Notebook, 21 October 2015: What Really Built America and Why Only a Socialist Gets My Vote

It’s one of the most puerile notions I’ve ever heard that free enterprise is “the genius of America” (Barack Obama) or that it built “the greatest Middle Class in the history of the world” (Hillary Clinton). Yes, individuals and groups went out there and started businesses, the vast majority of which failed in under 3 years or were swept aside as others taking advantage of the economies of scale put them under, but that’s neither unique to Americans nor what built the middle class, because things never happen in a vacuum. Apparently, Clinton, Obama and everyone else who swallows that canard needs to return to elementary school.

First of all, President, Obama, America didn’t invent the notion of small business. Small businesses thrived for centuries before America came along:

1682, London Bridge covered with small businesses

Ponte Vecchio, today. Originally the market center for the butchers of Florence

The word we use today is souq, but the term bazaar was a Persian word originally used to describe an enclosed commercial space.

The Bazaar of (Ottoman) Athens, 1821

And how did Chaucer come up with the Merchant’s Tale (written sometime shortly after 1389 – a century before Columbus’ first voyage) if small, independent businesses hadn’t been around? Is it rather that the New World offered an outlet for the pent up demand of those in Europe who could to go into business for themselves? That being the case, how much of a “genius” does one have to be in order to replicate an economic system which had existed since antiquity? (After all, the Greek word for “marketplace” and civic space, we are told, is agora, where Socrates got into trouble.)

Hillary Clinton’s assertion that capitalism was responsible for the creation of the modern middle class is laughable. First of all, the term “middle class” is notoriously imprecise. In the 19th century, a segment of Americans began organizing themselves around shared religious beliefs and civic values which coalesced as an adult education and civics movement we now know as Chautauqua. The original Progressive movement emerged as the political expression of Chautauqua, and it continued until the early 1920’s when what were essentially a group of good-government and charitable advocates were branded as “Reds.” So one way to define the Middle Class is as a group of fairly successful Americans, not necessarily professional or managerial, who coalesced into a self-enforcing subset of pious and civic-minded people. They didn’t have to be wealthy, and fact is, hardly any of them were. Apart from the today’s official designation of someone earning at least X amount in income, it has come to connote those who are educated or professional or managerial or entrepreneurial or holders of some kind of asset, usually their own home.

My definition of middle class, derived from how I recognize “prosperity,” is more precise. You can always recognize the existence of the middle class (and of prosperity) when middle skilled, non-agricultural workers are able to acquire assets, again, usually their home. That’s the middle class. “Prosperity” demands one other condition, that low skilled workers have many chances to quickly acquire the skills enabling them to become middle skilled laborers and thus have the capacity to enter the middle class. I say “many” here because the opportunity to advance may not suit someone at any given point and the notion of prosperity demands that other opportunities become available in short order. In other words, if the low skilled worker has only one or two shots at advancing their career, then “prosperity” hardly exists. I specify “quickly” because the time to attain the skills, acquire the savings and finally make that asset (home) purchase can take years and if the worker’s career runs out (as the business cycle insures it will) before the asset purchase is both made and consolidated, then the condition of “prosperity” goes out the window as well. Under my definition, the ‘old” middle class (pre-1945) in America was restricted to merchants and professionals. Notice I don’t include managers, per se, in the definition of “Old Middle Class.” The information I’m seeing thus far indicates that they weren’t earning enough to make the jump into the asset ownership unless they were very fortunate, as a few were in the very neighborhood where I’m living today (a banking crisis and recession drove the landlord of this neighborhood, originally “housing for mechanics,” into bankruptcy and a few renters were able to capitalize on this by buying their homes at fire-sale prices). The Old Middle Class was not as we conceive it is today. Case in point: it’s not for nothing that TIME magazine doesn’t begin its History of the American Middle Class until after the Second World War. This is the gestalt Hillary Clinton conjures up when she expresses her devotion to capitalism. It is what most of us understand as “middle class” and my definition fits.

Important to Remember

The key words you want to remember about prosperity, not only in America but everywhere and at all points throughout history, are “cheap” and “free” – for those ready to exploit economic resources, anyways. Throughout most of human history, that “magical” economic growth has often been tied to resources and capacities gained through conquest, mostly land, slaves, timber and minerals, as well as rights of navigation and access to markets.

Today, this reality takes place in the exploitation of cheap labor in under-developed countries.

Of course, America prospered because GI’s came home with accumulated pay and took advantage of government housing and education benefits under the GI Bill. We also prospered because, by 1945, we were the only game left and essentially, the entire world was our captive market (in exactly the same fashion Rome became the commercial center of the Mediterranean Basin after defeating their competitive rival Carthage and in exactly the same way the Venetian Empire flourished after its defeat of it’s rival, Genoa), and the situation where American businesses could operate virtually without competition lasted until the early 1960’s when Britain and Germany began to get some of their edge back.

It’s hard to imagine that Hillary Clinton could ever have uttered her paean to capitalism onstage at the Democratic Debate had the Second World War never occurred. America would most likely still have been struggling to emerge from the Great Depression throughout the 1940’s and 1950’s, and the struggle between labor and management would’ve continued apace, with labor activists being murdered and federal troops and state militias being deployed on the side of management. We’d also have a thriving Communist Party:

CPUSA Rally, Chicago 1939

So How Did We Get This Monster Economy?

Up until about 1925, economic growth in the United States was both lackluster and uneven. Agrarian societies aren’t very productive, but this is the kind of growth we might expect in a socialist economy, putting a premium on social justice and economic stability over growth. Moreover, under a laissez faire regime, we find that banking crises and panics occur fairly regularly in American history. In the eighty-eight years from 1857 to 1945, NBER lists 21 recessions, averaging one every four years. The worst of these crises (economic shocks with a banking crisis attached) occurred in 1819, 1837, 1857, 1873, 1893, 1907 and, of course, 1929/1937. Depressingly regular, and these had a real impact on economic growth, which from 1789 to 1938 averaged a dismal 1.407%1. While we can all agree that recessions are bad, we ought to note that they’re worse for working people than for those with wealth. Presuming the post 1970 pattern holds true for prior periods (not necessarily true at all, but lets say for the sake of argument that it does), this means that on the whole, working people never recover from economic shocks. A pair of graphs illustrates how the wage share of GDP declines after every economic shock:

Wage Share of US GDP, 1970 to 2012

Please note, the wage share of GDP has gone into decline even though the number of people earning wages almost doubled throughout the same period:

Civilian Labor Force, 1970 to 2012

Aside: Look again at what happened to the wage share of GDP after every recession since 1970. Look at how sharp the drops are and how pathetic the recoveries. I once heard Barry Ritholz interview his friend Lakshman Achuthan of ECRI (you’ll have to dig for it, but I confirmed that it is archived there. Check the “BV” playlist) who both agreed that people shouldn’t be afraid of the business cycle, but for the reasons illustrated in the graphs above, I couldn’t disagree more. Ordinary people depending on a paycheck to survive should be very afraid.

However, America was filthy rich from day one—in land. Granted, that land was inhabited by First Americans, and the remnant of settler and trading communities of France and Spain, but nobody in America considered First American ownership of lands they used valid because they didn’t conceive of land ownership as we did and possessed no title to the land under American contract law. The result was that in effect the land was free and Americans settled untitled and undeveloped lands from the outset:

US Territory, 1783

US Population Density, 1790

US Territory, 1822

US Population Density, 1810

A Wikipedia editor went to the trouble of creating a rather wonderful animated GIF and placed it in the public domain2, illustrating the non-native colonizing of North America, and I gratefully share that with you now:

This land came with some important advantages as well. This vastness of free, undeveloped land available to us was arable and came with an impressive network of inland waterways for cheap transportation of people and goods:

Inland Waterways of the United States

Not to mention the exploitable natural resources, such as the towering, straight timber in Maine, beloved of both England’s and America’s sail-powered ship builders and extractable minerals:

However, the plucky colonists persevered in spite of all depressions and obstacles, and made very creditable beginnings. was resumed permanently in Virginia in 1715. The metal was found in Massachusetts in 1628 and later, a company was formed to work it in 1643. Rhode Island, Connecticut, New York, and Pennsylvania followed suit. Penn had discovered iron as early as 1683; but no forges are mentioned on his grants earlier than 1719-20. began in Missouri, then belonging to France, in 1720; and the old Southampton silver-lead mine was opened in Massachusetts in 1765. Copper mining is first heard of in Connecticut, the Simsbury mines being worked as early as 1709; but they were abandoned as unprofitable about the middle of that century. The Schuyler Mine, near Belleville, New Jersey, was discovered in 1719, and is historic as the scene of the building of the first steam-engine in America in 1793-94. Lake Superior copper was first mined by the whites in 1771, and in small quantities. In the early colonial days the settlers used wood for fuel, and charcoal for the forge and smelting-works. Coal, however, was found in Rhode Island in 1768, and mined for use. The great bituminous seam near Pittsburgh, Pennsylvania was struck in 1784. Previous to this time coal, was found in quantities in Virginia; and canals were cut, connecting parallel rivers to facilitate its transportation. By 1789, quite an export trade with adjacent colonies had been built up.

Not to mention the gold rush in 1849 or the oil rush in Pennsylvania in the 1850’s.

How could we have failed? All the economic inputs were here except one. We had to import most of our slave labor. In fact, the auction model of modern financial markets is a direct descendant of the domestic slave trade. Indeed, the spot where financiers formulated the Buttonwood Agreement to formalize a market for stocks was made on what was originally New York City’s slave market. This is no coincidence. Slavery was fundamental to antebellum American finance.

For Hillary Clinton’s dictum to be worthwhile, we would have to assume that no other political economy would have worked as well and the evidence for that is lacking. For example, one could, with equal justification, credit the American middle class expansion of the 1950’s to the (socialist) granting of GI Bill benefits to returning servicemen and to the collectivization of labor—the Strike Wave of 1946-1950. Or you could credit a socialist project, the creation of the world’s largest transportation network equally as much. Or this one. The overtly socialist regimes in the world emerged as a result of violent revolutions and share the faults of all violent upheavals regardless of ideological stripe. The resulting repression is the norm in such situations and has been since the French Revolution in 1789. In other words, Pinochet’s Chile and today’s Honduras are the equivalent of Castro’s Cuba. (Socialism does not equal totalitarianism. This is why Democratic Socialism matters.)

Which segues nicely into one last point, and I can’t emphasize this enough. America was spared the conflict and the threat of conflict which afflicted our competitors in Europe. We have been in continuous growth since 1865, even through the business reshuffling of various panics and recessions while Europeans experienced periodic warfare and apart from the cataclysm of the American Civil War, civil unrest (Whites were certainly spared this) and natural disaster:
The Revolutions of 1848
The Paris Commune, 1871
The pan-European Potato Famine, 1840’s (Globalization gone wrong. It has been determined that a million Europeans died through the import of a Mexican pathogen.)

Indeed, it is hard to imagine any kind of stability in Europe today had not Europeans had the New World as an outlet for their surplus population. It is also hard to imagine where the new inputs will come from or how any nation takes and holds market share anymore, and China is about hit that wall. God help them if real estate prices in Shanghai collapse. Our infrastructure, not all of which is physical, is all built out. American corporations are already free to to exploit any number of legal fictions in order to avoid taxes. All our basic economic resources are already spoken for. The days of free and cheap are over and that is the social and economic challenge facing us.

Essentially, the arguments of Barack Obama and Hillary Clinton are those of path dependency and the protection of vested (wealthy crony) interests. They may just as well come out of the closet and admit they’re Republicans. Without captive world markets, without massive public investment in infrastructure and business, without the extension of government benefits to millions of Americans, without an unbelievably rich and diverse resource base and without militant labor, both Barack Obama and Hillary Clinton expect us to believe that the American Middle Class Expansion would have happened just through the operation of free enterprise? Don’t make me laugh. In either a lack of intellectual acuity and honesty or political cowardice masked as pragmatism, their position, the position of centrists everywhere, is in the long run neither pragmatic nor sustainable (see the wage chart above). What we do know that it is certain that their supposed preferences, couched in leftist rhetoric, haven’t a chance of being realized as long as “leaders” such as these dismiss the initiative before it is even undertaken.


1Source, Statistical Abstract of the United States, 1789 – 1957, Census, Link.

2By Esemono (Own work) [Public domain], via Wikimedia Commons


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