Tag: economics

The Past 100 Years

A lot has been said about our progress over the past 100 years. And though this article may seem to state the obvious, it’s good to have a recap. Progress has come in two forms: social and economic. Since much of social has been fueled by economic, let’s start there.

Economic

Economist, Robert J. Gordon, says that before the Civil War (1860s) the average American home was completely isolated. But by 1940, it was connected in five ways:

  • electricity
  • gas for heat
  • running water
  • waste disposal (sewage)
  • telephone

Before electricity, food was cooked on a coal or wood stove. There were no refrigerators, washing machines, or dryers (so groceries were bought often and laundry took forever), and air conditioning was out of the question. Not to mention electric light, electric fans, or anything else we plug in.

Before hot water tanks and gas furnaces, buildings were heated by coal or wood stoves. Running water saved the hours of lugging it from river or well. Indoor plumbing was not only more convenient than shuffling to the outhouse, it saved us from waterborne diseases (like cholera). And telephone allowed people to speak with someone not in the same room.

The internal combustion engine along with cross-country highway systems got vehicles on the road and air travel, radio, and television really made things cook. Why? Because feeding all those horses took one sixth of all agricultural output and they left residue on the street (which stunk). Air travel allowed us to move faster than by ship or rail, and radio plus TV were remarkable means to educate and entertain.

These advancements affected more than personal convenience, they greatly enhanced economic productivity. For example, hand tools to power tools—can you imagine? Equipped with electricity and the motor, industry could now pump it out. So rather than making your own clothes, one could buy them. And instead of employing 50% in farming, we freed up many to create new industries.

Social

As living standards increased, we started to feel better about ourselves. Much of which led to social change. Here are the major steps:

  • mass education
  • freedom from strict religion
  • the women’s movement
  • birth control, divorce, daycare, and retirement
  • gay rights
  • combating racism
  • health care
  • democracy, communism, and the (hopeful) end of imperialism
  • society’s focus on children

The industrial revolution (early 1900s) forced society into mass education. No longer was a man able to earn a living by being taught by his father. And the same went for ladies. Primarily because of productivity, we went from 25% living in urban cities to 75%. These new jobs involved all sorts of things that required various forms of learning (and they’re still expanding).  

Educating the masses brought about a release from structured religion. No longer were followers willing to accept unnecessary laws in order to be spiritual. Former preachers taught that life was to serve God and only through suffering could one attain paradise, but that notion fell as believers began to think for themselves. And though many of today’s youth believe women were constantly held down, that wasn’t the case. Prior to the past 100 years, women were kept in domestic roles out of necessity. Just think of it. You lived on a farm. No electric appliances. No birth control. No disposable diapers. How could any woman join the labour force when she was so busy working? It wasn’t until we moved into cities (thanks to productivity) that women working outside the home was even possible.

Birth control not only allowed for smaller families, it empowered the sexual revolution. Prior to, society pushed abstinence because, as everyone knows, the pony dance makes babies. But once we got the pill, floodgates opened. Divorce came with the movement of women into day jobs. Now that both sexes no longer required each other for survival the quality of marriage became important. Daycare then followed to accommodate single parents and really took off when grandparents claimed their child rearing days were through. Once everyone got past the guilt of leaving kids with strangers, daycare was fully embraced and is now government subsidized.

Before the modern concept of retirement, seniors simply lived with their children, contributing what they could (domestic skills, child care). But thanks to health care and personal savings, old fogies started buying places in Phoenix. Another major shift. And without getting into detail, people are now allowed to be gay (also against old church rule).

Racism in first world countries was combated and mostly overcome. There are over 160 instances of slavery throughout history. Britain abolished theirs in 1807; France in 1848. But ending slavery was usually followed by forms of racism (since former owners were still convinced of superiority). Slavery in the US ended in 1865, with blacks getting the vote in 1870. But less than 30 years later, the Supreme Court ruled racial segregation was constitutional, paving the way for repressive Jim Crow laws in the South (remember, not all states were slave states). These laws legalized discrimination and stayed in effect until the Civil Rights Act of 1964. Along the way, activists supported entertainers like Nat King Cole (1943-1965) and baseball’s Jackie Robinson (1947), to make public opinion change. Within 45 years, America elected its first black president.

In 1917, almost every country was ruled by a monarch. Only 12 were democracies. Also in 1917, communism was born in Russia. Sure it failed, but progress sometimes involves making mistakes. In the words of Boris Yeltsin, then president of the falling USSR, “Communism was an experiment that should have been tried on a much smaller country.” And since the 1970s, there’s been a huge focus on our youth. People were obviously not happy with how they were raised, and together with smaller families and better economics, kids today are being treated differently. No longer are they viewed as takers to be seen and not heard. Instead, they’re regarded as social responsibilities and the role of being parent is revered.

Summary

It’s important to understand our place in history and that modern civilization is not complete.

In Canada, 64% of adults between the ages of 25-64 have a degree, college diploma, or trades certificate. A lot more than ever before. Education, along with inventions, have unleashed human potential the likes we’ve never seen. It’s easy to see this economically but don’t forget the social changes. And though it’s possible to still witness prior times right before our eyes (since not all countries enjoy the same standards), living in a developed nation has never been better. Bottom line: much of the world is brand new. Remember this when citing history—sometimes it doesn’t repeat itself.

Note: See Robert Gordon’s presentation at TED (the above references start at the 6 minute mark).

Free Market Economics

A number of issues come with a system based solely on free market economics—that’s why we don’t have one. Ours is a mixed economy where government through regulation, production, and social welfare co-exists with the private sector. Yes, the majority of outputs still come from business but we have public involvement to address issues like security and stability (the tricky stuff).

Regulations

The theory of capitalism rests heavily on the notion of competition. That if company A makes a better widget than company B, they’ll attract more customers and then company B must either adapt to this new condition or perish. The net result is better value for the consumer and better efficiency for our system. The competition model works well because business, in its quest for survival and profits, will always try to outmaneuver the other guy. Without competition where is the motive to get better or cheaper? That’s why governments don’t allow monopolies. And if circumstances dictate one is required, they run it themselves.

In theory land, free market thinking supposes that once prices soar under a monopoly, companies in other industries will be attracted to enter the market, thereby reinstating competition. Sure, this might work in the long run but how long can we wait? And depending on the complexity of the industry, competition may never come. Businesses too, wish for competition because companies are also consumers, so monopolies hurt them equally as well. As you’ll soon see, total price is a determining factor in overall sales. So even if it is a level playing field with all companies paying monopolistic input prices (say, for plastic), my business still gets hurt because the whole market diminishes. For example, if every company’s I-pod is priced at $1,000 instead of $100, people buy less I-pods.

Same goes for regulating safety standards and minimum wage. Today’s common wisdom dictates that an external body is required to insist upon rules being followed because business, through a total free market system, cannot always regulate itself. Total free market theory says if company A provides window washers with safety equipment, they’ll attract the best workers. But rather than wait for a bunch of guys to fall off a platform, we chose instead to force companies into buying workers a harness. And if this increases the cost of having windows washed—so be it. We don’t need efficiency to be perfect. Likewise with employee wages, ethical companies are handcuffed by their directive to maximize profits. So if they can get away with paying less—they must.

Production

It’s always an argument whether government should be involved in producing goods or services. Proponents think it’s a great idea because, in theory, this keeps taxes down. Opponents (i.e., free marketers) say the business world is not the government’s space. But there is one instance in which everyone agrees where governments must get involved and that’s when circumstances carry with them extremely high investment and risk. Take for example, the Canadian National Railway. How could any company get financing for such a massive project that carried such huge risk? Did anyone really know how much it would cost and whether people would use it? So projects of this nature are always started by the government—essentially as monopolies. Examples include not only CNR, but Air Canada, utility companies, and many instances involving natural resources.

Now once an industry can stand on its own—with viable competition—free marketers say it should. And we’ve seen this through the privatization of most telephone companies and utilities (e.g., AGT and BC Tel becoming Telus). Many have gone well but some have become disasters (those privatized before their time or not conducive to competition). CNR is now successfully private since the huge risk is gone and competition is provided by trucking companies and airlines. So we can argue over whether provinces should own their own liquor stores and operate insurance companies, but everyone agrees that it’s the government’s role to get certain industries off the ground.

Social welfare

Every economist knows that capitalism brings with it inherent brutalities. That as competition rewards Company A with greater market share, Company B falls. You might think employees of Company B just go work for Company A, but what if they’re in different cities?

Economies have natural ebbs and flows. Sometimes we’re at full bore and sometimes you really can’t find a job. That’s why we invented employment insurance. It’s not welfare for people who don’t want to work, it’s a social program to bridge the gap between previous and future employment. And it’s essential when the market naturally crashes. Do people sometimes take advantage? Sure, but people also cheat the private insurance industry. So what’s the difference? EI was introduced to curb part of capitalism’s inherent brutality and the overwhelming majority of free marketers support it.

Likewise with social security (public pensions). Early capitalists insisted that people take financial responsibility for themselves and provide for their own future. But it quickly became apparent that most people don’t have the necessary skills. Too many of us were entering our senior years without anything for savings, and how was anyone to correct poor past behavior when they were at their financial weakest? Society, through government, chose to force people into retirement savings. And the forcing part, along with pre-determined outcomes, meant they had to be administered by the feds. Free marketer rumblings soon silenced once everyone realized there had to be forced “pay ins” and dependable “pay outs.” (Most countries, like Canada, have a hybrid model where public pensions provide you with something and you’re on your own for the rest.)

Summary

We don’t have a totally free market system. No country does. We have a mixed economy, where government plays a significant role. Total free-market economics is a theory, and just a theory. It doesn’t work in common practice. Practical free marketers believe in some government regulation, some government production, and some social services (like, employment insurance and public pensions). The difference is they don’t believe in excessive regulation, unnecessary government production, or questionable social services. And this position is perfectly justifiable.

Note: CNR wasn’t actually started by the government but I’m sure you get the point. CNR was the result of government buying up private railways that went bankrupt, and was later privatized.