American Economic Progress; E Asmus and D. Billings

Complemented on the American continent by the rich endowment of land and resources and a limited but literate population, but unencum bered by vestiges of feudal restric tions, the technologies begun in Great Britain were utilized by the industrious people of this new nation. In addition, the presence of a poDr. BarryAsmus is an economist and national speaker living in Phoenix, Arizona. Dr. Don Billings Is Pro fessor of Economics at Boise State University. This article is taken from their book, Crossroads: The Great American Experiment, pUblished In 1984 by University Press of America. Reprinted by per mission of the pUblisher. litical and social environment which rewarded work, encouraged savings and investment, and in large part left individuals alone in the pursuit of their own interests, also contrib uted importantly to the transfor mation of the American economy. A crucial ingredient in that ad vance was a set of economic insti tutions which provided the impetus for individuals to better their own condition: private ownership of the means of production, voluntary ex change in open and free markets, and a price system which assigned resources to their highest and most valued uses.

The benefits attributed to the "open qualities of American society" produced a willingness to consider and adapt new and better ways to get things done. In this environment, the propensity to "truck, barter, and ex change" was encouraged, and "the uniform, constant, and uninter rupted effort of every man to better his condition," in combination with the richness of the American conti455 456 THE FREEMAN August nent's natural environment, gener ated the most remarkable increase in wealth and progress mankind had ever experienced. Viewed as a long term process of raising living stan dards, competitive capitalism in the nineteenth century was eminently successful. From a Feudal System to One of Private Property In contrast to the success of private property arrangements in the nine teenth century, it is interesting that in the earlier phases of the British colonization of the eastern seaboard, attempts were made to transfer com munal arrangements of land own ership to America. The Virginia Company, for example, tried to es tablish a structure of property rights reflecting the late feudal system of Europe. Such efforts at common ownership discouraged individual motivation, however, and gave set tlers little incentive to better their own condition. The Virginia Com pany was eventually dissolved, and a system of private property rights in the land, a system of "freeholds,"

came to dominate American agri culture. Following the successful revolu tionary break with England, the new nation sought to establish the insti tutional arrangements necessary for economic growth. This would in volve, as Adam Smith had said, se curing the property rights of individuals, extending the market so that specialization might be encour aged, and insuring that gains in pro ductivity might become part of a self sustaining process of economic ex pansion. Fundamental decisions were made which increased and en couraged the role of the private sec tor of the economy and left relatively few functions for government. As an example, a significant con sequence of the constitutional con vention in Philadelphia in 1787 in volved the prohibition on tariffs between'the several states. Drawing on the ideas of Adam Smith and his Wealth ofNations, free'trade was en couraged among the United States.

The relevant market was thus ex tended and future economic expan sion was assured. The provision in the new Constitution for a patent system further strengthened private property rights, thereby encourag ing inventions and entrepreneur ship. The increased security of in dividual rights to property in combination with provision for the enforcement of private contracts laid the basis for a large and continuous increase in production and wealth. Since rights were protected and en forced, business risk was limited to that arising from the vagaries of the market, exclusive of government changing the legal, environment. Thousands upon thousands were willing to take a chance at reaching the golden ring.

1985 AMERICAN ECONOMIC PROGRESS 457 This constitutional period set the stage for the economic revolution which would follow in the nine teenth century. As stated in the highly acclaimed American Eco nomic Growth: "In short, the whole structure of the institutions and the legal enactments of this period, was designed to encourage the growth of the private sector by reducing trans~ action costs, with the supplemental result of shifting the private-public mix in favor of the former." Govern ment was largely restrained to pro tecting property rights and private individuals were allowed to work and produce. The rise of competitive capitalism in the United States had its impor tant beginnings in those early years of the Republic. The emphasis on private property and, therefore, pri vate initiative was also stimulated by a massive shift of resources from public lands to the private sector, culminating in the Homestead Act of 1862. The slow transition to an in dustrialized America and the pace of economic growth was quickening in the early decades of the nineteenth century.

Civil War Interrupts EconomicProgress The coming of the Civil War rep resented a dramatic interruption in this economic progress. It was an es pecially important watershed pe riod. Some industries, mostly in the North, such as woolen textiles, shoes and boot manufacturing, sewing ma chines, and farm machinery were stimulated by the hostilities. Other industries were contracting. Accord ing to Dudley Dillard and other eco nomic historians "... the Civil War was a major disrupting influence to American life and retarded, per haps, as many economic activities as it stimulated." Based on available statistics on employment and the value of output by economic sector, it is apparent that the Civil War separated an agricultural America from the industrial economy that followed. After the CivlI -War, progress be gan again. One author has called that period until the eve of World War I "the most rapid and striking transformation of a major social or der in the history of mankind."

Other writers and historians have characterized this time as the "Gilded Age" or the "Age of Ex cess." In any case, the United States was propelled to the rank of being the wealthiest country and having the highest standard of living in the world. While progress was uneven due to cyclical changes in the level of economic activity, the real mate rial standard of living, as measured by the real earnings of nonfarm em ployees, showed an accelerating ad vance. Not only did real wages rise significantly, but at the same time the work day was becoming shorter.

458 THE FREEMAN August The average work day in manufac turing and mechanical establish ments was 11.5 hours in 1850, 9.8 hours in 1900, and down to 8.5 hours in 1920. Dorothy Brady, in American Economic Growth, observed that " ... the refinements that house holds with modest means were in troducing into their homes in the 1830's and earlier, became available to the poor. By the 1870's such ar ticles as beds, bedding, chairs, ta bles, dishes, knives, and forks were considered indispensable even to the poor." And these material gains, it must be remembered, occurred be fore labor unions were at all signif icant as a portion of the American labor force. UnprecedentedGrowth Historically, we must remind our selves, economic progress has been very slow throughout the world. Generations and even centuries would pass without noticeable dif ferences in the standard of living. This so-called "Age of Excess" in the United States, and the earlier In., dustrial Revolution in Great Brit ain, represented an unprecedented break with the past. Per capita in come was doubling every 30 years, and Americans came to expect a con stantly improving economic life. The die was cast, there was no turning back. The agricultural revolution in America was giving way to an in dustrial revolution. By the late 1870's, employment in non-agricul tural occupations exceeded employ ment in agriculture. Between 1860 and 1910, the percentage of the labor force engaged in agriculture fell from about 60 percent to approximately 30 percent. Today it is less than 3 percent. The value of output in the manufacturing sector surpassed that of agriculture during the decade of the 1880's.

The massive and rapid transition to a fully industrialized economy was assisted by the building of the trans continental railroads. While rail road building involved a curious "mixture of government paternal ism," it was essentially a laissez faire philosophy that marked public policy. Government was careful not to offend the strident individualism of the post-Civil War period. In order to stimulate and accelerate the pace in the construction of a transconti nental rail connection with the West, more than 130 million acres of land adjacent to railway right-of-ways were granted to railroad companies between 1850 and 1871. For exam ple, the Union Pacific received 20 million acres, while the Northern Pacific acquired 42 million. Never theless, and in spite of these land grant subsidies, the actual construc tion of the railroads was with pri vate money and was carried out through the entrepreneurial skills of the Vanderbilts, Goulds, Hills, and Morgans. Capital was more gener1985 AMERICAN ECONOMIC PROGRESS 459 ously available in part because of the decline in the federal debt during this period. On the eve of the Civil War there were roughly 30,000 miles of track, by 1890 there were 170,000 miles, and by 1916 there were 250,000 miles. The railroad con struction boom created a truly in tegrated national market for the products of American farms, mines, and factories. Indicative of this growth in markets was the growth in ton-miles of freight hauled. In 1859 railroads carried 2.6 billion ton miles, by 1890 the figure had ex ploded to 80 billion ton-miles.

Specialization Since more geography meant ex panded markets, economies of scale could be attained by specialization in production and distribution. Mass production techniques were encour aged by the new national market, and assembly line principles of pro duction were employed by a number of industries. Automobile companies adopted the "process experiments" conducted by the slaughterhouses and grain mills. The "disassembly" ofpigs in slaughterhouses during the first decade of the 20th century pro vided the guidelines followed by Henry Ford's assembly line in the second decade. The "rationalization of the work process" permitted larger volumes of production and lower costs than would have other wise been possible. In 1916, the Ford Motor Company sold more than one half million Model T's at a retail price of less than $400 and shipped them all across the country on the radically improved and integrated national transportation network.

Ford's experiment, which relied on an industrial system that used "the principles of power, accuracy, econ omy, system, continuity, speed, and repetition," made available to the growing middle class the automo bile: America's great "freedom ma chine." Henry Ford literally placed a steering wheel in the hands of every working person in America. This is a feat which most industrial ized countries of the world have still not totally accomplished. The Great Entrepreneurs In the process of rationalizing techniques of production, the great entrepreneurs of the Gilded Age brought to the American people ever greater quantities of consumer goods at continuously lower prices. Since an essential input to most, if not all, of the new industries was steel, it was Andrew Carnegie who, through his entrepreneurial leadership and production techniques, filled the void and brought remarkable results.

Writes William Greenleaf: Carnegie's unrelenting insistence of cost-cutting through progressive technol ogy reduced the price of a ton of steel from $65 a ton in 1872 to $20 a ton in 1897.

460 THE FREEMAN August Between 1889 and 1900, Carnegie boosted his annual steel output from 322,000 tons to 3 million tons. During that time his profits increased eight times over, reach ing $40 million in 1900. Rising productivity also meant higher real wages for steel workers. In the process of searching for en trepreneurial profits, Carnegie's ef forts generated large increases in the output of steel at drastically lower prices, but higher wages for those in the industry. Unfortunately, the clearly beneficial results of Carne gie's cost cutting efforts are still viewed by many as selfish profiteer ing. This is a most unfortunate twisting of the facts. John D. Rockefeller was another "Robber Baron" who, with the as sistance of entrepreneurial partners Samuel Andrews, Henry Flagler, and his brother William Rockefeller, led the race in petroleum refining and distribution. This competitive race, in which Rockefeller set the pace for a while, revolutionized the average American's life and stan dard of living. The Rockefeller or ganization began refining petro leum products in 1865. By 1870, Rockefeller's share of total refined output was 4 percent, and at that time there were approximately 250 independent refiners. By 1880 the Rockefeller share was more than 80 percent, and the number of indepen dent refiners had fallen to less than 100. The decrease in numbers was encouraged by the generally defla tionary movement in prices during the 1870's, and by the economies of large scale production associated with the introduction of destructive distillation (petroleum "cracking").

The myth ofpredatory pricing, as the source of Rockefeller gains, has been soundly refuted by John S. McGee in a 1958 article in The Journal ofLaw and Economics. In actual fact, rival refineries were frequently pur chased by the Standard Oil Com pany at "outrageously" high prices. One George Rice in 1882 literally tried to "bribe and blackmail" Stan dard Oil into paying a price for his refinery which was inflated by a fac tor often. Standard Oil For economic growth and Ameri can living standards, however, we are interested in the implications of the competitive forces for costs of production and consumer prices. During the period in which the Rockefeller interests were supposed to have monopolized the petroleum industry, Dominick Armentano has captured the flavor of what was in fact going on: Between 1870 and 1885 the price of re fined kerosene dropped from 26 cents to '8 cents per gallon. In the same period, the Standard Oil Company reduced the av erage costs per gallon from almost 3 cents in 1870 to 0.452 cents in 1885. Clearly, the firm was relatively efficient, and a 1985 AMERICAN ECONOMIC PROGRESS 461 good share of that efficiency was trans mitted profitably to the consumer in the form of lower prices for a much improved product.

As costs and prices continued to fall into the twentieth century, Stan dard Oil experienced a progressively less important and less secure posi tion. Fuel oil, lubricating oils, and gasoline began to replace the kero sene age; new crude supplies were discovered in the Southwest and California; and additional inte grated petroleum companies entered the competitive oil business. Stan dard's share of crude supply fell from 34 percent of total market supplies in 1898 to just 11 percent in 1906. On the eve of the government antitrust suit against the Standard Oil Com pany in 1911, its share of the petro leum products market was 64 per cent, down from a high of 88 percent in 1890. The per gallon barrel price of refined oil, which had been 9.33 cents in 1880, declined to 5.91 cents in 1897, and continued to decline into the twentieth century. Yet in the face of these facts, on May 15, 1911, the United States Su preme Court ruled that the Stan dard Oil Company had "unreason ably" conspired to restrain trade, and, therefore, was in violation ofthe Sherman Antitrust Act of 1890. The socially beneficial effects of lower prices, and very large increases in the production and consumption of petroleum, was apparently not conCrossroadsis an important and comprehensive presentation of the rise, decline, and restora tion of freedom and the market economy. The authors do an outstanding job of introducing readers to the history and na ture of the American free mar ket experiment. Copies can be ordered from the American Studies Institute, 3420 East Shea, Suite 266A, Phoenix, Ar izona 85028: Paper $14.25, Cloth $26.75. Pleaseadd $1.50 for shipping and handling.

sidered at all. The accepted meaning of monopoly-the restriction of out put and higher prices-was to be turned on its head. Standard Oil was to be dissolved for increasing output and lowering prices. This case is just one example of where government chooses to interfere with economic activities regardless of the actual situation. In our own time, govern ment agencies find fault with IBM for increasing production and low ering the price of processing infor mation through innovation. If the price is too high, then government charges monopoly. If the price is too low, government charges unfair competition. What about the same price? Then, of course, the govern ment charges price fixing. The gov ernment rule seems to be: no matter the price, it is suspect.

462 THE FREEMAN August Competition and Government in the Gilded Age In· fact, the conventional wisdom that the American economy in gen eral was controlled by giant monop oly trusts around the turn of the century is itself incorrect. As the railroad tycoon James J. Hill said in 1901: "... the trust ... came into being as the result of an effort to ob tain ruinous competition." Accord ing to the economic historian Ga briel Kolko, monopoly during this period "... was the exceptional and not routine characteristic of most in dustries, and the use ofthe term 'mo nopoly' or 'trust' by defenders of the status quo, was based more on wish fulfillment than on economic real ity." Kolko quotes from an issue of The Iron Age in 1900 which sadly summarized the difficulty encoun tered in short-circuiting the compet itive process: Experience has shown that very few of the promises of the promoters of consol idation have materialized. That some of them are satisfactorily profitable is un doubtedly true . . . Others are less so some are conspicuously unprofitable: some have dissolved, and more will have to dissolve within the next two or three years.

The pressures of the inherently competitive open market system re quired that those wishing to protect themselves from new and potential competition had to turn to government for aid and protection. But imagine the kind of world we would have if business was generally suc cessful in hiding behind govern ment. Instead of solving problems through individual initiative, people would be encouraged to lobby, dem onstrate, coerce, threaten, and use government power to their own ends. In most cases, government action is synonymous with monopoly and the naked use of power. Seldom can a company maintain a monopoly po sition for long without the mantle of government protection. Profits at tract entry. The life ofthe incumbent is quite uneasy, and they must con stantly be looking over their shoul der for potential competitors. How ever, through licensing, controls, import restrictions, tax credits, de pletion allowances, and other de vices, government can successfully impede rivalry, and, hence, reduce or eliminate competition. In reality, government is controlled by power ful special-interest groups, and it is these minority interests that, with out exception, work at cross-pur poses to the private interests of the average citizen. It is this movement to state enforced monopoly which Gabriel Kolko has termed "The Triumph of Conservatism."

In general, then, most historians have this thing backwards. Seldom have antitrust laws ever been used against a firm that was restricting production and raising prices, but al1985 AMERICAN ECONOMIC PROGRESS 463 most always the firms that get pros ecuted are the ones that expand pro duction and lower prices. The result is that they get a larger market share. The question is: Should that be construed as bad? Suits are brought against these firms be~ause they attract and hold customers day after-day, and conduct transaction after-transaction in markets where new entrants are always a realistic possibility. In the final analysis, these firms are merely being respon sive to the consumer because they recognize that the consumer is king. As an example, and contrary to pop ular assumptions, the Interstate Commerce Commission was not cre ated to regulate a natural monopoly. It was lobbied in the Congress by in fluential eastern railroad interests as a means of enforcing their price fixing agreements and other cartel type behavior; enforcement which had proven to be impossible in the free and open market place. Kolko summarizes this more realistic perspective: Despite the large number of mergers, and the growth in the absolute size of many corporations, the dominant ten dency in the American economy at the beginning of this century was toward growing competition ... As new compet itors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many im portant businessmen that only the na tional government could rationalize the economy . . . ironically, contrary to the consensus of historians, it was not the ex istence of monopoly that caused the fed eral government to intervene in the econ omy, but the lack of it.

The Great Transformation On the eve of World War I, after a century of remarkable progress in the United States, economic growth and its benefits for raising the stan dard of living were evident for all to see. It was a time during which cap italism (cynics call it "Social Dar winism"), was given a chance, the role of government in economic af fairs, while substantial in some in stances, was quite limited in scope. Living standards, longevity, and eco nomic opportunity grew to levels un imaginable merely a hundred years earlier. Though progress was un even, and some people grew fabu lously rich, it was in part the poor who experienced the greatest im provements. By the end of the nine teenth century, America's poor en joyed material living standards significantly higher than most of the world's population. Something indeed must have been right in America. If not in the view of many historians and their social theories, then in the actions of the "teeming millions" who immigrated to the United States by voting for competitive capitalism with their feet. The truth was out that America offered economic opportunity and 464 THE FREEMAN political freedom. Between 1860 and 1890, more than ten million immi grants came to America to seek their fortunes. During the period between 1895 and 1915, on the average, more than one million immigrants a year came to the United States. Thomas Sowell, a contemporary economist, documents in his Race and Econom ics, the important degree to which these immigrants, mostly carrying just the clothes on their backs, were largely assimilated, within a gen eration or two, into the mainstream of American economic life.

The great increase in wealth and economic progress in the nineteenth century, which was shared by most if not all Americans, can largely be attributed to the revolutionary ideas of John Locke, Thomas Jefferson, and Adam Smith. They redefined the relationship of sovereign individu als to their government, and clearly demonstrated the socially beneficial results of a system of natural liberty. Political and economic freedom, af ter all, go hand-in-hand, and they produced living standards which even Karl Marx recognized would occur. But "capitalism" in many quar ters is, nevertheless, perceived to be morally unacceptable. While agree ing to its material advantages, aca demicians, pastors, parlor groups, people in the media, and other word merchants, believe capitalism is un worthy of compliment or retention. Even in the face of Stalin and Mao, the gulag and bure~ucracy, and re peated socialistic failures world wide, the dream lives on that there exists a better system than capital ism. Perhaps there is. But history, and especially the United States and its economic system during the nine teenth century, shows clear and overwhelming evidence that private ownership and limited government produce a system of natural liberty that allows man more freedom, eco nomic opportunity, and a better chance to improve himself than any other system known to man. Though falling far short of utopian dreams, it would seem far ahead of whatever is in second place. (I BIBLIOGRAPHY Armentano, Dominick. Antitrust and Monop oly: Anatomy of a Policy Failure. New York: John Wiley & Sons, 1982.

Davis, Lance; North, Douglas C., et. al. Amer ican Economic Growth: An Economist's His tory of the United States. New York: Harper & Row Publishers, 1972. Dillard, Dudley. Economic Development of the North Atlantic Community. Englewood Cliffs, N. J.: Prentice-Hall, 1967. Greenleaf, William, ed. American Economic Development Since 1860. New York: Harper & Row Publishers, 1968. Kolko, Gabriel. The Triumph ofConservatism: A Reinterpretation of America's History, 1900-1916. New York: Free Press, 1977.