INT 200: Global Capitalism and its Discontents American Capitalism II The 20 th Century

American Capitalism The Gilded Age and the Robber Barons (monopoly capitalism) – Era of rapid economic growth, especially in the North and West – But also of poverty and inequality – Labor unions and the Panic of 1873 and Panic of 1893 – Robber Barons: the 24 men who held great industrial monopolies and unprecedented wealth denounced regulators in the name of the free market but created monopolies – Governments’ roles

American Capitalism 1920s – Sharp increases occurred in productivity and profit; employer- managed racism; tear gas and bullets; etc. => The USA was never a capitalist utopia => government and business were never disentangled

American Capitalism The Great Depression Abnormally high unemployment, Lack of credit, Banking crisis, Financial crisis, Bankruptcies, Currency devaluations, Deflation, Less trade

American Capitalism What caused the Great Depression? – Free markets (Keynesians) vs. Government (Friedman) The Great Depression and International Trade – Smoot-Hawley (1930) – Average tariffs jumped from 25.9% in the mid-20s to 50% in – American exports: $5.2 Billion to $1.7 Billion

American Capitalism US Workers : – by 1933, nearly ¼ of the workforce was unemployed (½ of black workers) – Productivity rose, goaded by fear of unemployment – Strikers were attacked by police and hired anti-labor forces WWII – Management of the economic side of the war was left in the hands of large-scale industry National labor policy increasingly penalized unions for striking – Presidentially-appointed boards and the armed forces high command controlled economic aspects of the war => recovered its leadership role in domestic economic policy (that it had in the 1920s), and now had a major role in the military and foreign policy

John Maynard Keynes if investment exceeds saving, there will be inflation If saving exceeds investment, there will be recession – in the midst of an economic depression, the correct course of action should be to encourage spending & discourage saving – “For the engine which drives Enterprise is not Thrift, but Profit.” Keynesian economics – Markets are inherently unstable – Can result in large scale unemployment – Unemployment causes a decrease in spending, which then affects businesses and banks, which then leads to more layoffs – creating a vicious cycle – So, if banks won’t lend and industry won’t create jobs – the government must

John Maynard Keynes In other words: – Unemployment is the result of insufficient spending by consumers and firms – a government can increase overall demand and thus decrease unemployment by spending not only the revenue it receives from taxes but also what can be raised by borrowing from the public or printing money (hence, “demand-side economics”) – Deficit spending and fiscal policy

John Maynard Keynes Interest rates matter too: – investment spending was reduced when their expected payoff dips below the cost of financing them, the interest rate – Financing costs must be held down with low interest rates – discourages saving and encourages investing Low interest rates and deficit spending is the Keynesian prescription for prosperity – Economically and socially successful economies have significant contributions from both the government and the private sectors – marked a break with laissez-faire economics Success of Keynesian economics and greater role of government

Friedrich von Hayek Low interest rates cause an expansion of credit, so this credit flows into some parts of the economy before others – Creates boom or bubbles, and then busts – the inflationary effect of this credit expansion overwhelms any wealth effect and interest rates begin to rise – no further credit available to purchase the bubble assets, so the prices of these assets and their attendant industries collapse Preventing a future bust is as important as fighting a current one – Non-intervention in the markets, even by government The Great Recession: von Hayek vs. Keynes