reflection #3
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Later Industrialization
Developing to Developed: The New Corporate Economy The previous lectures considered early industrialization from the late 1700s to the mid-1800s – the steam engine, coal, iron, and textiles. This lecture considers later industrialization from the late 1800s to the mid-1900s – oil, steel, chemicals, and electricity. Here’s a broad perspective, using the United States as an example: The United States was
• an underdeveloped economy in the early 1700s
• a developing economy in the early 1800s (early industrialization)
• a developed economy in the early 1900s (later industrialization). As a developed economy, the United States became a leading industrial world power.
Several other countries also became developed economies during later industrialization.
• These include Great Britain and Germany which, like the United States, had begun industrialization earlier.
• Another country was Japan, the first non-western country to industrialize. Japan industrialized fairly quickly starting in the late 1800s and, as a result, was an emerging power in east Asia and the Pacific when World War I began in 1914.
• One country which did not industrialize in this period was China. China had a powerful empire back when early industrialization began in Great Britain in the late 1700s. But because China did not industrialize from the late 1700s through the early 1900s, China began a long process of decline, leading to the collapse of the Chinese empire in 1911.
o As a result, unlike Japan, China was not an emerging power when World War I began.
o China remained an underdeveloped country through most of the 20th century. Though it began industrialization in the second half of the 20th century and started to emerge as a world power in the early 21st century.
As we discuss the details of later industrialization below, we’ll use examples from the United States. But keep in mind that other countries were also going through later industrialization from the late 1800 through the mid-1900s – most notably Great Britain, Germany, and Japan. A main feature of later industrialization was the emergence of corporations in industries like steel, oil, chemicals, and electricity – i.e., the emergence of a new corporate economy. The “emergence of a new corporate economy” means that in the late 1800s the size of business began to get much bigger, leading to large corporations with significant economic power and wealth. Consider the following:
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• In early industrialization, the average textile mill employed about 25 people and was located in one place, what today we would call a “small business.”
• In the late 1800s, corporations were much bigger. They employed hundreds of people.
o The railroads led the way in developing a new corporate economy. Entrepreneurs like Cornelius Vanderbilt combined separate railroad companies into larger railroad corporations.
o Click here for railroads built in the 1850s and compare that with railroads built in the 1870s and 1880s here.
• Corporations employed more people because they combined numerous factories, railroads, pipelines, or refineries into the same business.
o For example, John Rockefeller’s Standard Oil Corporation owned oil fields in Pennsylvania, Ohio, and after 1900, Oklahoma and Texas. The Corporation also owned oil refineries. It owned railroads linking the oil fields to the oil refineries. And it owned the marketing, distribution, and selling of the oil by-product, kerosene.
o We’ll talk more about Standard Oil below, but this sketch highlights how a large corporation like Standard Oil was very different from a textile mill in early industrialization which was located in one place and employed about 25 people.
• In the 1890s, there was a series of mergers, meaning separate companies in the same business merging to create a larger corporation. Over 5,000 companies merged into about 320 corporations in this period.
o Sometimes mergers were called "Trusts" because they combined previously separate companies under one Board of Trustees. These trusts usually controlled more than 50% of the market in their industry and often used the word “American” in their name as a marketing strategy.
o Examples include the following corporations: American Locomotive, American Window & Glass, American Tobacco, American Hide & Leather, and American Ice (before electricity in homes, people owned “ice boxes” to preserve food).
o If you pay attention to economic news today, sometimes you might hear discussions of mergers, such as separate telecommunication companies or separate pharmaceutical companies merging. There was a series of these types of mergers in the 1890s.
Here is a key point: These corporations and trusts were private property. They were owned by private individuals. Be clear on this point.
• A socialist would say that the government should take over and own these corporations. That’s what socialism means – government controlling the production, distribution, and consumption of goods and services.
• The United States did not have a socialist system. Socialism requires a lot of government power and the U.S. Constitution limits the powers of government. One way the Constitution limits government is by protecting private property. Thus the U.S. economy was based on private ownership. Companies, corporations, and trusts were private property.
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Energy Transition (again) Energy is key to economic development. Creating efficient energy enables a society to produce valuable goods and services. Remember a society has to produce value before it can consume value. Societies which create and use efficient energy experience economic progress. They go from underdeveloped to developing, or developing to developed. Later industrialization included an energy transition from coal to oil.
• As noted in a previous lecture, an energy transition does not mean the older form of energy stops being used. It continues to be used as both older and newer forms of energy coexist to provide society’s energy needs. So coal remained an important source of energy, especially since the steam engine (powered by coal) remained the main engine powering the railroad locomotives into the 20th century.
o Eventually, the steam engine was replaced by the internal combustion engine in some cases and electricity in other cases. But that happened at different points in the 20th century depending on the type of transportation or manufacturing involved. Steamships, for example, remained major forms of oceanic travel even after automobiles were being manufactured with internal combustion engines.
• Also recall that energy transitions are long and complex, usually occurring over significant time. If and when millions of people discover better energy efficiencies at lower cost, then the older form of energy is gradually used less and the newer form is gradually used more. So it is not like oil replaced coal at any one point in time. Rather, oil was gradually used more and coal gradually used less over time. But even today, coal continues to provide a needed source of energy for human life across the globe, though it is certainly less central than it used to be.
• Oil began to emerge in the late 1800s as a new source of energy. Its original purpose was to provide light before electricity was common in homes, though refined oil would become increasingly important as the fuel powering the internal combustion engine.
Let’s discuss oil, specifically the fossil fuel oil known as petroleum. We often use the phrase “fossil fuel” without thinking about its meaning. A fossil fuel is a substance naturally made in the earth over millions of years. A fossil is the petrified remains of prehistoric organisms. Over time, geological pressure transforms fossils into substances such as petroleum. For almost all of human history, the petrified remains of prehistoric organisms known as petroleum sat in the ground. It was of little value to humans because it was of little use. That’s not to say humans were unaware of it. Oil often bubbled up to the surface and people from ancient Mesopotamians to Seneca Indians had collected bubbled up oil to help with ailments like stiff joints or as an insect repellent. This limited use, though, meant the vast amounts of underground petroleum remained of little value, until later industrialization.
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In the mid-1800s, chemists began to find a large-scale use for petroleum. Chemists discovered how to refine fossil fuel oil into kerosene. To refine means to heat petroleum in complex ways to create a related, though chemically distinct substance called kerosene. Kerosene was useful and thus valuable because, if refined well, it was a chemically stable substance which people could burn in kerosene lamps to light their homes. Even by 1900 almost no one – no matter how wealthy – had electricity in their homes. To have light, one needed candles or kerosene lamps. Think about how this process highlights the incredible creativity of the human mind.
• The petrified fossils of prehistoric organisms known as petroleum sat in the earth as a relatively useless substance for millions of years – useless and thus valueless.
• Then because of the creativity of the human mind – the development of chemical engineering knowledge – humans discovered how to make great use of underground petroleum to improve their lives. They refined it into kerosene to light their homes.
• This creativity meant that petroleum became of great use and thus of great value.
• Chemical engineering helped create great value – a new multi-billion dollar industry, the oil industry, which began drilling for underground petroleum. Think about that: Billions of dollars of wealth were created by the ingenuity of the human mind, taking a mostly useless substance and turning it into a valuable substance. This led to great power and wealth for those who led the industry. Knowledge created great wealth.
Creative Destruction (again) With this background, let’s return to our theme of Creative Destruction. Recall our example of creative destruction in early industrialization. The development of new technology in the production of cotton textiles created a lot of new jobs and wealth. At the same time, the new technology destroyed a lot of old jobs in the wool industry. A similar process of creative destruction happened because of the petroleum business. Before chemists found a use for petroleum in the mid-1800s, petroleum mostly sat in the ground – of little value because of little use. There was, however, a kind of oil that people could burn in lamps to light their homes – whale oil. Before the mid-1800s there was a large whale hunting industry. This industry was the topic of a famous novel, Herman Melville’s Moby Dick (1851). Whale hunters went out to see for months at a time on whale hunting ships. The goal was to kill whales for their whale blubber which could be burned down into whale oil. People could buy and burn whale oil in lamps to light their homes.
• But the whale hunting industry had low productivity.
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• Hunting whales was time consuming, taking months of dangerous labor to produce moderate quantities of whale oil.
• Low productivity usually means high prices. The price of whale oil was high – in today’s money about $70/gallon. That was too expensive for the average American to buy.
• Whale oil was thus a luxury item for the wealthy (similar to cell phones in the 1980s). When chemists discovered how to refine fossilized petroleum into kerosene in the mid-1800s, they began a process that put the whale hunting industry out of business. By the 1860s, many companies emerged that refined petroleum into kerosene which consumers bought to burn in kerosene lamps for light. John D. Rockefeller’s Standard Oil Corporation (1870) became the biggest, often by buying rival companies and making them part of Standard Oil. Rockefeller’s corporation massively increased productivity which led to lower prices.
• In the 1870s, the price of kerosene was about 60 cents/gallon. That was much cheaper than $70/gallon for whale oil.
• By 1900, kerosene was even cheaper – about 8 cents/gallon.
• Oil to light one’s home went from a very expensive luxury item for the wealthy to an inexpensive mass consumer item which most Americans could afford.
In terms of Creative Destruction:
• The “creative” part is this: New chemistry knowledge and refining technology created a new oil industry with lots of new jobs making a new consumer product (kerosene). The new jobs were in oil drilling, oil refining, oil shipping, kerosene distribution and marketing.
• The “destructive” part is this: The new knowledge and technology destroyed an entire industry and its thousands of jobs – whale hunting.
• Remember, the “creative” part cannot happen without the “destruction” part. It is not possible to create new technologies which help the economy grow without destroying some existing jobs and industries.
• Economic progress is multi-dimensional.
o The economic growth of creative destruction benefits all of society over time – over the course of a generation or more.
o In the short term, however, the situation is more complex. Inventors and investors in the new technology make money. They create new jobs which benefit many. Consumers also benefit by new products often at cheaper prices. But this process destroys many existing jobs and businesses, meaning it results in economic hardship for some.
o Remember, the creative part of “creative destruction” – economic growth – cannot happen without the destruction part.
Other Corporations In addition to Standard Oil, other corporations in later industrialization included Westinghouse (electricity), Dow Chemical, Swift Meat Packing, and Andrew Carnegie’s U.S. Steel Corporation.
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Let’s briefly discuss steel. Like the oil industry, the steel industry was based on a natural substance from the earth – iron ore. And like the oil industry, the steel industry required chemical engineering knowledge, which showed the incredible creativity of the human mind.
• The industry converted iron into steel by heating iron while purifying it, creating a chemically altered substance called steel.
• Steel was lighter, stronger, and more flexible than iron.
• The unique qualities of steel led to economic developments such as: stronger steel railroad tracks replacing the old iron tracks of early industrialization.
• Steel also allowed for the construction of high-rise buildings (iron was too heavy and weak to construct tall buildings). And steel allowed for the beginning of subways by 1900 (again, iron was too heavy and weak for subways). It’s thus no coincidence that modern cities emerged as steel productivity increased during later industrialization.
Because steel was so important for later industrialization, its production was a major source of wealth. And the United States began to produce steel on a massive scale. The leader was Andrew Carnegie, a Scottish immigrant from a poor background who, after years of working in various jobs, eventually made a fortune in steel production. Carnegie opened his steel corporation – Thomson Steel Works – in 1875.
• Before this, the U.S. had low productivity in steel. The nation produced 19,000 tons of steel per year. Low productivity means a high price – $56/ton.
• Because Carnegie's company expanded quickly, the U.S. massively increased steel productivity. By 1900 the country produced more than 10 million tons of steel per year. Higher productivity means a lower price – $11/ton.
• With increased productivity and a lower price, Carnegie made a fortune. In 1901, he sold his company to J.P. Morgan for over one billion dollars. Morgan renamed the company, U.S. Steel.
By leading the world in oil and steel production, then, the United States became a developed economy during later industrialization – from the late 1800s to the mid-1900s. New corporations in oil and steel as well as in electricity and chemicals transformed the American economy into a new corporate economy. These new corporations created great value, massively increasing productivity and decreasing prices for various goods and services.
Who Benefits?
Let’s end this lecture the same way we ended last lecture – by asking, Who Benefits? We’ll again answer this question by considering how the economic progress of creative destruction is multi-dimensional.
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We know by now that over time – across generations – creative destruction increases the standard of living for entire societies. We made this point in the last lecture. The countries which went through later industrialization were significantly wealthier by the early decades of the 20th century – the United States, Great Britain, Germany, and Japan. In contrast, China which did not industrialize was significantly less wealthy. Remember, as these industrialized countries were increasing in wealth and power, the Chinese empire was collapsing in 1911. Many also benefited immediately – within one generation – from creative destruction of later industrialization. Those who helped invent new technology in the oil, steel, chemical, and electricity industries certainly benefitted. They made a lot of money. They also created new jobs. And consumers benefitted by new consumer products, often at cheaper prices. Indeed, in the early decades of the 20th century, more and more people began to get electricity in their home –a huge benefit. But we also know that there was destruction. Those whose jobs and businesses were destroyed in later industrialization certainly did not benefit. Rather, they experienced economic hardship. So we know that creative destruction is multi-dimensional because it creates new technologies, industries, and wealth while simultaneously destroying some existing jobs and businesses. But we also said that creative destruction can be multi-dimensional even when we just look at the new jobs it creates – jobs in the new industries of later industrialization such as oil drilling, steel manufacturing, and chemical plants. Many industrial workers in these new jobs in this period formed labor unions and joined new political parties. The German Social Democratic Party, for example, was formed in 1875. What’s interesting about this party – called the SPD – is that many of its intellectual leaders were revolutionary socialists. Many SPD intellectuals called for the revolutionary overthrow of the “industrial capitalist” system. Yet many working members of the SPD were not actually revolutionaries. They focused instead on more practical goals – better pay, shorter hours, and better working conditions. The reason for this difference between the revolutionary vision of some SPD intellectuals and the practical goals of many SPD workers concerned the standard of living in the years of later industrialization. Recall how we said that many workers in early industrialization – coal miners, textile weavers – may not have experienced an increase in their standard of living in the first half of the 1800s. But by the end of the 1800s, after later industrialization was well underway, many industrial workers were experiencing an increased standard of living. That’s not to say they didn’t still work long hours. And their standard of living was still really low from our perspective today. But it is their perspective that matters. And the standard of living for many industrial workers was better by 1900 than it was in 1850. As a result, many members of the SPD were not thinking
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about the revolutionary overthrow of the economic system. Instead, they were thinking of further improving their conditions within the economic system. This was also true of a lot of the industrial workers in the United States. In 1906, the sociologist Werner Sombart published a book called Why is there no Socialism in the United States?
• Sombart’s title was a bit misleading. There was labor violence in the United States during the economic depressions of the mid-1870s and mid-1890s. And there was a socialist party in the United States. Its candidate, Eugene Debs, received almost a million votes in the 1912 presidential election.
• Yet Sombart was still largely accurate. Each of the two depressions was over within a couple years and neither reversed the long-term economic trend of an average standard of living better than earlier generations. The socialist movement was thus not a mainstream movement with broad support in the U.S. It received significantly less support both before and after 1912.
Sombart explained that socialism lacked broad support in the United States because the standard of living for many industrial workers was increasing over the decades of later industrialization. Rather than join a revolutionary socialist political party, many American workers joined labor unions such as the American Federation of Labor formed in 1886. This union – the AFL – did not call for the revolutionary overthrow of the economic system. Instead, it sought the same thing many workers in Germany sought – improved conditions within the economic system which seemed to be offering a higher standard of living than previous generations enjoyed.