Three Revolutions and Two

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There have been two political revolutions in the last three centuries. The first was the rise of classical liberalism in government; Richard M. Ebeling provides a nice overview. The second was its replacement by socialism, including the variants known as democracy and communism. One step forward and (at least) one step back. The one step forward, liberalism, may have had flaws that led to the one step back, socialism; but that is not my subject.

Meanwhile there have been three industrial revolutions. Because of them, we are surely far ahead of where we began in material terms. All three involved invention and application of invention (technology) to the production of goods. The goods were widely distributed to those who produced them. By and large, we are better off.

The first of these centered around such inventions as the spinning jenny (1767), the cotton gin (1793), and the steam engine (1600—1785, see here.) Industries such as textiles, mining, steel, and machine tools all bloomed.

The second industrial revolution centered around developments in electricity, chemistry, and the internal combustion engine. In 1820 Hans Christian Oersted discovered that electricity produced magnetism. It was not long before Michael Faraday induced electricity in a wire using the electromagnetism of another wire. The way was open for the electric motor, transformer, and generator. When James Clerk Maxwell in 1864 connected electric and magnetic waves to light, he opened the way to the discovery of radio waves.

Friedrich Wöhler was the first chemist to synthesize organic compound from inorganic molecules. In 1824 he made oxalic acid and in 1828 he made urea. The definitions of organic and inorganic are fuzzy. What is important is that his discoveries stimulated further research and synthesis of hundreds of compounds, including polymers, cellophane, fibers, and plastics unknown in nature.

The internal combustion engine of Nicolaus Otto and Eugen Langen (1878) paved the way for the automobile, diesel, and aircraft — a transportation revolution.

The third industrial revolution is ongoing. It traces back to the computer. Between 1939 and 1947, the electronic digital computer was born. A number of people contributed: John V. Atanasoff, Clifford Berry, Konrad Zuse, Alan Turing, Howard Aiken, John von Neumann, John W. Mauchly, and J. Presper Eckert. The latter two developed the ENIAC at the University of Pennsylvania in 1947. In that same year, William Shockley, Walter Brattain, and John Bardeen made the first transistor. The names are mostly unfamiliar. The interesting thing is how greatly we have benefitted from the efforts of these people whom we do not know. The rest, we might say, is history; but that would diminish the work of countless others since.

While these industrial revolutions were occurring, people at large were gaining greater command over goods as a result of their own labors. This improvement shows up in many ways. One way is real earnings. In 1973, E. H. Phelps Brown published an article in The Economic Journal in which he gave estimates of the growth in real wages for several major western countries between 1860 and 1970. The per annum rate in the U.S. was 1.73 percent. Over a 110-year period, this seemingly small rate increases real earnings by a factor of 6.6.

The rate is higher between 1890 and 1970: 2.08 percent in the U.S., but the rosy growth has stalled over the last 40 years or so. In 1964, the average weekly earnings of private nonfarm workers were $302.52 (in 1982 dollars.) In 2009, they are $288.15. Average per hour earnings show the same. The total private average was $8.42 in 1970 and is $8.64 today.

Why this has happened is a contentious issue. Begin with basic economic theory. In the long run, an economy that saves more and invests it in productive capital will accumulate more productive capital compared to its output. This will increase the real wage of labor. This is the Wicksell effect. It occurs in industrial revolutions. Prosperity spreads.

But real wages will grow more slowly or not at all in economies where saving and investment are reduced, or where saving is directed into non-productive investments.

Americans have been saving less and less since 1980. More and more wealth has been diverted to government, where it is spent. The share of government in the economy has doubled since 1947. The collection of wealth from the private sector through taxes creates disincentives to save. It also creates compliance costs. Then, after the government gets the funds, it spends them unproductively. While some of this spending has productive outcomes, most of it does not. Bureaucrats and politicians do not seek out profitable ventures in competitive markets and they are not accountable to investors.

Socialism also has taken the form of increased government regulation of economic activity. (An intimidating list of federal agencies is here.) This has slowed down capital accumulation, and it also has imposed high deadweight costs of compliance upon those who are regulated. Congress knows this, but continues to make matters worse. The activities of state, county, and local governments add to the burdens.

The Obama administration is consciously aiming to expand the federal government even more greatly than the Bush administration has done, which was already far more than under the Clinton administration. This will stall economic growth. Real wages will continue to stagnate or fall, unless the industrial revolution by itself gains new traction and manages to overcome the socialist drag of government.

If Obama gets his program through Congress, the government’s revenues will fall short of its spending by trillions. This will be at a time when other government social obligations will be falling due. The deficits cannot be met by increased taxation without further slowing the economy and reducing the government’s revenues. The only alternative will be inflationary finance. These consequences are clearly evident and known by many, even in Washington. Politics will determine the results that actually will occur.

Industrial revolutions are advancing the human race. While they are touched by government in various ways, it is indisputable that they are basically affairs of the free market. They are decentralized and spontaneous workings of people who control and steward their own private property. No one plans them. No one controls them (until the socialists interfere). No one knows where they are leading. No one can know. The resulting order of things emerges unplanned, and it is a largely benign order because the incentives lead in beneficial directions. Quite possibly biotechnology and nanotechnology or some other as yet unheralded advances will introduce a new industrial revolution.

The political transformation away from mercantilism to classical liberalism worked well for a period. Its institutions supported the first and part of the second industrial revolutions, as Ebeling outlines.

The second industrial revolution was slowed by socialism’s advent, but it was powerful enough so that the net effects were still favorable. Socialism’s growth in the last 40 years in the U.S. has been a factor that has seriously prevented the fruits of the third industrial revolution from flowing as widely and deeply as they may have. Clearly, we need to make greater headway on the political transformations if we are to continue to benefit fully from the industrial transformations. Political progress has not exactly been a hallmark of mankind’s recorded history.

We need a third political transformation. Its shape is unknown. Let us now focus attention on the general political problems we face and attract minds to them. One problem is to articulate sound social and political principles to undergird a new political landscape. This means we have to understand the good and bad points of past political ideas. A second problem is to bring about a fruitful third political revolution. The agenda is a large one.

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

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