Duryea recognized the gasoline engine's superiority over steam for self-propelling road vehicles.
By 1892, he and his brother produced the first gas-powered "automobile," initially a fragile toy.
An improved model followed in 1893, and by 1896, the Duryea brothers had sold 13 cars.
In the same year, Henry Ford sold his first "quadricycle," marking the beginning of the automobile industry.
Phenomenal Growth of the Auto Industry:
By 1905, there were 121 automobile manufacturing establishments employing 10,000 wage earners.
By 1923, the number of plants soared to 2,471, making the automobile industry the largest in the country.
In 1960, its annual payroll equaled the entire national income of the United States in 1890.
The industry became the largest consumer of sheet steel, zinc, lead, rubber, and leather.
It purchased one out of every three radios and absorbed 25 billion pounds of chemicals annually.
It was the second-largest employer of engineering talent after national defense, the source of one-sixth of all U.S. patents, and accounted for one-tenth of all consumer spending.
By the 1980s, roughly one in every seven jobs and one in every six businesses (including repair shops, garages, gas stations, and even traffic police departments) were directly or indirectly linked to the automobile.
Societal Transformation due to the Automobile:
By 2001, 96 million U.S. households owned 151 million passenger cars, with over half owning two or more.
This enabled approximately 50,000 towns to thrive without rail or water connections, an impossibility before.
At least seven out of ten workers commuted by car, no longer living within walking distance of employment.
The entire economy became "mobilized," relying on wheeled, self-propelled transportation for its very operation.
Hypothetical Catastrophe: A sudden incapacitation of the automotive fleet (e.g., gasoline becoming incombustible) would cause a social disaster as grave as a catastrophic famine in the Middle Ages.
Real-World Impact: The Arab oil embargoes of 1974 and 1979 profoundly impacted the industrialized world due to its dependence on oil.
Economist Kenneth Boulding humorously suggested that intelligent extraterrestrials might initially perceive the dominant life forms in the U.S. as creatures with hard shells, soft insides, propelled by wheels, capable of sluggish motion only when not in their "natural exoskeletons."
Broad Economic Consequences of Technology
While the car highlights economic consequences, technology's ultimate impacts extend beyond economics, including profound disruptive power over the environment and human existence.
Human inventive capacity threatens whole species (including humanity) through pollution, heat emission into the atmosphere, and the mastery of atomic disintegration. These larger issues are distinct from economic effects, but are acknowledged as significant.
Key Economic System Effects:
Urbanization: Technology significantly enhanced farmers' ability to support non-farmers, leading to a massive increase in societal urbanization.
In 1790, only 24 U.S. towns/cities had populations over 2,500, accounting for just ext{6}% of the total population.
By 1860, 392 major cities held ext{20}% of the population.
Roughly 140 years later, over ext{80}% of the nation's population lived in 276 "standard or consolidated metropolitan areas," with the Boston-to-Washington corridor effectively becoming one continuous "city."
Industrial technology has literally reshaped the human environment, bringing both benefits and severe problems associated with mass city life.
Interdependence: The growth of industrial technology dramatically reduced the economic independence of the average citizen.
Modern society's inhabitants are highly vulnerable and dependent on the labor of countless others.
Technology not only moved people from rural areas to cities but also vastly increased work specialization.
Unlike the versatile farmers of the early nineteenth century, today's factory or office workers perform only a tiny, specialized part of increasingly complex social operations.
This has made the solution to economic problems reliant on the seamless coordination of an expansive network of interconnected activities.
Sociological Effects on Work: Industrial technology radically altered the nature of work itself.
Historically, work was strenuous physical activity, often solitary or in small groups outdoors, demanding dexterity and culminating in easily identifiable end products (e.g., grain, cloth).
The Industrial Revolution changed this: work became repetitive, rarely engaging a worker's full muscular ability, and demanded only the capacity to repeat a single task on a changeless surface.
Workers labored indoors in vast factories alongside "regiments like themselves," often losing a sense of their contribution to the final product.
Example: A worker on a "merry-go-round" conveyor used a clip gun to attach zigzag springs for car seats, performing only a few seconds of a single, repetitive task and feeling disconnected from the completed seat.
Mass Production and Economies of Scale
Mass Production: Industrial technology led to a new method of continuous throughput, known as mass production, which far surpassed the productivity gains from Adam Smith's division of labor.
Early Ford Assembly Lines (Allan Nevins): Orchestrating the supply of components was critical. For a chassis alone, 1,000 to 4,000 pieces of each component were needed daily at precise times and locations; any failure could halt production.
"Shortage chasers" actively monitored and resolved deficiencies, reporting results to a factory clearing-house.
Productivity Gains: This systematization dramatically reduced assembly times.
The time to assemble a motor dropped from 600 minutes to 226 minutes within a single year.
Building a chassis went from 12 hours and 28 minutes to 1 hour and 33 minutes.
A simple 3-minute operation (assembling rods and pistons) was subdivided into three jobs, allowing half the workers to achieve the same output.
This routinization, known as "Fordism," still exists today, though it is on the wane.
Economies of Large-Scale Production (Economies of Scale): Mass production's economic result is that increased production scale leads to significant cost reductions.
Even though mass production machinery is expensive, output rises so rapidly that costs per unit drop dramatically.
Illustrative Example:
Small Plant: 1,000 items/day, 10 workers @50/day each (500 payroll), material cost 0.50/item (500), overhead 500. Total daily cost: 1,500. Cost per item: rac{$1,500}{1,000} = $1.50.
Mass Production Plant: Output up 100 times (100,000 items/day). Payroll up to 1,000, overhead to 5,000. Material cost: 0.50/item (50,000). Total daily cost: 56,000. Cost per item: rac{$56,000}{100,000} = $0.56.
Conclusion: Despite a >30-fold rise in overall expense, the cost per unit was nearly cut to one-third.
Ford Car Sales and Prices (Table 5-1, 1907-1917): This phenomenon is historically validated; Ford car output increased over 100 times while prices were reduced by seven-eighths (e.g., from a Model K at 2,800 in 1907-1908 to a Model T at 360 in 1916-1917).
Impact on Competition: Economies of scale introduce "size" as a crucial market element.
A firm that significantly outpaces competitors in size (due to management, product, location, etc.) capitalizes on economies of scale to further extend its lead.
Larger size typically means lower costs, especially for expanding industries, leading to bigger profits and the ability to grow even larger.
This dynamic threatens to redefine competition, potentially driving an ever-larger market share into the hands of the most efficient and largest producers.
Alfred D. Chandler's work highlights that the emergence of big business depended on cost-cutting, mass-producing technology, and mass distribution technology, which did not develop uniformly across all industries.
Agents of Industrial Change: The Great Entrepreneurs
Economic changes were propelled by a specific social type and business environment.
Characteristics: Many great American entrepreneurs of the late nineteenth century were of humble origins, similar to England's "New Men" of the eighteenth century, and possessed an indomitable drive for business success.
Examples: Andrew Carnegie (steel), E. H. Harriman (railroads), John D. Rockefeller (oil), Henry Clay Frick (coke), Philip Danforth Armour and Gustavus Swift (meatpacking), Cyrus McCormick (agricultural machinery).
Reality vs. Stereotype: Economic historians like F. W. Taussig noted that the average entrepreneur was often not a poor immigrant but the son of well-off individuals already in business, and not as successful as the celebrated "captains of industry."
Captains of Industry: Nearly every industry saw the rise of at least one dominant figure.
The number of millionaires grew impressively: from around 100 in 1880 to 40,000 by 1916.
Distinction from Earlier Leaders: Unlike their eighteenth-century predecessors, these American captains of industry were not primarily inventors or engineers.
Engineering functions shifted to salaried production experts and plant managers.
Their leadership involved guiding industrial strategy, forming alliances, identifying areas for growth, and overseeing logistics.
They increasingly focused on broader strategies of finance, competition, and sales rather than the technical aspects of production.
The Golden Age of Capitalism (1950-1973)
The period from 1950 to 1973 is regarded as perhaps the most prosperous in capitalist history, an era aptly named the "Golden Age."
The Postwar Economic Boom
Demand Origin: Fueled by a social effect of four years of wartime deprivation, where gasoline was rationed, auto production ceased, new housing halted, and ordinary clothing was deprioritized.
The end of WWII brought not just victory but also the opportunity to satisfy long-denied consumer demands, supported by swollen savings from high wartime wages.
Consumption Dynamics: Similar to how mass consumption of standardized goods spurred nineteenth-century growth, the mass consumption of consumer durable goods drove early postwar expansion.
Levittown, Long Island: A prime example of this trend, offering clusters of affordable, nearly identical houses.
Each Levittown home required multiple cars, televisions, refrigerators, telephones, washers, dryers, and other appliances.
The acquisition of these goods became integral to the "American dream" and a marker of middle-class status.
Structural Changes in American Capitalism during the Golden Age
Technological Advancement: The ability of firms to mass-produce affordable goods was crucial for satisfying pent-up demand.
Wartime Innovations: New production techniques, including the early forms of automated (machine-guided) processes, emerged during the war.
Rise of Tourism: A dramatic example was the new tourism industry, propelled by four-engine prop planes (adapted from bombers) and later jet planes.
Transatlantic jet service began in October 1958 (New York-London flights).
Within years, tourism became the fastest-growing U.S. industry, enabling ordinary Americans to travel internationally.
Consumer Technology Boom: New technologies stimulated growth across many sectors:
Television receivers in the U.S. increased from just over 1 million in 1950 to 10 million in the same decade, and over 50 million by 1960.
Automatic dishwashers, laundry machines, and new ovens and toasters transformed the American kitchen.
Automatic shifts simplified driving.
These numerous technical advances contributed significantly to unexpected prosperity; however, the long-term questions regarding machine substitution for human labor had not yet emerged.
The Capital–Labor Accord: The economic boom required sustained business investment, which typically depended on expected profitability.
A concern was that increased labor demand might lead to higher wages, potentially ending the boom.
Labor Unions' Pivotal Role: Surprisingly, unions played a crucial part by agreeing to tie wage increases to productivity increases.
As productivity rose, so did worker remuneration, which prolonged the boom rather than halting it.
Twofold Effects of the Accord:
Workers gained a direct stake in firm performance, supporting technological advancements that boosted productivity.
Labor unions, feeling more secure, were content to delegate workplace organization and control to managers.
Rise of Professional Management: Managers became a distinct and powerful social group, heavily involved in long-run investment decisions and shop-floor organization.
Business administration became increasingly "scientific" and professional.
The separation of management from ownership became standard in large corporations, leading to "managerial" theories of the firm where managers' long-run strategies often superseded owners' short-sighted tactics.
Economic Stability: This arrangement led to a relatively constant share of national income for both wages and profits, reinforcing business confidence and investment willingness.
The Proactive Role of Government: Government played a central and expanding role in the postwar economy.
Wartime Legacy: During WWII, government spending reached unprecedented levels (from ext{9}% of total output in 1940 to almost ext{45}% in 1945), and consumer markets were extensively regulated.
Postwar Government Functions:
Entitlement Programs: Established by the New Deal (Social Security, unemployment benefits, agricultural price supports) continued and expanded.
The GI Bill provided free college education to millions of veterans, significantly boosting the U.S. higher education system.
It also offered subsidized housing and other veteran benefits, further stimulating the nascent economic boom.
Military Predominance & Cold War: The U.S. maintained military dominance to contain Soviet communism, justifying massive federal spending on conventional arms, basic science, and incredibly expensive projects like space exploration.
Civilian Infrastructure Development: The government utilized its expanded capacity for civilian purposes.
National Highway Network: Under President Eisenhower, a multi-million-dollar federal effort constructed "superhighways" connecting major cities, creating the modern interstate system.
This boosted interstate commerce and solidified America's "car culture," making the U.S. the premier producer of commercial motor vehicles and the largest consumer of fossil fuels.
Airport Construction: Government funding significantly aided the aircraft industry, which had already been heavily supported by wartime military demands.
Macroeconomic Stabilization: As the economy strengthened, the government expanded its role to stabilize macroeconomics, experimenting with fiscal policies to minimize economic cycles.
In 1961, President John F. Kennedy, advised by his Council of Economic Advisers, initiated deliberate tax cuts to stimulate the economy.
"Stabilization policy" became a crucial government task; by 1964, economists like Arthur Okun noted their unprecedented prestige.
Some economists in the mid-1960s even optimistically believed in "The End of the Business Cycle."
"Great Society" and War on Poverty: President Johnson's ambitious vision aimed to eliminate poverty through community development grants, housing, and education programs.
Poverty did decline in the late 1960s and 1970s but rose again in the 1980s as these programs were dismantled, remaining a significant challenge.
World Prosperity and Convergence
Global Patterns: Similar government roles emerged internationally, adapted to specific cultural contexts.
France: Maintained its "dirigiste" (directive) state role, using national economic plans.
England: Struggled with post-empire decline, oscillating between an ambitious welfare state and industry revitalization efforts.
Germany: Shaped by post-WWI hyperinflation, adopted strict money supply control and extensive labor-management cooperation (including union members on corporate boards).
Scandinavian Countries: Achieved a successful balance between egalitarian Labor Party policies and sophisticated corporate elites.
Italy: Experienced northern prosperity alongside southern stagnation.
Unprecedented Growth: Despite national variations, the 1950-1973 period saw the most prosperous growth in capitalist history.
Table 9-1: Annual Per Capita Growth Rates:
Developed Countries: ext{4.0}%
Developing Countries: ext{1.7}%
World: ext{3.0}%
These rates significantly surpassed previous periods since the early nineteenth century (except the brief 1920s boom) and have not been seen in developed countries since.
The End of the Golden Age
The postwar era, marked by rapid economic growth, technological change, and civil rights gains, eventually faced disillusionment.
The optimistic geopolitical order faded as much of the underdeveloped world remained stagnant.
Domestically, the economic and political components of the Golden Age eroded due to globalization and a shift away from government economic involvement.
The period of growth gave way to a quarter-century of semi-stagnation, disruption, and uncertainty, surprising due to its unexpectedness.
Inflation Emerges: The defining characteristic marking the end of the Golden Age was the emergence of persistent and alarming inflation, which economist Wallace Peterson termed a "silent depression."
Political Roots: Economic policies often reflect political aims; the full-scale U.S. entry into the Vietnam War in 1965 significantly triggered this inflationary trend.
Price Index Escalation:
Until 1964, consumer prices rose just over ext{1}% annually.
President Kennedy's 1962 appeal to U.S. Steel to rescind a price increase temporarily succeeded.
1966: Consumer prices rose ext{1.6}%.
1967: Rose ext{2.9}%.
Three years later: Rose ext{5.7}%.
1974: Leaped to ext{11.0}%.
Historians attribute Vietnam not as the sole cause of inflation but as a key example of U.S. misjudgment regarding its ability to control events, also seen in the failed attempt to maintain the dollar as the central world currency.
The Oil Shock:
During the Golden Age, the U.S. dominated world oil production, particularly from new fields in Texas and Oklahoma, making American oil the cheapest globally (e.g., U.S. gas price ext{0.39} per gallon vs. Germany ext{4.00} and France ext{3.56}).
However, with the rapid increase in automobiles, U.S. oil production began to fall short of consumption.
OPEC's Rise: This set the stage for the Organization of Petroleum Exporting Countries (OPEC), a Middle East-centered cartel, to gain control over oil supply.
1973 Embargo: In response to pro-Israel policies of industrialized nations, OPEC imposed an embargo, cutting off oil supply.
Gas lines formed, and due to the price-inelastic demand for oil, prices soared.
U.S. crude oil prices tripled from 3 to 10 per barrel, with even sharper rises in Europe and Japan.
Economic Impact: This price shock drastically increased production costs across nearly all sectors, forcing firms to reduce profit margins or raise prices, leading to inflation and a slowdown in investment.
Second Oil Shock (late 1979): As inflation eroded the real value of OPEC's earnings, a second production curtailment boosted oil prices to over 35 per barrel (as illustrated in Figure 9-1, showing sharp spikes in nominal and inflation-adjusted crude oil prices).
Contagious Effect: This directly translated into a rising consumer price index.
By 1974, CPI growth exceeded ext{10}%.
Following the second shock in 1980, it jumped to ext{13.5}%, one of the largest increases in American history.
Increased Inflationary Susceptibility: The contagious nature of the oil price rise in the late 1970s was due to deep institutional changes since the 1920s/30s.
Then, personal incomes were relatively fixed, forcing households to reduce consumption (e.g., less coal) when prices rose.
By the 1970s, new income support systems (Social Security, unemployment insurance, bank account insurance, cost-of-living adjustments in wages) cushioned consumer spending, preventing a significant fall and thus increasing inflationary susceptibilities.
Stagflation and the Policy Dilemma: The combination of high inflation and weak investment created a fragile economic environment.
Keynesian Trade-off: Postwar economic policy was based on a perceived trade-off between inflation and unemployment (the Phillips Curve).
Rising prices were linked to tight labor markets and wage increases; falling inflation to rising unemployment and lower wages.
This presented a comforting seesaw dynamic: one undesirable outcome came with a desirable one.
Keynesian Consensus Breaks Down: The Golden Age had solidified Keynesian economics, with its government spending countercyclical policies (President Nixon even declared, "We are all Keynesians now" in the early 1970s).
However, the new phenomenon of "stagflation"—simultaneous inflation and economic downturn with rising unemployment (e.g., real output fell in 1970, 1974, 1975, 1980, while inflation rose towards double digits)—could not be addressed by traditional Keynesian tools.
Keynesian policy was caught in a bind: reducing spending to curb inflation would worsen growth, while stimulating growth to combat recession would worsen inflation.
The Federal Reserve Steps In: In this impasse, the Federal Reserve (the Fed), responsible for monetary policy, took control.
Monetary Approach: The Fed viewed inflation as a monetary problem ("Too much money chasing too few goods") and aimed to reduce the money supply by making borrowing more difficult.
Volcker's Draconian Policy: Starting in late 1979 under Paul Volcker, the Fed aggressively raised the interest rate charged to member banks.
By 1981, this rate reached almost ext{18}%, translating to over ext{20}% on bank loans to customers.
This severely curtailed borrowing and expenditures, effectively reducing inflation.
The "Volcker Recession": By 1982, inflation had dropped to a more moderate ext{5-6}%. However, expenditures fell, and unemployment consequently rose to ext{11}%, which the Fed considered necessary to control inflation. This period is known as the "Volcker recession."
Lasting Impact: This episode left a lasting scar, shifting the monetary authorities' focus from promoting growth to preventing inflation. Even during worsening economic conditions in the 1980s, the Fed prioritized curbing inflation over encouraging investment and consumption.
Elevated Unemployment: The deep recession of the 1980s heralded a 20-year period of much higher unemployment rates in most industrialized countries compared to the Golden Age.
Germany's unemployment, historically low, rose to nearly ext{10}% in the late 1990s.
France and Italy saw unemployment exceed ext{10}%, settling slightly below that (Table 9-2 shows comparative unemployment rates 1970-2010).
From Slower Growth to Greater Inequality
While the U.S. maintained lower unemployment than other G7 nations (though debates arose about the quality of new jobs), a less dramatic but significant shift in income and wealth distribution began.
The Golden Age was characterized by steady aggregate income growth and a gradual reduction in the gap between rich and poor; these trends subsequently reversed.
Wealth Inequality (Financial Assets):
Pre-Depression: In the booming 1920s, the top ext{1}% of families owned an unprecedented ext{42}% of the nation's financial wealth.
Post-Depression/New Deal: This share dramatically fell after the 1929 market crash, during the 1930s' low stock prices, and due to New Deal tax policies, roughly halving by 1940.
Golden Age (1962-1983): National wealth grew rapidly, and its increase was distributed more or less proportionally to existing wealth holdings:
Top ext{1}% of families received ext{34}% of the wealth increase.
Next ext{19}% received ext{48}%.
Bottom ext{80}% received ext{18}%.
Post-Golden Age (1983-1989): Within just six years, the distribution became highly unequal:
Top ext{1}% of wealth holders received ext{62}% of the total wealth gain.
Next ext{19}% received only ext{37}%.
Lowest ext{80}% received a minuscule ext{1}%.
Historical Parallel: Economist Edward Wolff stated this increase in wealth inequality was almost unprecedented, comparable only to the 1922-1929 period, which was buoyed by excessive stock values that crashed in 1929, leading to the Great Depression.
Income Inequality: The trend in income distribution also worsened.
CEO vs. Average Worker Pay:
1970: Average male worker wage \$25,000, top CEO pay \$1 million (ratio of 40 to ext{1}).
2004: Average wage \$43,000, top CEO pay approached \$15 million (ratio of >350 to ext{1}).
Skill-Based Disparity: Inequality was also evident in the widening gap between wages of low-skilled and high-skilled workers, particularly those with college or higher educations compared to those without.
Broader Income Trends:
Golden Age: All income groups experienced annual income growth of about ext{2.5}%.
Since 1973: Income growth became positively correlated with relative income level; the richest ext{20}% saw the most rapid growth, and the poorest fifth actually experienced a decline in incomes between 1973 and 1989.
Paul Krugman described this shift as going "from picket fence to staircase"—from relatively flat income growth across the population to a step-like increase up the income ladder.
Rising Poverty: Income inequality in the post-Golden Age was associated with increased poverty rates.
The percentage of people below the poverty line in the U.S. rose from ext{11}% in the 1970s to between ext{13}% and ext{14}% in the 1980s and 1990s, reaching ext{14.3}% (43.6$$ million people) in 2009.
Conclusion: Income distribution patterns have unequivocally worsened, posing significant moral and economic challenges, a phenomenon seen to a lesser degree in almost all capitalist nations compared to the U.S.
Behind the Inequality Problem: No single cause explains this complex phenomenon; economist Barry Bluestone identified nine "suspects":
Technological Changes: Placing a premium on skilled labor while reducing demand for less skilled workers.
Employment Concentration: Shift towards low-wage service industries (e.g., McDonald's) from high-wage sectors (e.g., commercial aircraft production).
Deregulation: Industries like trucking saw the entry of nonunion, low-wage employers.
Decline in Unionization: A significant drop in the proportion of workers in manufacturing industries belonging to unions. (Further suspects are implied but not detailed in the provided text).