Political Economics Prof

Tag: Industrial Revolution in America

  • How America Industrialized and Became Wealthy

    How America Industrialized and Became Wealthy


    INTRODUCTION



    This post and the next is on
    the topic of economic development and its contribution to economic growth.  Since the beginning of the Industrial
    Revolution more than 200 years ago, this is the central economic dynamic.  



    The following are factors that led to American economic
    development, many in place before the beginning of the Industrial
    Revolution.  The United
    States, more than any other country, was
    positioned to take advantage of the new technology and ideas that were the
    basis of the Industrial Revolution.  The
    following is an outline of those factors. 
    For the full story of the early decades of America’s Industrial Revolution, see Engines of
    Change     and some of the excellent histories written about America
    after the Revolution.


    FACTORS IN AMERICAN ECONOMIC DEVELOPMENT AND
    GROWTH



    The usual narrative centers on the inventors and entrepreneurs
    who developed and commercialized new production and transportation technology and technological
    improvements.  They also invented new
    organizational structures to exploit the new technology, both on the supply and
    demand side.



    This post looks at contributing factors that made the
    American experience exceptional.  The United States
    began innovation after England, the country that started the Industrial Revolution, but quickly caught up. By the mid-1800s, America has surpassed England in key technologies.  Innovation has continued up to the
    present.  Why?


    RADICAL POLITICAL, CULTURAL AND
    SOCIAL CONDITIONS CONDUCIVE TO SUPPORTING THE INDUSTRIAL REVOLUTION



    The United States
    had developed social, political and cultural institutions that were supportive
    of the market capitalism version of the Industrial Revolution before it began.  Because of the American Revolution, there was
    an aversion to a strong central government, which at the time was dominated and supported favored
    pre-industrial classes or groups.


    • No
      rent-seeking (parasitic) royalty or nobility.
    • No
      state-supported church.
    • Limits
      on government-supported monopolies. (By rulings of the Marshall Supreme Court)
    • No
      guilds to retard innovation, factories and new forms of labor relations.
    • A
      Constitution giving the Federal government wide powers to support a
      national economy and limiting states’ ability to “restrain” trade among states.
    • A
      culture emphasizing individual responsibility and individual opportunity.
    • A
      radical political system, a democracy based on universal white male suffrage.
    • Wide dissemination of information among a literate public.
    • A
      mobile social system and open society that encouraged risk-taking.

    ENGLISH LEGAL INSTITUTIONS, ESPECIALLY PROTECTION OF
    PRIVATE PORPERTY, PATENTS,     AND
    ENFORCEMENT OF CONTRACTS



    Strong English tradition of protecting private property
    and enforcing contracts.


    Underlying law and custom protecting the rights of
    individuals.

    Patent law to protect innovations.


    ACCESS TO ENGLISH INDUSTRIAL TECHNOLOGY AND
    APPLIED SCIENCE



    England
    was the first country to industrialize.  Some
    important aspects:


    • Innovative
      methods to smelt iron, increasing quantity and lowering unit cost. 
    • The application
      of more efficient steam engines and water power to drive machinery.  Beginning of factories.  Large increases in quantity and reduction in unit cost. 
    • Steam engine power-driven
      textile mills and then railroads. 
    • More
      accurate machine tools to produce machinery and metal products.
    • Tradition of entrepreneurs and innovative mechanics, machine tool makers and engineers
    • Continuous invention and improvement; cumulative large increases in productivity.  


    Most of this technology, and the ideas behind them, were transferred
    quickly to America,
    changed to fit American conditions, and improved.  Some transmission channels:



    English immigrants.

    An English immigrant named Samuel
    Slater built the first            water-powered cotton spinning mills.



    Welsh ironmasters who knew how to
    use anthracite coal to smelt iron.



    Contacts with England,
    both personal and scientific.      


    Imitating or
    stealing English technology.



    Francis Cabot Lowell and the
    integrated, power-driven textile mill.



    Steam engines and locomotives.  Americans went to England
    to study the English development of locomotives and railroad technology even
    before the English built the first general-purpose railroad.


    Within two years of the first
    English railroad, Americans were importing English locomotives, adapting them
    to American conditions, and manufacturing them.

    Robert Fulton first learned about steamboats in England.



    Access to English scientific and
    technical publications.


    Establishment of American
    scientific societies to discuss new ideas and technologies, and disseminate the
    knowledge.


    HUGE NATURAL RESOURCES



    In early decades, vast quantities of wood, iron ore, anthracite
    coal, fast-flowing streams and rivers for water power.



    The United States
    would continue to be the world’s leading producer of almost all key minerals
    and fossil fuels (coal, oil, natural gas) until after WWII.

               


    Huge potential agriculture. 



    Development of commercial
    agriculture, starting in colonial     period.

                            Commercial production for market.

                            Surplus
    food for industrial workforce.

                            Main
    source of exports until 20th Century.


    CONTINUING IMMIGRATION



    In the colonial period and until 1860, slaves and indentured
    servants produced most of America’s
    exports that helped pay for the importation of European capital goods and
    technology.



    Over the last 200 years, there have been as many as 75
    million immigrants.  Immigrants have been
    an important factor in American economic development from the very beginning.



    Free human capital.


    Mostly young adults. Much of the
    cost of raising them to adults, their education and acquisition of knowledge
    and skills paid before they came to America.  Crucial “free lunch.”

                           


    Like Sam Slater,
    many brought specialized skills and knowledge.



                Disproportionate number of innovators and entrepreneurs.

                            Created
    vast and growing internal market.



    Early on, America’s
    democratic ethos and the existence of an open society created opportunity for
    advancement for lower-class mechanics and millwrights unavailable in England.  They could become part-owners of new business
    establishments based on their technical knowledge.  This was the beginning of what I call the
    “hustler and the nerd” model of economic innovation.  From Samuel Slater and Amos Brown (cotton spinning) to William
    Clark and Isaac Singer (Singer Sewing Machine) to Silicon Valley
    (scientific and computer nerds and venture capitalists).


    For the first 100 years of the Second Industrial Revolution (1870 – 1970), all industrializing societies, including America, ignored the “negative externalities.” As had all societies before then. This meant the producers, distributors, and consumers did not have to pay the full cost of their activity. Some examples of negative externalities are destroying the natural environment (clear-cutting forests, water pollution, air pollution, dangerous and deadly work places, noise pollution, accidents and death (auto fatalities and injuries), terrible unhealthy slum living conditions). It was only with the exponentially cumulative effect of all negative externalities that governments began to deal with them.


    CONCLUSIONS



    In economics, Milton Friedman popularized the phrase “There
    ain’t no such thing as a free lunch.”  This
    may be true in a closed economy but not in an open society like the United
    States that allowed immigration, imported (stole) ideas and technology, and provided
    the resources and opportunity to develop new technologies and economic
    institutions.



    A more formal phrase for a free lunch is “positive
    externalities.”   A positive externality
    occurs when someone benefits from someone else’s actions without paying for
    it.  For the American private sector as a
    whole over the last 200 years, there has been lots of free lunches.

                Tens of
    millions of young adult immigrants.

                            Brought
    labor, skills, education and knowledge.

                Access to
    knowledge of foreign technology.



    This combination reduced the cost and increased the speed of industrial innovation.



    Immigrants, shut out of traditional and high-status careers,
    look for or created new opportunities. They had to
    be innovative but had opportunities for advancement not available elsewhere.  A recent study concluded that immigrants are twice as likely to start new businesses than native-born Americans.

    The point is that continual economic development depends on a country’s political, cultural, and social institutions, not just on its economic institutions.

    ==================================================

    A related post:


    The Beginning of the Industrial Revolution in America


    These posts on early American history give some detail on the factors discussed in this post:


    American Colonial History, 1607-1775


    Revolution and the New Country;  American History, 1775-1790


    A New Nation, America from 1789 to 1860



    For an excellent example of an entrepreneur at the beginning of the Industrial Revolution in England, see


    Josiah Wedgwood, the Wedgwood Pottery Company, and the Beginning of the Industrial Revolution.

    See related posts:

    After reading this post, you might want to see the related post on the first case study of a source of economic development, Adam Smith’s Pin Factory. 

    For the story of how England lost its economic leadership, see A Cautionary Tale:  England and the Industrial Revolution

    For the economic dynamics within this wider environment, see A Stylized Model of Innovation:  The Dynamics of Capitalism. 




  • A Historical Example of Bilateral Oligopoly: Baldwin Locomotive Works

    A Historical Example of Bilateral Oligopoly: Baldwin Locomotive Works

    Baldwin Locomotive

    Baldwin, the largest producer of steam locomotives in the                 nineteenth century, faced problems typical of a dominant company in a bilateral
    oligopolistic industry.  Almost everything that               happened at Baldwin
    was conditioned by a highly cyclical, almost   unpredictable competitive
    environment.  A high level of business       risk followed from sudden, large fluctuations in demand. This         meant that Baldwin
    often had excess capacity with substantial         fixed investment, leading to a
    strategy based on economies of scope and not economies of scale.  Baldwin also depended
    on a skilled       labor force with firm-specific knowledge and experience that was    exposed to sudden and massive layoffs followed by the company’s   attempts to
    rehire the same workers.  It is hard to
    imagine a more    challenging competitive environment.                                                    



    Baldwin was a large and dominant
    firm, accounting for approximately one-third of all steam locomotive
    production.  The buy side of the market
    was dominated by a small and increasingly concentrated number of railroad
    companies, which were some of the largest corporations in America
    in the nineteenth century.  The sources
    of market power of the locomotive builders were their specialization and flexibility
    in production, although some of the larger railroads – Baldwin’s
    largest customers – also built locomotives in their own machine shops.  The sources of market power of the railroads
    were their large purchasing power, technical knowledge of their “master
    mechanics” who ordered equipment, and knowledge of the optimal mix of equipment
    for their particular company.  In such an
    environment, Baldwin had market power because of its
    size and assembly expertise, but never enjoyed the market control of a mass producer
    of standardized products.  Market power
    based on marketing to final consumers was not feasible; railroad customers did
    not demand that railroads use Baldwin engines.



    Every large railroad developed its own specifications and
    demanded customized equipment from Baldwin.  In addition, there was continuous
    technological improvement of the basic steam locomotive, often innovated by
    railroad technical staff.  As a
    consequence, Baldwin could never control the pace of
    design change.  The company could not totally
    incorporate mass production techniques because of constantly-changing
    customized design and finish.  On the
    other hand, by working closely with its customers over a long period of time, Baldwin
    probably had lower transaction costs than if its sales were arms-length market
    transactions.



    This mutual dependence, along with railroads’ credible
    threat of internal production, usually gave the railroads a bargaining
    advantage when negotiating design customization and price with Baldwin.  But working closely with its largest
    customers, particularly the Pennsylvania Railroad, also increased the
    probability of Baldwin’s long-run survival. 



    This symbiotic relationship between steam locomotive
    builders and the railroads worked as long there was no fundamental innovation
    in engine design and both sides benefited from continuous improvement in the
    steam locomotive.   The bilateral
    relationship would be much different in the later market for diesel engines in
    which General Motors controlled the technology and forced railroads to buy
    standardized products.



    Baldwin’s management objectives were
    to minimize risk and maximize operating flexibility by sharing risk with
    suppliers through subcontracting out much of its parts production.  Since production was to order, Baldwin
    managed a “just-in-time” parts inventory system that minimized working capital
    requirements. When times were bad, Baldwin could delay
    payment to its suppliers and thus use them as a major source of working
    capital.  This was one way the company
    dealt with severe cash flow problems in economic downturns.



    The company countered the potential loss of skilled workers
    after massive layoffs with high wages, skill development through apprenticeship
    training for employees and sons of employees, and the hope of higher income for
    long-term employees through a system of internal promotion and inside
    contracting.  Inside contracting, usually
    managed by long-term employees, put pressure on contractors to keep labor costs
    down.  This led to much more cooperative,
    less confrontational labor relations policies than those of other large-scale
    employers like Carnegie Steel.


    Horace L.Arnold – “Modern Machine-Shop Economics.” in Engineering Magazine, 11. 1896


    Because of the complex nature of its production, Baldwin
    needed sophisticated internal systems to keep track of parts, subassemblies,
    and final production schedules.  The
    company substituted detailed cost and internal job flow information for
    management control bureaucracies.  While Baldwin
    did little internal product development, it was very quick in applying advances
    in product design and production technology. 
    But the company never “bet the ranch” on internal development of a
    radically new design of steam locomotives.


    The long-term success of
    Baldwin, under highly uncertain market conditions,
    raises the issue of the limitations of the multidivisional form of
    organization.  Multidivisional
    corporations often do not stay focused on production of key product lines and
    the development of core competencies. 
    Rather, they are prone to the danger of more diversification than they
    can efficiently manage, with the related danger of diseconomies of scale.


    When diesel locomotives
    became less expensive to operate and maintain than steam locomotives,     Baldwin tried to adjust but its technology and skill
    base was too specialized to adopt the new technology.      Baldwin did
    innovate, designing and producing more powerful and efficient steam engines.  But to no avail.      Baldwin was
    doomed, another victim of “creative destruction.”


    COMPANIES SIMILAR TO BALDWIN

    A suggestive line of inquiry might be the similarities between
    Baldwin’s strategies and those of Japanese companies to
    minimize risk and maximize innovation in a highly uncertain and changing
    environment. Large Japanese companies
    followed similar strategies in the early phases of their industry growth. A big difference was that zaibatsu risk was reduced by the actions
    of the Japanese government and related financial institutions.



    Probably the current companies most similar to Baldwin
    are capital goods companies that sell large, complicated systems.  Another suggestive analogy might be the
    similar strategies adopted by organizations such as financial software
    companies that build large, complex systems, such as SAP
    or Oracle.     Any company that relies on
    employees with firm-specific skills and experience, including knowledge of the
    requirements of large customers, face many of the challenges that Baldwin
    did.