*** economics economies








Economics


Figure 1.--The Great Depression of the 1930s had a huge impact on people's lives and on the course of history. The woman here, Florence Thompson, had five hungary children and was widowed. She was trying to survive as a migrant laborer by picking peas. This is one of the best remembered images of the Depression and was taken by Dorthea Lange in 1936.

HBC is primarily a history site. Marxists would say that economics fundamentally drives history. HBC believes that this is a gross over simplification, but of course economics is a powerful force that affects history, perhaps even the single most powerful force. It is clearly, however, not the only force and often not even the dominant force. Its importance, however, means that it has to be considered by historians. As a result, we will create some pages to address major economic trends such a feudalism, slavery, the industrial revolution, child labor, the depression, globelization, and other developments. Economics is especially important to HBC as the production of textile has been a major economic activity since the dawn of civilization and in fact was at the heart of the Industrial Revolution--the single most important development since the Agricultural Revolution thst created civilization..

Ecomomic Sectors

The two basic sectors are commonly seen as the the agricultural and industrial sectors, but this is an oversimplification. Industrial is commonly see a ca generic term for a modern, complex economy. The aricultural sector developed first and the appearance of agriculture is what in fact generated civilzation. The wealth created by intensive agriculture vastly exceeded that which could be generated by hunter gatherers. Live stock raising is generally associated with agriculture, but some people advanced from the hunter-gathering level by associating with migrating heards or ctully domesticating the hears to a degree. This was the pattern in Central Asia. Another early economic sector was mining. The production of metals preceeded agricultural, but became much more sophisticated when praticed by the more advanced and better organized agricultural socities. Fisheries was another early sector, but unlike agricultural and live stock raising, remained largely a hunting sctivity until the 20th century. These societies financed and made possible the development of civlization. In the wake of civilization, artisans began producing the acoutements of civilization. Agriculture ramained the primary source of wealth for milenia. And this did not begin to cvhaznge ujntil the 19th century. In many areas of the seveloping world, agriculture continues to be the principal economic activity. True industrial production began with the Industrial Revolution first in Britain and then in Europe in general as well as North America. Modern industrial societies have many important sectors beyond actual manufacturing, including construction, energy, financial, information, leisure, services, natural resources (fisheries, forestry, and mining, social (education and health), transportation, and trade. One important observation is that the portion of the ecomony devoted to producing goods and swevices is in many modern economies becoming overwealmed by the goverbmental sector, a development with profound economic and social consequences.

Economic Eras

We note several major economic eras. They include hunter-gatheing, the agricultural/neolithic revolution, the medueval era, mercantilism, the industrial revolution, and perhaps the a new modern era. Civilization be gan ith the agricultural/neolihic era, end the mileniaplong huntr-gathr era. As we approach the modern eras the duration of the era shink from millenia to centuries. Some observers believe that we are now entering a new economic era--the information age. One particularly notable aspects of these differents era is the duation. The length of each era has become progrssively shorter as we approach modern times. By far the longest lasting era was the hunter-gathering stage, encompassing the great bulk of human history. The agricultural revolution was the next longest era covering the the great ancient civilizations. Another aspect is that the eras have been primarily defined by production methods. Another important factor was transportation which appears slower to change than production methods. Only with the modern industrial era and capitalism have average individuals began to achieve comfortable lives. Strangely this does not seem to be regognized by many, including academic writers, who seem dubious about capitalism as an economic system. The various eras overlap because changed occurred at different times in various areas.

World Regions

Culture and ecomomics for most of human history were basically similar hunter gattering influencec mostly by climate and resource availability. This was the case on every continnt. This only changed with the Paleolithic/Agricultural Revolution, beginning about 10,000 BP. Here major regional differences on each continent began to develop. The first four major civilizations emerged in river valleys, three in contact (Mesopotamia, Egypt, and Indus) and one entirely independently (China). Gradually economic power shifted from the Middle Eest to the Mediterranran (Greece and Rome), but India abd China developed extrodinary economies. All of these centers experienced medevil periods, but China emerged as the richest and most innovative society. China came to dominate much of Asia. And where Chinese political control was not esstablished, Chinese culture ws still very influential. Chinese culture did not influence Europe, but Chinese technology certainly did. Perhaps the greatest question in world history is why China with all its riches and a great generator of technology did not lead the world into modernity. Rather it would be the relatively poor, backward Europe that would createc modernity--essentially the idea of freedom. This led to the inention of science and other aspects of nodernity--political freedom (democracy) and economic freedom (capitalism). There are a range of regional and country differnces that merit discission.

Continental Trends

Africa was where all humans evolved. but it is the humans that migrated out of Africa that would create the great civilizatios and economies. Asia is by far the largest continent with the largest population. It is dominated by China and the economy develope independently from the other centers of civilzation in western Asia (the Middle East) and South Asia (Indus Valley). China was the youngest of the great river valley civilization but has the lonest recorded history. China's isolation was due to the Himilayas, the Gobi Desert and the vast European Steppe inhabitted by warlike mounted tribesmen. China in isolation developed the richest pre-industrial society which also proved to be an engine for technology. South of the Himalayas another rich economy developed, entirely separate from China. The Silk Road provided the first connecting link between East and West. The problem with this and subsequent exchange is that China prodyced all kinds of luxury goods the west wanted while the West produced very little the Chinese wanted. Thus the trade had to be financed by gold and silver. This continued after Eropeans launched the voyages of discovert (15th century) and maritime trade commenced. The trade was financed by the vast Spanish silver discoveries in Bolivia (18th century) and then by opium and industrial manufactured good (19th century). It was Europe that would lead the world into the modern age. Maritime trade undercut the ecomomies of the Middle and Muslim powers wjic had control of land routes between China and Europe. Science and capitalism would lead to the creation of indistrial scocies generating vast wealth and human progress and well being on an unprecsented scale. The America laid unknown between Europe and America indiscovered for millenia. Souh America would be colonized and developed by the Catholic powers (Portugal and Spain). North America would be settled by Protestant England. The result was starteling different outcomes. Authors with ethical motives blackened the idea of capitalism and promoted socialism as the economic system of the future. The Soviet Union in Europe and Maoist China in Asia, however, proved that socialism destroyed wealth. Europe and America America had demonstated how capitalism created wealth. And the asian Tigers and China after market reforms demonstated once again how caoitalism generates weath and well being.

Country Trends

We want to look at the economies of individual countries. The ecomonies of these countries are closely intertwined with their history. Thus some basic ecomomics information is needed for our historical assessment. This is a major undertaking that will take some time to undertake. We will concentrate on the larger countries, including America, England, France, Germany, Italy, Japan, and Russia. The success of each of these ecomomies was strongly correlated with the adoption of free market capitalist systems. Despite the unrefutable evidence of this, it is interesting to note the number of countries that fail to implenent free market econommies or place limits on free markets. Two of the most notable are the remaining Communist countries (Cuba and North Korra). Here political concerns explain the maintenence of failed economic policies. Other countries fail to develop a poliical and legal system necessary for free markets to floutish. African countries in particular have not been able to develop vibrant economies. Some countries like Nigeria have oil income to help finance ecomomic development, but seem to have made little real progress. Other countries do not have oil ot other major export income and are dependant on foreign capital. Developing countries (China and India) are now energing as major economies after pursuing disatrous socialist policies. Several smaller ecomonies (Argentina, Cuba, Poland, and Venezuela) are also interesting.

Money and Credit

The history of money and credit is in large measure the history of civilization. This is because civilization began with settled agriculture and the creation of wealth beyond what hunter gathers could accumulate. This also involved a specilization in labor. With the specialization of labor pure bartar was akward leading to the development of money. The development of writing appears to have developed out of a need for accounting records. Early money was metal coins which had intrinsic value. Money was invented in Mesopotamia. The next step was credit. Modern banking traces its origins to the Templars. Christian pilgrims needed a way of transfering money to the far away Middle East and the Templars established a system to do this. It was the Medeci in Florence that established the foundation of modern banking (15th century). Banking was contrained in Europe because of the Church procriotion against paying interest which was consider usurious. For that reason Jews were commonly involved in lending money during the Middle Ages. From early times there has been a populist reaction to money lenders and banks. This was an elementb in European antiSemitism. Even the Medici faced a populist uprising led by Savanarola. He is best known for his religious teachings, but populist sentiment was an important factor in the rising against the Medici. Populist sentiment against banking has continued to this day. While populist has generally blamed banks for economic problems, throughout history it has been the lack of an efficent banking system that has impedxed economic growth, not the presence of banks. Along with money and credit has come economic cycles and financial bubbles.

Labor

Labor in the ancient world had no real satus, in part because much of it was performed by slaves or peasants with few rights. With the fall of Rome in the west the Feudal system evolved where the peasantry became serfs tied to the land. Artisans in the cities organized guilds when helped to raise their status. The position of skilled labor, however, was udermined by the industrial revolution and the mechamization of industry. The labor movement developed differently in various countries. The general pattern was that industrialits refused to recognize unions and attempted to break unions that organized strikes, often with violence. Governments often intervened to support the industrialists. The labor movement itself was split. Some radical unions were organized like the International Workers of the world (IWW). The IWW was not concered with collective barganing, but rather with radical social change. There were also divisions between trade unions and industrial unions. And union leaders had a range of social attitudes. Some union leaders especially in America beliece in free enterprise, but just wanted a reaonable share of the earnings in wages. European labor unions had more politiocal orientations ranging from Socialist to Communist. Generally speaking the Communist political leaders were more radical and had a more radical politcal agenda. After the Communist Revolution in Russia, Communist labor leaders came under the control of the Soviet inteligence services. Gradually after World War I, labor unions in most Western European countries and America won collective bargaining rights. In America this was one of the achievements of Franklin Roosevelt's New Deal.

Raw Materials

The need for raw mayetrials have been a fzactor in history from the ealiest times. The raw materiald of value has changed over time. One material that has been of value has been gold. This was because of its beauty and the fct that it could be found in its elenmentary form without any meed for metalurgy. During the ndolithic era, it was stone an organic materials that were of value both as luxury goods and for practical pourposes. In Meso-America, obsedian was one of the most valuavle materils and powered the rise of Teotihuacán who great pyramids rose north of modern Mexico City. Different kinds of stones including flint were of importance. The great monolthic stones of Stonehedge had to be transported considerable distances. Lumber was also valuable. The transport of stone nd lumber (except for luxury woods) limited its value as a trade good. With the Neolithic Revolution the pace of economic change quickened. Egypt's monumental building required enornmous quanities of stone. Mesopotamiaa rose with vast quantities of clay bricks. This began the quest for metals. The two most important were first copper and than the tin need to make bronze. The result was expanding trade activity at increasing distances and the related military activity. As metalury technology improved, iron, a much more common metal, became important. These metals were the important raw materials along with organic materials needed for textiles (wool, flax, and later cotton) as well as leather. The rest of world trade was slavery and luxury goods. Olive oil and wine were impooretbt in Mediterranean trade. The famed Silk Road for example carried mostly luxury goods as did the subsequent maritime Spice Route. Chinese luxyry goods abnd spices led to the European Maritime outreach. The principal goal of the Mercnatilist Era which was fired by European expansion was to acquire gold ansd silver. It was the Industrial Revolution that created the need for a wide range of new materials, many of which were unvailable in Europe. And at the same time the indiustrial revolution created the possibility to transport bulk commodities through rail roads and steamer ships. For the first time trasport moved away from rivers and coastal shipping. And it is at this time that scientists began to discover all kinds of metals and other elemnents. Steadily uses for all these new metals were developed with the rise of industry (19th century). And the machinery of the industrial revolution had to be powered. Water wheels were useful, but limited to how much machinery could be powered and where. Wood was not available in sufficent supply. The fuel that powered industry was coal, a substance that was of very little interest until the Industrial Revolution. Coal dominated the 19h century and much of the 20th century. And coal was available throughout Europe and in quantity. With the 20th centyry a new fuel rose to the surface--oil. This was another substance of little interest. At first it was just needed for kerosene (home lighhting) and lubricants. But in the 20th century it became a vital part of the modern economy, especially after Hrnry Ford and the invention of the internal combusion engine. Oil would play a key role in the history of the 20th century and very llttle oil was available in Europe.

Measures of State Success

HBC has addressed a number of controversial issues which involve the comparison of different countries. Here the issue of failed states has arisen. HBC has readers from all over the world. Most of our readers are Americans or Europeans, but we have readers from Asia, Africa, Latin America, and the Middle East. And some of our readers understandably don't like their country described as backward or a failed state. Our readers raise a fair question. How does one define a failed state and society. We need to estanlish metrics here so that we can fairly assess failed and successful states. Here the oil countries present a special problem. Several states (Brunei, Iraq, Iran, and the Gulf emirates, Kuwait, Saudi Arabia, and Venezuela) are endowed with vast quantities of oil. As a result of this oil these countries are able to finance a high standard of living. Our assessment of state failure relies heavily on living stndards, but they are not the only metrics involved. Paricularly important here is measurable indicators so that an assessment can be made free of idelogical and theocratic beliefs. Even this is complicated, however, because many failed states are such failures that they do not have reliable statistical systems which can provide us reliable statistics. We would suggest a range of factors, including ecomonic productivity, prosperity (percapita income), public health (infant mortality, longevity, sanitation, nutrition, etc.), education (literacy, school attendence--including girls), political democracy, civil liberties (especially free speech), religious freedom, artistic achievement, transportation network (paved roads, mass transit, ect.), communications (telephones per capita, access to the internet, ect), and number of books published, These are some of the major indicators that we would look at in assessing countries and in ranking advanced and backward countries. A country that consistently ranks low in these areas might fairly be called a failed state.

Economic Laws

Economics is a social science. And by this it is mean that there are basic laws of economic behavior. The most obvious is the law of supply and demand. Thomas Carlyle it called economics the dismal science and without knowing it he put his finger on a basic problem with economics. Many authors want to ascribe moral values to economics. Thus political leaders who have the power to influence economies commonly instead of following the laws of economics instead try to insert their moral judgements. Thus you see President Obama when he talks about economic policy, continually use terms like compasion and fairness. Now you would not see those terms being used when discussing other sciences, both physical and social sciences. Now compassion of fairness are highly subjective values. For a host of politicians (Clemet Atlee, Hugo Chavez, President Obama, and others), what they mean by compassion and fairness is redistribution of wealth, to take from the affluent and give to the less affluent. Many Americans agree with this prescription. For other Americans the Governmrnt taking their income and passing it out to others is neither fair or compasionate. The fact that many Government programs redestributing income have proven very ineffective is a whole other, but no less important issue. Now readers can, based on their moral values, decide who is correct in the debate over resistrubution, but it should not be confused with economics as a science or optimal management of an economy. Such decesions reflect religious and social values, not economic laws. They do, however, have economic consequences. For example, if you pay people not to work, you will have more people not working and fewer people working and paying taxes. Or if you tax investors creating businesses and jobs, you will have fewer people risking their capital and creating jobs. Or if you increase the cost to business people of hiring people through regulations, you will have businessmen hiring fewer people. These are simple laws of economics. Of course the level of payments, taxes, and regulations are critical. If they are small, they will have negligibe impacts. If they are substantial, they will have a signigicant impact. The Liberal Democrats who have through regulations imposed their values on businessmen and investors are now asking, where are the jobs. This is the same question that Liberal Denmocrats asked during the New Deal which over 9 years never suceeded in ending the Depression in America.

Economic Freedom

The question arises as to why economic conditions are so varied around the world. The Communists claimed it was because evil capitalists were exploiting their own workers as well Third World countries. Many people bought this and other Socialist teants, especially on the heels of the Great Depression. The only thing is that in the later part of the decade several surprising economic trends emerged: 1) European countries became richer after losing their colonies, 2) Many colonies became poorer after independence, 3) The Soviet Union and its satellites as well as China and other Communist countries were unable to compete economically with the Western capitalist countries, 4) Free market reforms in China, India, and other countries turned torpid economies into engines for economic growth, and 5) Socialist policies in Western Europe and America are being exposed as being both unsustainable and counter productive. Others argued that natural resources were critical. Again we see countries disproving this thesis, Japan, Taiwan, South Korea, Singapore, Taiwan, and other ciuntries prioved that suceesful ecomomies can be built by countries without notable resources if a country develops it human capital. Increasingly it is becoming obvious, much to the dismay of Socialist acolytes around the world is that the key to economic success is economic freedom. And to test out that theory, one has to compare indices of economic feeedom with actual economic conditions. The Wall Street Journal andThe Heritage Foundation, a respected free market think tank, have tracked the economic freedom trends around the world with its Index of Economic Freedom. They define economic freedom as "the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself." They measure ten components of economic freedom, assigning a grade in each using a scale from 0 to 100, where 100 represents the maximum freedom. The ten component scores are then averaged to give an overall economic freedom score for each country. You can go to their site to see the country rakings and a detailed duiscussion of conditions in each country. While one can debate the precise findings and individual country assessments, the basic findings are unmistakable. Countries high on the economic freedom list are successful countries with high living standards. Countries ranking low on the economic freedom list are countries with failed economies with a population condemned to poverty. What the index does not measure very well is the ability of countries with oil-based economies to avoid freeing their economies. A variety of cultural factors can also affect economic conditions.

International Trading Regimes

It is also true that the Royal Navy helped establish the modern world trading system. It broke up the closed international system established by Spain and Portugal and replaced it with a much more open system. Sea trade is of course the central vehicle for international trade. Even today, something like 95 percent of international commerce takes place by sea. There have essentially been three world trading systems. The first was the Silk Road. This was the medium connecting China and Europe. The Silk Road commerce was conducted over a Millenium and affected both by Byzantium, the rise of Islam. the advent of the Monguls. This trading system was suplanted by the rise of the Portuguese and Spanish empires and trading system beginning in the 15th century. It was this system that the fledgling Royal Navy began to attack, first as freedooters and then in the spectacular engagement of the Spanish Armada in the English Channel and the North Sea. The defeat of the Armada meant the beginning of the end of the world trading system dominated by Spain and Portugal and the beginning of the new trading system which would be made possible by the rise of the Royal Navy.

Economic Systems

There are two basic modern economic systems, free-market capitalism and state socialism. These are of course the extremes. There are countless permutations between the two basic systems in actuality. Free market capitalism is an economic system in which the means of production are privately owned and operated. The economic goal is profit. Investments and business expansion are are determined by private decisions in the free market as opposed to the state through central economic planning. Prices are set in the open market by supply and demand. Private individuals invest in new enterprises seeking profit. Government in a capitalist system should pursue laizze faire policies. Laissez faire is a French term meaning "leave alone," meaning that the Goverment should not interfere in the operation of the free market. The mecghanics of capitalism were clearly set out by 18th century economists, most clearly by Adam Smith in the Wealth of Nations (1776) where he describes an invisible handn economics, the invisible hand, also known as the invisible hand of the market meaning the self-regulating operation of the marketplace. Economics has been called the 'dismal science'. An economists can be found to support a wide ramge of economic systems. One of the few unrefutable economic trends is that those countries which more closely appraoch Smith free market approach are the most prosperous (America, Britain, France, Germany, and Japan) and those countries which most greatly diverge and interfere or even control the market tend to be the least prosperous (Cuba, North Korea, the Soviet Union, and Vietnam). The change in China after the introduction of capitalist economics is the most stunning confirmation of Smith economic theories. Not only are capitalist countries the most prosperous, but they are also the most creative and innovative. Liberals in the 19th century struggled to remove the heavy hand of government, mostly monarchies, from the economy. Their successes were part of the massive increase of wealth during the century. It is interesting to hear politicians talk about change and new ideas. Adam Smith clearly described how a nation can achieve prosperity and the passage of time has only confirmed that he was correct. Smith did not believe as subsequently advocated by important industrialists that there was no role for government. Smith saw the need for the government to set rules to ensure the operartion of the free market. Smith foresaw that concentrations of capital could prevent the operation of the free market. While capitalism has clerly been shown to be the most successful economic system, it is also clear that the Government is needed to establish and enforce minimum social, health, worker safety, and environmental standards. The other basic economic system is socialism. Socialism is an economic theory advocating public or common ownership and cooperative management of the means of production and allocation of resource in a society. And like capitalism, socialism had an outstanding theorist--Karl Marx. Mark publised Das Kapital about a century after Smith's ground-breaking work. Unlike Smith, very little of what Marx wrote proved to be accurate or workable. Marx explained that the driving force of capitalism was the exploitation of workers. He postulated that essential source of capitalist profits was the unpaid labor of wage laborers. He postulated that the excesses of capitalism would lead to worker revolutions in advanced industrial countries and the eventual creation of a communist society in which the state would whiter away. This of course did not occur. The communist Revolutions occurred in China and Russia, the two least advanced states in Europe and Asia. And Marx's theories proved so unworkable that Lenin/Stalin and later Mao had to rewrite the book--creating Marxist-Lennist ideology. This was a repudiation of liberalism, and the reintroduction of state controls. But the 20th century Communists went far beyond the monarchial controls of the 19th century, but attempted to totally operate the economy. The results for Russia, China, and other countries attemptingthis approach was economic failure and poverty. The interesting aspect of the demobstrable success of capitalism and the failure of socialism is the number of people in the modern world who continue to embrace socialism and socialist economic theories.

Modernity: Rise of the West

One of the interesting questions in history and economics is why did the West begin to generate wealth and power, outstripping other regions. The rise of the West is a very recent phenomenon. China until the 19th century was a richer society than the West. Britain fought the Opium Wars with China because it could not produc anthing else that the Chinese wanted. This began with the European maritime expandion and voyages of discovery. Several authors have addrssed this question nd there is no clear-cut answer, but there are several ghough provoking assessments. One authors sees the answer in the environment, the accidental combination of geographic and climatic facors affecting available flora and fauna and the importance of disease pathogens. [Diamond] This analysis offers important insights and explains part of the story. The authors mentions, but largely glances over two important issues. First ideas. He does not see ideas like free market capitalism, democracy, and the rule of law as a root cause. Second he briefly mentiions China, but does not really explain why it was not China that emerged as thne world leader rather than Europe. Another author offer has prpoposed what he calls six killer apps. These include: 1) competition, 2) science, 3) the rule of law based on private property rights, 4) medicine, 5) the consumr society, and 6) the work ethic. [Ferguson] And we would add that the\ree effective movements (the Renaissance, the Reformation, and the Enlightenment) helped focus these killer apps in the West.

Failure of Modernity

The West led the way to modernity. The scientific method invented in the west (16th century) as well as democracy and capitalism led to remarkable change that became increasingy manifest by the 19th century . We see, however, a a failure of modernity in large areas of the world. This led to a significant expansion of Europeam colonial empires. This also led to European contact essentially with people which time as litterally forgot. And thanks to photography there are visual records of these societies. And not only in the 19th century, we see images from the 20th century showing extemely backward areas. I first became aware of this phemonenon when I was thumbing through our family Bible. I remember as a child thinking that the photographs of Holy Land scenes were actually taken in ancient times. The reason for that was that there was absolutely no indication of modernity such as electrical or telephone lines, cars or other motor velicles, rail lines, factories, TV atenna or the other indicators of modernity. And here we are not talking about a little behind. We see images tht could have been taken not only in the middle ages, but areso devoid of technology that they could have been taken in ancient times. Sub-saharan Africa was the single most backward area. But we see countries showing great poverty and the lack of technolog in many other areas as well. One of the most backward areas is the Muslim world streaching from Central Asia through North Africa. North Africa wss a little different because it was colonized by the Europeans. We notice other areas that seem baxkward such as India and China and are not sure how to compare them with the Middle East and Central Asia. And of course any such comparison had to destinguish between urban and rural areas.

Capitalism

A key element in the rise of the West was free market capitalism. It was not the only factor, but it was arguably the single most important factor. European mercantilism evolved into what we now call capitalism. Capitalism is founded on the same ecoinomic impulse as mercantilism the drive for profit. Both the mercantilist and the capitalist seeks to acquiring desirable goods for lower prices than they can be sold. The difference between the two is profit. And profit is at the heart of the system. Socialists have criticised the profit motive. And it is a cold, dark unemotianal heart. The only problem for socialists is that it generates wealth. And socialism with empathy and humanitarian social concerns does not. Adam Smith in the Wealth of Nations describes the mechanism that drives capitalism. The profit motive was essentially a hidden hand directing the system. Smith postulated that society as a whole benefitted by allowing each individual from seeking his own individual interests. Individuals pursuing their own personal interests will guarantee the interests of society as a whole. There are major differences between mercantilism and capitalism. Capitalism involves the rational or efficent use of the means of production. Labor becomes specialized workers in the form of wage labor. The managers or capitalist manipulate capital, raw materials, terchnology, and oher fsactors so as to maximize profit or wealth. There is the potential for capitalist to cause social problems by reducing wages to poverty levels, cvhild labor, casusing pollution, producing unsafe problems, unfair competition, etc. Here it is up to the Government to regulate the system to prevet these undesirable consequences. Labor unions can also unballance the system through raqeteerng, unsustaninable wage demands, etc. And thus must be regulated. Here there is a fine line. Inadequate regulation can threaten te system by resulting in a socially unacceptable concentration of wealth. Oppressive regulation can destroy the profitability of the system. The individual and his desire for a profit is at the hear of the capitalist system. It was the Dutch who first invented capitalism. It was quickly adopted by the English and in the American colonies. It was the efficiecies and wealth generating capabilities of capitalism that enabled the Dutch and English to survive and prosper in conflicts with much larger countries. Other European countries also embrsaced capitalism, but none more throughly than the Anglo-American powers. This proved to be the central force in the 20th century when Britain and America faced a series of conflicts with powerful adversaries challeging not only capitalism, but ln\beral democracy which developoed as a ritically important adjunct

Economic Fluctuations

Along with market economics and capitalism has come economic fluctuations. Some have been wrenching and disruptive, but only in economies that guarantee poverty like Fudalism and Communism can market fluctuations be avoided. With the economic miracles followimg the Great Depression and World War II, economist and politicans began to think that at least the modern industrial economies of the West had the academic understanding and financial tools to avoid another economic disaster. We now know that they were disasterously wrong. Studies now emerging show not only how wrong and ill-informed the Federal Reserve was in the run up to the Great Recession (2008-09), but did not even know a major down turn was underwy a year into the recession. [Madrick, pp. 66-68.] And the ECB, BOE, and BOJ were just as wrong headed and ill prepared if not more so. All of this should give pause to the Socialists that continue to believe that major economies can be managed more effectively than market forces. There have since the invention of capitalism in the 17th century been eight epic market crashes. This began with Holland's tulip mania (17th century), South Sea Bubble (18th century), and in modern times the Great Depression (1930s) and Japan's meltdown (1990). We have just begun to study these major market collapses, but have some work on the American economy.

Monetary History

A monetary system is the mechanisms by which a government provides a neans of exchange (money) to facilitate economic activity. In addition to exchange money can also serve as a store of value and a standard for measuring value. Normal istitutions, are a mint/printing office (bureau of engraving), central bank, and commercial banks. In the modern age new intitutions and exchang mechanisms are seveloping such as bit-coin and fintech. Over time a wide range of items have been used, including skulls, salt, pigs, palm nuts, wapum, shells and much mokre. Different societies have evaluated various items differently. The Aztecs and other Native Americans greatly valued a green stone (turquoise) which the Spanish were not impressed with. Over time two metals known as bullion (gold and silver) were seen by most sophisticaed cultures as of great value and thus provided a useful mode of exchange--the most common type of commodity money. The first monetary coins were appeared independently during the Iron Age in Anatolia and Archaic Greece, India and China (7th and 6th centuries BC). The use of monetary coins then spread rapidly. Paper bills were first adopted by the Chinese during the important Tang Dynasty (7th-10th century AD). Usage did not become widesread wunti modern times (late-19th century). Modern systems have used bullion (gold and or silver) and in the 20th century primarily paper bills. Paper money was at first not commoly accepted unless convertavle into gold and silver. Paper currency was, howevet, after the Depression of the 1930s and the end of the gold system was not normally convertable into bullion becoming fiat mony. he money of especially important economies with responsible finncial systems becme accepted as reserve currncies, the British pound stirling in the 19th century abd the American dollar in the 20th century. The Europeans created a common currency which now competes with the dollar, but reckless fiscal policies in both he United States and Europe are destablizing financial markets. China with its growing economy is interested in making its Yuan a reserve currency.

Taxation

A major question in ecomomics is taxation. The question of what is and is not a tax can get complicated, but is more of a political than an economic question. A tax is essentially a mandatory charge or levy the government imposes upon a citizen or resident of a political entity. Historically taxes were imposed in various ways, such as a corvee or paymrnt in labor or payment in products, commonly part of an agricultural harvest. Since the Industrial Revolution and the development of more prosperous capitalist economies, taxes have geberally unvolved money payment. A tax is generally thought of as a revenue raising methods, but revenue is not always the primary purpose of a tax. Chief Justice John Marshall famously observed in the McCulloch v. Maryland (1819) decesion that the "the power to tax is the power to destroy." In this case it was a political effort to destroy the Bank of the United States. The Liberal movement of the 19th century was largely an effort to end the high taxes and other restraints on economic activity imposed by the largely monrchial governments of the time. Taxes are also used for social engineering, political efforts to advatage one group at the expense of another. Since the Progressive Era in America, many tax rates have been progressive, meaning that higher income people pay a higher tax rate than low income earners. This is also common in Western Europe. Top marginal tax rates in America have been as high as 92 percent (1952-53). This has been a major tool of liberals seeking 'social justice'. It is widely assumed that higher tax rates will increase revenue that the government can use to finance social welfare systems. This often is not the case as higher tax rates often not only result in lower tax collections, impede economic activity which also lowers tax collections. Even so, many liberals influenced with socialist ideology continue to push for higher taxes because of a virtually religious obsession with lowering the income of the wealthy regardless of the impact on low-income earners. President Obama whenbquestion about whether higher taxes would actually increased revenues, explained that there were other important considerations and that it was a 'matter of equity'. This obsession is often compounded by the fact that socialist economic policies generally fail to raise the very low-income earners they seek to aid. This has proven true of not only the Communist countries, but also the welfare state of Western Europe. Because of the widespread acceotance of socialist economics, rarely do modern governments set taxes at a rate designed to maximize the collection of revenue.

Inflation

Inflation is the level of increase in the prices for goods and services. When prices rise money buys fewer goods and services. A a result, inflation reflects a reduction in purchasing power. This means that the real value of the currency declines. Iflation has been an issue ever since civilized society were forced to move away from barter abd create currency, at first primarily metal coins. At the time not only prices affected infkation, but a debasement of the coins, government officials reducing the silver and gold content. Once paper currenct was introduced the question of the metalic backing was important, but after Government stopped exchaning currebcy for gold or silver thus has become of much less importance. Today the inflation rate reflects both prices and the amount of currency issued. Countrieslike Zimbabwe and Venezueal which simply turn on the printing presses essentually destroy the value of their cuurency. The measure of the level of inflation over time is the inflation rate. There is no way of course of measuring all financial transacrions. As a result, governments create baskets of good and sevices that can be measued to relect the overall. the annualized percentage change in a general price index, usually the consumer price index, over time.[7] The opposite of inflation is deflation. Inflation affects economies in a varity of ways. mostly negative, but some postive. Negative impacts include: 1) the lost opportunity cost of holding money, 2) uncertainty over the future inflation rate, 3) discouraging investment and savings, and 3) shortages of goods abecaue of the erosion of currency value. Positive impacts of modest inflation include: 1) reducing unemployment due to nominal wage rigidity, 2) provising central bank leeway in conducting monetary policy, 3) encouraging loans and investment, and 4) avoiding the problemd associated with deflation. Most economists contend that high inflation rates are primarily caused by an excessive growth of the money supply such as just yurming on the presses. Economists differ Views on which factors determine inflation rates are more varied. Contributing factors can incluse: 1) changes demand for goods and services and 2) changes in supply es such as during scarcities. There is a strong consensus among economits that sustained inflation is caused by government increasing the money supply growing faster than the supply creation (economic growth). Modern economists generally favor a low and steady rate of inflation. After years of fighting inflation, mny cebtral bankers in the 2010s have been atempting to create inflation. Limited inflation is believed to reduce the severity recessions by allowing the labor market to adjust more quickly to an economic downturn. Yhe advocates of Modern Monetary Theory coceptualizes currency as a public monopoly and ignores the delerious impacts of defecit bspending and inflation.

The Third World: Developing Countries

Most of the approximately 200 countries around the world today have come into existence as a result of the decolonization process following World War II. The Third World leaders who took comtrol of the former colonies were for the most part inexperienced and poorly educated. And despite the vast differences among the countries involved, most shared two fundamental beliefs. First, the end of colonialism would immediately mean a bonanza of wealth accuring to their countries. Second, socialism wwas a much more efficent and fair economic system than capitalism. A third widely held belief although not so universally shared was that the Soviet Union was a stunning success and that one-party statist governments could best guide rapid economic development. Latin America was a little different, but followed a similar economic path. Thus as the many new countries became independent and launched new economic programs, there was widespread optimism about a golden, prospeous future. The result was, however, a tragic abysimal failure. In many former colonies, economic conditions actually declined. It was the former colonial powers in Europe that actually expeienced an economic miracle. Europeans, at least Europeans in the capitalist West, within a few years after the War, were living prosperous lives far beyond economic levels before the War. And the economic failure in the third world ocurred despite massive economic assistance from America and Europe. A factor here was the security situatin which declined after colonial rule, but economic policy was a major cause of the failure to achieve the great hopes that accompanied decoloninization

Tiger Economies

After World War II, socialist ideas became very popular among developing countries as a way to rapidly develop their economies. A factor hereis that many of the new ledeers saw capiutalism as a part of European colonialism from which they were just shaking free. Many were also impressed with the Soviet Union which had hidden their economic failure and had played a key role in defeating the NAZIs in Wirld War II. As a result, many of the new nations including China, to various degrees, adopted socialist economic policies and institutions. The result was economic failure in some cases and disappointing results in other countries. Four countries in Asia adopted free markets economic policies and in short order had roaring economies. As all four countries were Asian, they became known as the Asian Tigers. The tiger is a symbol for power and energy throughout Asia. It features prominently in Chinese mythology . The Asian countries to pursue these policies all Asian and the phenomenon continue to be parimarily Asian. The first countries were Hong Kong, Sinapore, South Korea, and Taiwan. There success was so stunning that even the Chinese Communists took notice. Mao died (1976). Chinese Vice-Premier Deng Xiaoping noting the stunning successes of the Asian Tigers, discuused the matter with Prime Minister Lee Kuan Yew on an official visit to Singapore (1978). The result was market reforms. The Coominists and Socilaists had so successfully darkened the term 'capitalism' that they didn't dare use the term 'capitalism'--at least at first. India a little over a decade later also adopted their own 'market reforms'. Other countries follow suit. The results were nothing short of spectacular--although rarely recognized by the Mainline Media in the West which contines to focus on the imperfections of capitalism. In a little more than a geneneration (a speck in historical time, the shift from socialism to capitalism has thrust some ONE BILLION people from abject poverty to the prosperous middle class. Never before have so many people achieved a prosperous life-style in so short a period. In nfact that is more people than have enjoyed prosperity in ALL OF HISTORY. And this has been accomplished in one short generation. And note that the ocialist/progressive MAIN LINE MEDIA in the West never even mentions what is demobstably the greatest economic event in human history. Some 20 countries with more than a third of the world's population have attempted to create workers' paradices with socialist policies. All have failed and failed spectacularly and in the process committed horrendous crimes involving the murder of tens of millions of their people. The simple fact is that capitalist economies are the only economies that have created the wealth neccesary to create prosperity. The only exception are the oil rich countries sitting on pools of oil. And the ability of socialism to destroy wealth is so starkly illustrated by the destruction of the oil-rich Venezuelan economy.

Living Standards

Throughout most of history, people lived lives that were only marginally changed. This is because the primary economic activity was agriculture. The great bulk of humans made their living in agriculture. This did not begin to change material until the 19h century and only in a few countries. And the income of farmers -was limited by the ;land that an individual could work. Now there were variations depending on the crop, the land, and the animals such as an ox or horse for plowing. But even in the most ideal conditions there were limit on what one person could do. And there was also the issue of land ownership. Most farmers around the world did not own the land they worked. Slavery was of course the most egregious form of forced labor, but very few people actually owned land and this included Africa, Asia, Europe, and Latin America. The only exception was North America and at the om the 1790s, the french peasantry. As result, the great portion of the world's population could expect no improvement in their living standard and life prospects during their life time. [Rahn] Living standards were little changed since the Roman Empire. This can be measured in diet, housing, clothing, life span, and another indicators. Life span is particularly important indicator. Th average life styled in 1800 was" France (35 years), England (40 years), and America (45 years). It should be noted that the French peasantry as a result of the French Revolution just obtained ownership of the land they worked. England and America had the highest life span and it should be noted that they were the most capitalist of all countries. It is commonly misrepresented that England was a land of great poverty--by those who ascribe to the Oliver Twist school of economics. Typicall woke economists nd histioruans comare Englabd to 21st century levels rther thsn other contemporary countries. In fact living standards in England were the highest in the world t the time. Only in America were living standards higher, largely because most Americans owned the land they worked and had the best diets. Other actual studies based on data rather than ideology show that England was the most prosperous country in Europe. [Van Zande] Statistical data clearly demonstrates that. We have had conversations with Spanish bloggers who claim that Spain was more prosperous than England and that Spain's has been unfairly treated and problems are all due to Anglo-Saxons. A typical comment is, "Literally the Nobel prize is a complete absurdity, there are dozens of Spanish inventors and scientists who were not recognized for the simple fact of being Spanish. What is it that you don't m realize, that we Spaniards have been very stigmatized and hated for 500 years and everything that came out of there was completely ignored and rejected in other countries." [Cao] Note the reference to 'dozens' and compare that to the enormity of Anglo-Saxon inventors and scientists. And the derisive attiutude tiward Nobel prices. So ingrained is Socialist thought, there is a general resistance to accept the obvious importance of capitalism. The data clearly shiws that shows the most propsperous countries were those adopting capitatism and tht the Ibrin cpimytiing clinging to meracantist polcies were filing. And this was the case even wehn the treasure fkleets were delivering vast wealth to Spain.

Asian Financial Crisis (1997-8)

Although countries develop econimically over time, financial crises can erupy very rapidly. The Asian financial crisis in 1997–98 was triggered by Thailand’s decision to float its currency, the baht (July 2, 1997). Only obscure economists at the time had the vaguest idea that the Thai baht or any nother Third World currency could triger a major world financial crisis--the proverbial Black Swan event. The Thai Government abandoned its peg to the dollar. The value of the baht pulmeted falling about 50 percent by the end of the year. The plunging currency caused foreign investors not only to reasses Thai economies and investments, but situation throughout the region. They began selling assetts (withdrawing capital) froim Thailand and soon from other countries (Indonesia, Malaysia, South Korea, and Taiwan). These countries soom foujnd themselves caught in downward economic cycle to varying degrees. It affected financial markets in the United States and Europe. The International Monetary Fund (IMF) arranged bailouts. The United States akso intervened. These efforts sought to rescue the affected countries rather than taking the risk of further financial contagion.

Dot Com Bubble (2001-02)

The Dotcom bubble was a rapid rise in the valuation of American technology stocks. This was not only the absolute price of the stocks, nit the price earmings (PE) ratio. These ratios rose to extrodinary levels. Actually it was even worse than that. Stocks of comapnies without any earmings at all. The internet was brand new and companies involved with the internet became the investment flavior of the day, fueling a powerful bull markey during the late-1990s. The value of American equity markets increased exponentially. The technology-dominated Nasdaq index skyricketed from less than 1,000 to more than 5,000 (1995 - 2000). Investors began to question these high valuations, nespecially with companies failing to produce eaemings. The bubble burst and a bear market developoed (2001 - 2002). The Nasdaq plummeted from its peak of 5,048 (March 2000) to only 1,139 (October 2002). Investors who bought stiocks with high PEs or without earnings fomnd their investmnts collapse. Many dotcom stocks lost all vaslue. Evem healthy companies with solid bisinesses (Cisco, Intel, Micrsoft, and Oracle lost 80 percent or more of their value because the PEs has reached such eklevated valuations. It would take 15 years for Nasdaq to regain its former peak (April 2015).

Subprime Mortgage Crisis (2007-10)

The Subprime Mortgage Crisis was the result of the expansion of mortgage credit. This meant that borrowers who previously would have had difficulty qualifying for mortgages. This was the result of Government policvies begun during The Carter Administration (1977-81) to help low-income Americans buy homes. When the crisis developed the problem would be blamed oimn bankers, some of whom were involved in illegal activities, and the role of the Government was largely ignored. Increased home buting and artficially low interet rates were a factor in steadily increasing home prices. Home ownership in America was limited by access to credit, especially among buyers with below average credit histories, limited funds for down payments. or needed high-payment loans. Unless ythey could get government assistance (insurance guaantees), lenders' mortgage applicatiins were often denied. Some high-risk families could obtain small-sized mortgages backed by the Federal Housing Administration (FHA). Most had no option, but to rent. Although most Americans aspired to home oewnership, for some the rental option is often better for a host oif reasons. The bery fact tghst ghey are low income probsnly means that they have not lead the most responsible life styles. The modern woke generration will probably shout institutional racism, but are generallu unwiilining or unable to discuss the ussue ratioanlly. There ceryinly racial descrimination involved in buying homes, but by the time of the Subprime Crisis this was no longer a major issue. Home ownership before the Subprime Crisis hovered round the 65 percent level, mortgage foreclosure rates were low, and home construction and house prices orimarily varid with periodic fluctuations in mortgage interest rates. A major change occurred about the turn of 21st century (early and mid-2000s). High-risk mortgages became available from lenders who bergan funded mortgages by repackaging them into pools that were then sold to investors. A long history of rising home prices made these pools attractive to investors. New financial products were created, suposedly to apportion risk. Private-label Mortgage-backed Securities (PMBS) providd most of the funding for subprime mortgages. Homeownership and home prises rose. The resulting increased demand bcaused hiome prices to rise. This was esoecially the case in araes where housing was in great demand or in tight supply. The steady price incrases caused expectations of still more house price gains to come. Thos only increasing housing demand and prices. Investors purchasing PMBS profited as long as house prices contunued to rise. The invrsaing prices protected them from losses. When high-risk mortgage home buyers were unabkle make loan payments, they simply sold their homes at a gain and paid off the mortgages or borrowed more against higher market prices. Investors becane acustomed to rising home prices. And the new mortgage products were untested. As a result the risk associated with PMBS was not well understood. This all began to chnge when home prices peaked.

Impending Crisis

Because gains in real output and wealth depend upon efficient pricing of capital and savings. But the modus operandi of today's central banking is to deliberately distort and relentlessly falsify financial prices. After all, the essence of zero percent interest rates (ZIRP) and negative interest rates (NIRP) is to drive interest rates below their natural market clearing levels to induce more borrowing and spending by business and consumers. It's also the inherent result of massive quantitative easing (QE) (bond-buying) where central banks finance their purchases with credits conjured from thin air. The central banks' big fat thumb on the bond market's supply/demand scale results in far lower yields than real savers would accept in an honest free market. The middle class and retirees who rely on savings lose out. The same is true of the old doctrine of 'wealth effect' stimulus. After being initiated by Alan Greenspan 15 years ago, it has been embraced ever more eagerly by his successors at the Fed and elsewhere ever since.

Sources

Cao, Cola. Intrnet exchange (June 11, 2022).

Diamond. Jared. Guns, Germs, and Steel: The Fates of Human Societies (Norton: New York, 1997), 494p.

Ferguson, Niall. Civilization: The West and the Rest.

Madrick, Jeff. "Why the experts missed the recessiuin," New York Review of Books Vol. LXI, No. 14 (September 25, 2014), pp. 66-68.

Markwell, Donald. John Maynard Keynes and International Relations: Economic Paths to War and Peace (Oxford: Oxford University Press, 2006).

Rahn, Richward W. "The decline of America? The federal government is ctively eroding noh our economic nd civil liberties," The Washington Times (October 26, 2021), p. B2. Dr. Rahn is Chairman of the Institute for Global conomic Growth and Mcon.

Van Zanden, J.L. "Wages and the standard of living in Europe, 1500-1800," European Review Economic History Vol. 3, No. 2 (1999), pp. 175-97..











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Created: February 9, 2003
Last updated: 6:21 PM 7/25/2019