Essay on Social Change and Workers' Capitalism
Capitalism Evolves
The old order changeth yielding place to new,
And God fulfils himself in many ways,
Lest one good custom should corrupt the world.
When studying national flow of funds accounts, we should keep in mind the evolving nature of capitalism and the effect of social and political change on the supply and demand for securities.
The most common error in market analysis is to reach for conclusions by looking at a graph of security prices, without noting that every point on the graph is from a slightly different time warp than preceding and subsequent points.
Every point on the graph is from a different time warp
The motivations of market players are not constant, nor are the characteristics of market instruments permanent.
Everything changes, including the nature of capitalism.
Henry Ford said, 'History is more or less bunk' and he was right — more or less.
Despite George Santayana's warning, 'Those who cannot remember the past are doomed to repeat it', history never repeats.
This doesn't mean that people don't make the same mistakes over and over again, but that, in a larger sense, society and the economic world constantly evolves.
There's No Going Back
Even if history is bunk (more or less), we should still study the past to understand how we got to where we are today and why common wisdom, based on the presumption of historical repetition, is most probably wrong.
Theories of investment, developed in the 1950s and 1960s, are not immutable science, but rough hypotheses, useful perhaps when conceived, but now irrelevant in a different world, except that many are unaware of the irrelevancy.
Laws that define security instruments gradually become inappropriate for the demands of current usage, creating distortions with unexpected consequences.
The Securities and Exchange Commission, for example, was set up to deal with speculation in the 1930s and perceived needs for better disclosure and fairer trading in a world of bucket shops.
The SEC was set up to deal with a world of bucket shops
Seventy years later, after decades of mass marketing of mutual funds and with the rise of powerful hired-managers of public corporations, the SEC's legal basis is inadequate to address the conundrum of the transmission of fiduciary responsibility through multiple fiduciaries, or the conflicts between the investment horizons of fund managers and those of the ultimate beneficial owners.
Accounting rules become obsolete when confronted with complex networks of companies with entangled interests and with balance sheets burdened with new derivative products, hastily cobbled together from pieces of other derivatives, all with poorly understood risks.
Is the shortage of stocks that we have noted in the 1990s temporary, or is it a symptom of a more profound, perhaps irreversible trend?
For this we need historical perspective.
As the economic system evolves, supply and demand for capital shifts.
Of particular interest is the changing role and status of the entrepreneur throughout American history, since it is upon him or her that the supply of equity depends.
Three Periods of Capitalism
To this end, it is useful to think of American capitalism as divided into three great periods.
There is no bright line separating these epochs, but, give or take a few decades, we might view American history as having:
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a agricultural-capitalist phase lasting until 1880,
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an industrial-capitalist phase from 1880 to 1930, and
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a worker-capitalist phase from 1930 to the present.
It also seems that we are likely, over the next fifty years, to enter into a fourth phase, for which we as yet have no name.
In this essay, we sketch some of the highlights in the evolution of American capitalism up until the 1930s, the beginning of the current era.
There have been fundamental changes in securities markets in the United States, driven by demographics, that have contributed to the shortage of equities in the 1990s.
A separate essay, 'FDR and Workers' Capitalism' carries the story further.
A Nation of Small Businessmen
During the first stage of American capitalism, capital in the form of land taken from Native Americans was easily available to the millions who immigrated to this wide-open country (except people from Africa who came as slaves).
For the colonizers, property rights were on a par with civil rights.
With no income tax, few regulations, the fastest growing market in the world, and an open frontier, it was possible to achieve the American Dream of owning a farm or small business, gaining personal independence and freedom from repressive governments of Europe.
Capital, in the form of land, was freely available to the millions who colonized the United States
The administration at the nation's capital was sparsely staffed and pro-business, which generally meant, in today's terminology, small business.
Most Europeans that came to America during colonial times did so under dreadful conditions.
A large percentage died in transit. In their first two years in the new land, as many as forty percent sickened and passed away.
Between half and two-thirds were 'indentured servants' – virtual contract slaves – and were sold as such in public markets by ship captains.
Scarce Labor and Financial Panics
In fact, throughout most of the period of Agricultural Capitalism, life was short and the multiple migrations across sea and land were unsafe.
The paths to better-living were liberally punctuated with bodies of those who didn't make it.
For the first eight or nine generations, labor was scarce and interest rates high.
People worried about things that seemed to be the province of God, not government: good or bad weather, Indian raids, animal attacks on livestock, death in childbirth, sickness, and disease.
On today's scale, there was no 'big business'.
A fragile banking system plagued America from colonial times until the Great Depression
Political discourse wrangled over which economic activity should be favored – manufacturing, farming, or banking.
Government pushed 'manifest destiny' and expansion of the frontier with land subsidies for railroads and canals.
Innovation and invention were promoted through patents and expositions boasting Progress.
Foreign investment was welcomed and poured in from the world's largest capital market, London.
Despite ups and downs, the value of the dollar was generally protected by metallic standards and the absence of central banking.
However, the banking system itself was dangerously weak.
Bank deposits were not guaranteed, banks were small and virtually unregulated, bank notes sold at a discount that increased with distance, and – worst of all – banks used demand deposits to provide medium and long-term capital to farmers and business.
As a result, every three to six years there was a financial panic. Banks failed and borrowers went bankrupt.
The term 'unemployment' was hardly used until after the 1870s
The fragile banking system was a constant danger to the American economy from colonial times until the 1930s.
Hard times caused periodic unemployment among the working classes, especially manual laborers.
However, the term 'unemployment' was hardly used until after the 1870s, since most people lived on self-sufficient farms, dependent more on the 'God of Nature' than the whims of others.
Immigration: The Engine of Growth
Immigration was the great engine of growth, with the first wave of over seven million immigrants, mostly poor, making the treacherous sea voyage from Great Britain, Ireland, and Western Germany.
Towards the end of the period, many came from Scandinavia.
Consistent with the general perception of the role of Divine Providence in physical and economic survival, there was a 'Great Awakening' of religious fervor.
The moral compass of the times was predominantly set by Protestants who believed that by reading the Bible, a reasonable person could determine what God wanted.
Reading the Bible presumed literacy and independent thinking.
This presumed both literacy and independent thinking.
However, bigotry, intolerance, and persecution between members of a multiplicity of Protestant sects were commonplace, producing a long series of schisms and sub-divisions into ever smaller factions.
Faced with constant reminders of their own mortality, people tried to live their beliefs.
In small schools run by local communities, children were inspired by moral lessons and Biblical quotations in McGuffey's Reader.
Would-be capitalist youths thrilled to the imaginary triumphs of self-starting, right-thinking, boys in Horatio Alger's dime novels.
The period encompassed the lives of the earliest colonists, the founding fathers, and hero-entrepreneurs like Andrew Carnegie, Thomas Edison, George Westinghouse, and Alexander Graham Bell.
The Golden Decade and the Passing of the Frontier
The end was marked by a 'Golden Decade' (1876-1886) of astounding technological progress and by what the historian, Frederick Turner Jackson, called 'The Passing of the Frontier', which occurred not on a specific date or at a certain place, but gradually as 'free land' ran out, large industry developed, and farmers moved to cities.
As the empty land was occupied, the entrepreneurial spirit that had turned America into the world's most dynamic society began to wane, ever so slightly.
Frederick Turner Jackson described Americans of that time as a people with
'that coarseness and strength combined with acuteness and acquisitiveness; that practical inventive turn of mind, quick to find expedients; that masterful grasp of material things... that restless, nervous energy; that dominant individualism.'
At the end of this first phase of capitalist America, most people were in business for themselves, mainly on family farms.
However, with the introduction of efficient farm machinery, monoculture increased beyond the tobacco and cotton plantations of the South.
Life on the farm was hard and dreary
Agricultural business began to require ever greater investment.
Over-production and misuse of the land were common, leading to further migrations to the west and to the cities, culminating generations later with the Dust Bowl of the 1930s.
Furthermore, life on the family farm was hard and dreary.
With the coming of electricity and indoor plumbing and industrial demand for the mechanical skills of the sons of farmers, many saw a move from the country to the cities as a chance for a better life.
Industrial Capitalism (1880-1930)
By the last generation of the nineteenth century, America had become the world's leading industrial nation.
People were leaving the farms for jobs in cities that were organized around factories and the railroads.
Political and financial power was in the hands of white Protestants – the 'old stock Americans' that after generations of hard-work and running their own businesses had become affluent.
In the early years of Agricultural Capitalism, labor was in short supply and immigrants who arrived penniless were quickly hired.
Most could hope to eventually save enough to own their own farm, since land was cheap.
Many immigrants came with resources that allowed them to pass through the port cities and start farming on readily available land in the interior.
In the early years, immigrants were welcomed because there was a shortage of labor; most of the newcomers had religious affinities with the general population.
Those excluded from this bounty included slaves imported from Africa and millions of impoverished Irish that had fled the Great Famine from 1849 to 1867.
The Irish that flooded the ports of the Eastern seaboard to escape the potato blight were different and presaged the change in attitudes towards immigration in the generations that followed.
The Rise of Unemployment
The Scotch-Irish that had come before the Famine, like most early immigrants from Britain, were Protestants; they often paid their way as indentured servants, which meant they had a job on landing.
In contrast, the Irish that came later had no prospects of employment.
Those hard pressed souls that managed to survive the deadly sea passage were desperately poor and often sick.
Many were without the ability or resources to go further west and take up farming.
Irish Catholics came in great numbers and were not easily absorbed
They were predominantly Catholic and were viewed with suspicion by those in power – mostly Protestants.
Finally, they came in such numbers that they were not easily absorbed in the economic life of the cities where they accumulated in ghettos and sometimes turned to crime.
The distinction between the earlier Scotch-Irish and those that fled the Potato Famine gave rise to a typical American ethnic slur, in which the former were called Lace Curtain Irish and the latter Shanty Irish.
Help-wanted advertisements of the period bore the initials 'NINA', which meant 'No Irish Need Apply', referring to the Shanty Irish.
The plight of these unemployed immigrants was celebrated in a music hall ballad that went:
I'm a simple Irish girl, and I'm looking for a place,
I've felt the grip of poverty, but sure that's no disgrace,
'Twill be long before I get one, tho' indeed it's hard I try,
For I read in each advertisement,
'No Irish need apply.'
Alas! For my poor country, which I never will deny,
How they insult us when they write,
'No Irish need apply.'
Now I wonder what's the reason that the fortune-favored few, Should throw on us that dirty slur, and treat us as they do,
Sure they all know Paddy's heart is warm, and willing is his hand,
They rule us, yet we may not earn a living in their land,
O, to their sister country, how can they bread deny,
By sending forth this cruel line,
'No Irish need apply'.
The cold welcome of poor Irish immigrants during the 1850s foreshadowed the reception of the second great wave of immigration that occurred between 1890 and 1910.
In this second wave, the majority came from Austria, Hungary, Italy, and Russia.
This wave included millions of Catholics and Jews with customs that seemed alien to the descendants of earlier settlers.
The number of these immigrants was not only greater than in earlier decades, but most were destined to be workers in an expanding industrial economy, rather than farmers.
From 1905 until World War I, about one million people entered the United States each year.
The frontier was now gone; great wealth was to be made in industry.
The capital to set up manufacturing operations far surpassed the amount needed to start a family farm a century earlier.
In the first period, capital had been abundant relative to needs (because of cheap land) and labor scarce (because of the difficult and dangerous sea passage).
After 1880 the reverse was true. Labor became plentiful because there were virtually no restrictions on immigration.
The cost of passage to the United States fell and transportation became safer with stream powered, screw-driven, metal-hulled transatlantic liners, with space in steerage for immigrants.
Decline of Self-Employment
The second great wave of immigrants was finally cut off by the First World War.
After 1924 and passage of the National Origins Act, immigrants were subject to quotas designed to restrict the oversupply of labor and avoid a further skewing of the population mix from its Anglo-Saxon Protestant origins, but it was already too late.
The nation was now made up mainly of employees with cultural values considerably different from those of earlier Americans.
New immigrants harbored lasting resentment against the first-comers
The new immigrants harbored long lasting resentment against the first-comers, which eventually fueled the class warfare that left-wing demagogues used to weaken free enterprise.
The dream of going into business to get rich was still alive and many did so and prospered, but the tide was turning.
Descendants of farmers came to the cities to become employees, not because their farms were failing, but because city life had more to offer.
The story of Henry Ford is typical.
The son of a farmer, Henry Ford left school at fifteen to work on the family farm. Not happy with farm life, he got a job in Detroit as an apprentice in a machine shop.
His father tried to lure him back to rural life by giving him forty acres as a farm of his own. He tried this for a while, but spent most of his time trying to build steam-driven vehicles.
He finally gave up rural life and returned to work as an engineer at the Edison Illuminating Company, a job which, in those days, did not require a college degree.
New immigrants unable to find adequate job opportunities would scrape together cash to open a tailor shop, a laundry, a family restaurant, or a mom-and-pop store, but this was not what they wanted for their children.
Workers Outnumber Entrepreneurs
Many of the poor immigrants that now flooded the market never made it to even the simplest level of capitalism, going through life as hod carriers, day laborers, factory hands, and toilers in sweat shops.
At some point between 1880 and 1930 there were more workers than entrepreneurs in the United States and the trend was never reversed.
The American Dream changed from having the independence of running one's own business and being a landholder to merely having 'a good job'.
Thus began the rush to acquire professional credentials that offered respect and easier employment.
Poor Irish, Italian, and Jewish mothers scrimped so that their sons could go to college to become doctors, lawyers, engineers, or teachers.
However, America had become the most powerful industrial nation due to the inventiveness and genius of entrepreneurs, most of whom did not have a college degree.
America became the most powerful industrial nation thanks to entrepreneurs, most of whom did not have a college degree.
Ford, Andrew Carnegie, George Eastman, Thomas Edison, George Westinghouse, Ezra Cornell, Leland Stanford, and thousands of other great Americans did not need a diploma to get rich and provide employment and better lives for millions.
Nevertheless, as the nation entered the twentieth century and became increasingly dominated by the desire for 'steady employment', a college diploma became the essential passport to economic betterment.
A study of unemployment rates in 1910 showed that whereas between twenty to thirty-two percent of industrial and construction workers were periodically out of work, the rate fell to below ten percent for those in public and professional services and trade.
(“The Social Structure of Unemployment in the United States: 1910”, America at the Millennium Project, Working Paper 2, May 2001. )
Universities Turn From Religion
As people settled permanently as employees in cities, ever more removed from a first-hand understanding of the economic system, and as the Protestant practice of each person using their own commonsense to determine what was right and wrong was diluted by new cultures with far greater respect for credentialed authority, the role of universities slowly changed from purveyors of the truth in a single book, the Bible, to protected gathering places for self-proclaimed, tenured experts of 'scientific' truth on all matters under the sun and beyond.
By 1922, so many Jewish boys were entering Harvard that the university president proposed a quota of fifteen percent, less the values of 'old-stock' Americans be eroded.
This would be bigoted by today's values, but the Ivy League universities, by and large, were founded by those seeking to teach Protestant religious beliefs.
In fact, the original seal of Harvard bore the inscription, 'In Christi Gloriam'.
In any event, the guardians of the old order were as helpless against the tide of Catholics, Jews, anti-religious, socialist Protestants, and others that contributed to an increasingly confusing whirl-a-gig of ideas and cultures, as were university presidents in the 1960s that buckled to the invasion of baby-boomers and flower-children.
Moral Relativity and Communism
In 1908 the Harvard Business School was founded.
Two years later, John Reed, the son of successful 'old-stock' Americans from Oregon, graduated from Harvard, having served on the editorial board of the Lampoon and the Harvard Monthly.
He went on to write 'Ten Days the Shook the World'', glorifying Lenin and the Soviet revolution and to organize the Communist Labor Party and serve briefly as Soviet consul in New York.
He died in 1920 and is buried besides the Kremlin Wall with other Bolshevist heroes.
Harvard came to be known as the 'Kremlin on the Charles'
His portrait hangs at the entrance of the Senior Common Room of Adams House at Harvard.
As the twentieth century wore on, Harvard came to be known as the 'Kremlin on the Charles' for the anti-capitalist views of its faculty.
In the 1930s, by a discreet slight of hand regarding the semantic difference between a seal, a coat of arms, and a motto, Harvard dropped reference to Christ in its symbolic representation, as unbefitting the university's new role of universal savant, haven for secular high priests.
The period of Industrial Capitalism between 1880 and 1930 was essentially a period of transition – a shock between the older culture of entrepreneurial capitalism and the demands of the new working classes that would not be denied.
On the one hand, big business got bigger, forming trusts, amalgamations, and mergers to control prices, restrict competition, and increase profits.
During these years, John D. Rockefeller created Standard Oil as a trust, J.P. Morgan organized United States Steel, and countless industries found ways to restrain trade for the benefit of shareholders.
Socialist labor unions arose to represent the now permanent class of workers.
On the other hand, socialist labor unions arose to represent the now permanent class of workers, using the same tactics of amalgamation and monopoly to force concessions from business owners as businesses were using to extract higher prices from consumers.
Between 1900 and 1915, union membership expanded threefold to 2.5 million.
More and more Americans became accustomed to going through life as employees of 'the fortune-favored few'.
The idea of a permanent 'working class' took hold and the plea for 'social justice' of the 'simple Irish girl' a half-century before resonated in the minds of politicians as the key to political power.
The socialists had on their side the votes of millions of workers and the left-wing scribbling of muckrakers and anti-capitalist intellectuals that now dominated the universities.
A Good Job is the Issue
As industry expanded, so did the impact of periodic unemployment on factory workers, at first restricted by location, but later more generalized.
A Bureau of Labor Statistics study, sometimes contested, found unemployment in industrial workers to have reached 32% in California in 1892, 63% in Kansas in 1884-1887, 53% in Maine in 1890, and 62% in Michigan in 1889.
The difference between unemployment in the period of Industrial Capitalism and unemployment during the Great Depression of the 1930s was mainly the increased percentage of the population that belonged to the permanent working class.
Until the 1930s, except for periodic wartime economies, government was small, taxes were low, and business regulation extremely modest by today's standards. It would seem to be an
entrepreneur's paradise.
By 1910, about twenty seven percent of the population was still self-employed, either on farms on in the cities.
This was down significantly from 1880, when most people worked for themselves, but still five times higher than at the end of the twentieth century.
Between 1880 and 1930, thanks to massive immigration and the rise of big business, the balance of power between Americans who were actually in business for themselves and those who worked for others had shifted decisively and irrevocably towards a nation of employees – a proletariat awaiting a 'man on a white horse' to guide them into a socialist future.
For better or worse, that man turned out to be Franklin Delano Roosevelt, a blue-blood, aristocrat of the rentier class — the first important 'limousine liberal' — the man who was to force the nation into a new 'Workers' Capitalism' from which there was no turning back.
Immigration and the closing of the frontier have been decisive in this shift. 
