Saturday, March 15, 2008

19th century economy vs. the consumption economy, part 1.

Part one of a multipart series. The biggest change economically in the past century was the transition from an economy based primarily on production to one that combined productive activity with mass consumption. The expansion of purchasing power and therefore consumption to the working classes proved to be a stroke of economic genius, and powered the growth of industry in the United States and Europe.

But what existed before this? The picture before the rise of the consumer economy was basically the one that Marx outlined in the 19th century. Capitalists employed workers whose wages tended to go as low as they could while still physically supporting them. A roof over a person's head, maybe shared with seven other people, some clothes, food, and maybe a few precious items handed down through the family. Workers produced but someone had to buy the stuff in order to make it all work.

Workers didn't have the money to buy the goods they made and capitalists were such a small class of people that even if they wanted to buy a lot of stuff it still wouldn't have supported the industries that they owned. The gap was filled by the small proprietor class, shop owners, small businessmen, people who were involved in occupations that were everywhere. They formed the first middle class. Workers worked, the small bourgeois (as they were called) sold, sometimes worked, sometimes employed people who made things on a small scale, and consumed, the capitalists consumed luxury items and planned the production of big business.

The middle class was the new addition to the picture, and was the development that capitalist boosters in the late eighteenth and nineteenth centuries pointed to as being evidence of progress. The theory was that these small producers, operating not just stores but workshops as well, had the motivation and the ability to innovate and to therefore make goods cheaper as well as coming up with new goods that satisfied needs to a greater degree than before. Business in the form of big business existed both before and during the eighteenth century but was linked to the aristocracy, the richest merchants, and to the state itself, which sponsored it for the enrichment of the country and for managed international competition with other nation-states. Corporate charters established these businesses, granted from the crown in England, which controlled the state. This process was seen as corrupt and feudalistic, as well as inefficient. The coming into being of small proprietors was thought to solve those problems by giving an incentive to innovation, to less corrupt dealings, and to somewhat popular control all through the competitive market place. But all was not what it seemed.

What happened eventually was that the small proprietors who innovated eventually became big businessmen, with their businesses resembling the state sponsored, corporate chartered, high business of the past. They went from being small people participating in a competitive market to being capitalists, who face a much more limited form of competition. In England the new big capitalists were gradually assimilated into the upper classes, much like the big traders and merchants who participated in state sponsored economic activity were in the seventeenth and eighteenth centuries. So the system that they thought would somehow break up the class divisions ended up by reproducing them. And then there were the workers.

The other side of the equation was workers originally serving feudal lords farming, then for a minority of them participating in large industries like weaving. The promise of what would become known as capitalism to them rested on the notion of the worker-proprietor, someone who practiced craft or a job and could hopefully open up his own business, practicing his craft, eventually. According to Eric Hobsbawm in his book "Industry and Empire", which is an economic history of England, originally some of the capitalists were people who worked for small proprietors, got ideas for innovations in their particular specialty, and set up shop doing their job in a way that incorporated those innovations. But it's really doubtful if the idea of competitive small proprietors could have been extended to all workers.

In any case, the people doing the innovating found out that increasingly specializing labor so that several people did the job that one person might have done lead to more efficient production. Instead of one person doing a skilled trade like shoe making, for instance, people could now focus on one step of the process, then hand the shoe over to another person, who did the next step, who passed it onto a third person. It was an innovation not just in design, which is what we usually think of innovation as, but in working techniques, and it signaled the birth of the industrial worker, who got father and father away from the possibility of eventually setting up shop for himself as the production process got more complex. And with a reduction in skill necessary to do a job came a reduction in wages.

But the middle class wasn't totally eradicated. It still existed. Progress, although much faster than before, was still relatively slow because of the lack of a really large market to buy the goods that were produced. This was helped somewhat by the invention of the modern banking system, which gave capitalists the leeway to make expensive innovations on credit with the hope that they would lead to greater productivity and profits, and by the development of the stock market, which did the same thing in a way, but the problem persisted. Some of it was solved through formal imperialism, which we'll deal with later. No matter how much credit and investment made financing flexible, the basic slow progress of capital accumulation persisted, and the schemes created economic instability by becoming more and more precarious. Because of greatly increased efficiency in production some of the benefits of capitalism trickled down to the working classes in terms of somewhat more affordable goods, but it wasn't enough. Competition also fed instability in the form of busts and booms, where capitalists overinvested and overproduced and then found themselves unable to sell their wares, leaving them with both excess goods and excess capacity leading to unemployment.

There needed to be a way both to stabilize production and to create a base that would enable industry to grow on a large scale. After the Great Depression, or during the Great Depression, economists hit on the idea of using the working class as the anchor for the capitalist system through reversing the tendency towards complete proletarianization somewhat. Instead of wages being permanently pushed down some of the wealth would be shared with the workers themselves, raising their standard of living. With a raised standard of living would come the ability to buy more complex products beyond the basics, not just food, clothes, and maybe some precious luxury items but furniture and other goods that normally people in the proprietor class were able to afford. The working class was more stable than the proprietor class anyways, which saw itself shift around, be partially destroyed by increasingly large capitalist businesses, reinvent itself, and generally experience turbulent times. But workers were always there. According to Marx this class was doomed to die out, being replaced by capitalist enterprise and its minions on one side and workers on the other.

But it's important to note that Marx's idea of what things were tending to first of all wasn't a small group of people on one side and a large mass of workers on the other. Instead, there would be an increasingly intricate corporate system, meaning that there were buffers between the two groups. The idea of just a small group on top with a large, undifferentiated, group on the bottom was something that he labeled (in his 19th century way) "Oriental Despotism", and that he linked with the perceived stagnation of Middle Eastern and Asian societies.

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