MAIN IDEA:

The main idea of this book is to review history of capitalism in America and extract from it some lessons for current situation when after the great recession lots of people once again loosing believe in this system. Author also trying to suggest some solutions, but they are not going beyond typical suggestions of better managing entitlements and decreasing regulations, albeit without any clear explanation how to achieve either one of these objectives.

DETAILS:

INTRODUCTION

Author starts with imaginary meeting in Davos in 1620 when in his opinion nobody would predict America becoming the richest and most powerful country in the world with 5% population and 20% of world GDP. He credits capitalism and democracy for this development and revers to property rights as foundation of American DNA. Author discusses key engines of American development: intellectual property protection, individual freedoms to think and act, mass immigration, free market that forces increase in productivity as the best way to obtain wealth, and the most of all creative destruction that constantly moves the country ahead. At the end of introduction author points out the downside of all these: constant presence of losers who were left behind who respond by banding together in unions, gangs, and most important political class: groups that make living by violence. After hundred years of struggle these people succeeded in robbing America of its dynamism and binding its economy with myriad entitlements and limitations.  Author indicates that he believes that there is need for radical change in line with Swedish model that was implemented after social-democratic way brought Sweden to stagnation.

One: A COMMERCIAL REPUBLIC: 1776-1860

The history in this book starts with creation of America, which practically inherited its democratic rule and market economy from colonial times. Moreover, the revolution was mainly prompted by attempt to remove these conditions. Author describes mainly subsistent economy that existed at the time and was based on agriculture, horsepower, and wide availability of land. However despite being subsistence economy it was managed by people who actually were productive, culturally conditioned to use market for exchange, and armed so they could keep product of their labor for themselves. Author pays a specific attention to the fact that original Americans were busy people always trying to do something to improve their lives rather than demand from somebody else to do it for them. Initially it meant extensive growth: bring immigrants and start cultivating more land, but sometime after war of 1812 it start turning into intensive development when economy was growing faster than population.

Two: THE TWO AMERICAS

Two individuals represented the original America’s divisions: Jefferson with his ideal of farmer’s republic and Hamilton with his ideal of industrial capitalistic republic. It then morphed into North with its free labor and South with its slave labor. Here is interesting table of South wealth structure in which between 1/3 and 50% of wealth was market value of slaves:

Author does not provides equivalent table for North were taxable labor was belonging to individuals providing this labor. However the difference between development with free labor and slave labor nicely demonstrated by GDP per capita table showing that break in performance actually occurred in 1830-40 and it remained wide until in 1960s southern labor also become free:

The two Americas went to war with each other and capitalist North based on free labor won, more or less uniting country under capitalism.

Three: THE TRIUMPH OF CAPITALISM: 1865-1914

This chapter is about the period in American history when capitalism was pretty much not restrained neither by slave owing aristocracy of South nor political aristocracy of the North, mainly because the former perished in the Civil war, while the latter was only in process of forming. This process was continuously disrupted by impact of western movement when new land, gold, and other resources dramatically increased wealth of country. This wealth was concentrating in hands of Midwestern tycoons rather than adding to the wealth of Eastern aristocrats, which made it available for massive development of the middle of the country. Important factor here was that it was not only natural resources but also growth of productivity as represented in this graph:

Four: THE AGE OF GIANTS

This chapter is about industrial giants who rose to huge economic power during this period mainly by achieving significant advantage in productivity that allowed them dramatically cut prices and push competitors out of business. The interesting thing here is that while author talks about dramatic growth of corporations and role of innovation, the final result of this was overwhelming control over economic development in hands of professional management or in other words corporate bureaucrats who become less and less interested in innovation and directed their efforts more to maintaining standardized mass production and avoid disruption by small, but effective competition.

Five THE REVOLT AGAINST LAISSEZ-FAIRE

The revolt came from the part of population who found themselves not competitive in the new industrial economy and started looking for the way out. Big part of it were farmers that believed that their problems came from tight money supply based on gold so they demanded silver and found their champion in Bryan. The other, more important movement was coalition of new immigrants who found that their labor was not valuable enough to provide for their needs and educated classes who found pretty much the same: free market needs for their labor could not provide levels of compensation they believed they entitled to. They all saw solution to their problems in increased government intervention: force employers to agree to better condition of work than could be achieved by individual bargaining, limit market power of corporation that could not be achieved by competition, government supported jobs that would put their holders outside of market pressure.  This created progressive movement that succeeded in increasing government expenditures and intervention in economy. Author discusses details of how it happened and provides a few graphs demonstrating results:

There were also two big cultural forces that promoted increase of government. The most important was American believe in education as the way to rise to higher level in society both materially and psychologically. This created the chronic oversupply of highly educated individuals that could not find place in market economy on par with their perceived self-value and therefore directed their effort to obtain it via government interference. The other factor was the end of frontier that removed safety valve letting out individuals who were not ready accept live of employee in somebody’s else business and did not have resources and/or abilities to start their own.

Six THE BUSINESS OF AMERICA IS BUSINESS

Here author moves to period after initial triumph of progressives in 1900 – 1920 when progressive success combined with war economy and big government excesses of Woodrow Wilson lost support of population. It was period of “do nothing” Harding and Coolidge administrations that freed economy at least to some extent and produced economic miracle of 1920s including self-fixing brief depression of 1920-21. Author reviews multiple technological achievements of this era when car, radio, electricity, and many other new technologies were rapidly implemented. Author also reviews changes in business culture when utilitarian approach as represented by Henry Ford was pushed out by more hedonistic approach as represented by Alfred Sloan. Author discusses radical change in resource allocation brought in by formation of financial industry, providing massive consumer loans, formation of unified countrywide market with chain stores like Piggly-Wiggly. This development was supported by dramatic improvement in transportation and communications, allowing countrywide optimization of allocation of labor and capital. At the end of chapter author stresses that it all created tensions that later led to the great depression: growing debt, unrestricted financial speculation, culturally diverse population with significant number of recent immigrant in main centers of the country, and, also very important, unwarranted growth of believes in engineering approach to the management of society as represented by Herbert Hoover – probably the most experienced and qualified societal engineer ever.

Seven THE GREAT DEPRESSION

This chapter describes the great depression and author defines its causes in such way:

Author also discusses in details monetary aspects of the depression, expressing view that the problem was not with unsustainable gold standard, but with fixing exchange rates to dollar at prewar levels. In short author characterizes the problem as necessity of transformation of economic center from Britain to America that failed to be conducted smoothly due to “European pride and American irresponsibility”. Author also defines as one of the main causes of depression low effectiveness of American political system that was not designed for massive internal intervention and therefore failed to respond in time to markets breakdown. The author discusses Hoover’s failure to contain depression and FDR’s New deal, which was pretty much the same policy that Hoover had, only on much wider scale, without restrictions of constitution, and with massive support of intellectual class. Author points out that FDR’s failure to revive economy was combined with his success in providing substitutes for healthy economy in form of safety net: unemployment benefits, social security, mass unionization, and government expense. The war and economic mobilization that provided more than full employment created illusion that FDR overcame depression, while the victory in the war made not only hero out of him, but also sealed up, at least for a while, his New Deal achievements as permanent characteristic of American system.

Eight THE GOLDEN AGE OF GROWTH: 1945-1970

This chapter is about the most prosperous time when America was one and only big industrial country that came out of WWII without any destruction on its territory and consequently become producer of just about everything needed for the significant part of the world. This golden age created quite unreasonable believe that such condition will last forever, resulting in what author calls corporate imperialism – dominance of big American corporations at home and abroad supplemented by increasing psychological unhappiness of population in both places. Obviously it could last only until economies in Europe and Japan would be restored and once again become competitive.

Nine: STAGFLATION

Some 20 years after the end of war world capitalist economies mainly recovered and American golden age in production ended. First Germany, then Japan, and later on other countries start producing goods as good or better than American and sell it at cheaper price. That’s when unsustainable entitlements, corporate benefits, and government regulations demonstrated how much they are burden on economy, which responded by stagflation: combination of huge inflation and economic stagnation happening at the same time – something that Keynesian economist confidently stated could not possibly happen. Author provides a few graphs that demonstrate decline of core American industries: steel and automotive.

Ten THE AGE OF OPTIMISM

This chapter is about 1980s, Reagan, and changes in American attitudes away from big government, that brought stagnation, to more economic freedom for American business and less accommodation for American enemies. It is also about one less noticeable, but most important development – revolution in finance that allowed much more efficient resource allocation via junk bonds, mutual funds, IPO, and other mechanisms. It was beginning of the globalization process of combining multiple economies in one supply chain. Author discusses change in America during this period from manufacturing to service economy and massive implementation of information technology.

Eleven THE GREAT RECESSION

This is about great recession of 2008, its causes and consequences. Author defines causes as exuberance of 1990s that followed fall of communism and countries of eastern block joining one world economy. Author especially stresses his believe that one of reasons was under-consumption, when consumption could not keep pace with growth of savings, causing inflation of such assets as housing in USA. This was combined with securitization of assets leading to overly complex structure of securities that masked quality of underlying loans, resulting in bubble that eventually burst. Author avoids mentioning his own role as FED chairman in allowing this to happen under political pressure, but praises work of his followers who, in his opinion, prevented this recession turning into depression by pumping practically unlimited amount of liquidity into the system.  He explains the following up stagnation by decrease in the growth of productivity that started even before recession and provides graph to demonstrate this:

Twelve AMERICA’S FADING DYNAMISE

Here author discusses declining economic dynamism of America and explains it by country’s move away from creative distraction to less risky behavior. He discusses multiple reasons: decrease in quality of education, aging of population, decrease in quality and scale of immigration and disappointing result of IT revolution. Generally author rejects these causes and points out to growth of entitlements and regulation that stifle economic development.

CONCLUSION

In conclusion author discusses what he believes is downside of creative distraction – its losers who create political pressure against capitalism. He points out that even if its costs are visible, while benefits are not so much in reality it was capitalism benefits that created mass prosperity from cheap and abundant food to better work conditions and much more. Author reviews changing social structure of America from 1800 to 2000 and expresses believe that technological improvement will allow overcoming current problems as it pretty much did before.

MY TAKE ON IT:

It is a nice historical overview, but it is not going deep enough into causes of the problems. In mine opinion there is not enough attention to people who rise again and again against capitalism despite dramatic increase in wealth and quality of life in America, especially if compared with any socialistic and communistic experiments conducted in XX century with catastrophic results. I’d like to see much more clear analysis of anti-capitalist forces, layers of society that constitute these forces, and reasons for theirs increasing power. I would like to see clear understanding of the situation and some ideas how to fight it, because this really is an ideological war in which one side has difficulty to understand that they are at war. I actually believe that XXI century will produce final victory of capitalism and destruction of all forms of socialism that will lose supporters similarly to what happened to National Socialism after military defeat. The question is how big price humanity will pay to achieve this result.