reflection #3

This content is protected, and may not be shared, uploaded, or distributed. Early Ind. part 2- 1

Early Industrialization part 2

Multi-Dimensional Progress In previous lectures, we noted the following points:

• New technologies increase productivity.

• Increased productivity increases value – as productivity goes up, value goes up (meaning wealth goes up).

• Some of the newly created wealth gets reinvested in newer technology and the cycle starts over – the self-sustaining growth of capitalism.

Make sure you grasp these points. Remember the two shirt companies. The company with greater productivity (one employee per twenty shirts produced: 1:20) is more valuable than the company with lower productivity (one employee per three shirts produced: 1:3). The new technology of the steam engine was key in early industrialization because it was a new, more efficient way of producing energy. The technology of this new energy increased productivity, which increased value.

• The steam engine increased productivity in making goods such as textiles and iron;

• and it increased productivity in providing services such as transportation on steamboats and steam locomotives (railroads).

Recall our point that a society has to produce value before it can consume value. As a society uses technology to increase productivity and thus to produce more value in goods and services, that society can consume more valuable goods and services – their standard of living goes up. This is economic progress. But progress is often not one-dimensional, especially when measured within one generation. Certain forms of progress do not benefit everyone. Within the time frame of one generation – about 20 years – progress is often multi-dimensional, meaning some benefit more than others, and some feel disadvantaged by the progress in question. The picture might look different, however, if we change the time frame and consider what progress looks like across two, three, or more generations. Let’s dig deeper into this multi-dimensional process of economic progress.

Creative Destruction In 1992, I was part of study abroad program in Europe. I attended various classes at different universities in several European countries. I did some research in some archives. And I met students from other parts of the world. I, of course, brought a camera with me. And I took all

This content is protected, and may not be shared, uploaded, or distributed. Early Ind. part 2- 2

kinds of pictures. When I returned home, I dropped my film off at the nearest drug store and waited several days for the pictures to be developed. I still have some of those pictures. The camera I brought with me was a popular brand name camera – Kodak. In the 1990s, the Kodak company employed about 150,000 people worldwide. The company’s stock was close to $100 per share and the company was worth over $30 billion. Kodak was the fifth most valuable brand in the world. In 2012, Kodak declared bankruptcy. Its stock was removed from the New York Stock Exchange. What happened? Since its creation in the 1880s, the Kodak company made cameras. For over 120 years, people bought a lot of Kodak cameras. Then the smartphone was invented in the early 21st century. Smartphones had built-in digital cameras. What’s the point? New technology often destroys jobs. Thousands of Kodak employees lost their jobs because of smart phones. Investors in Kodak lost a lot of money. Before early industrialization there was a wool industry in England. Sheep farmers raised sheep in order to shear the sheep for their wool. The farmers then sold the wool to merchants who employed hand weavers and spinners to turn the wool into clothes. These hand weavers and spinners did not work under one roof like a factory, but worked out of their homes. They were dispersed throughout local communities. As a result, the process of distributing the wool to the weavers and spinners, and then collecting the cloth products they made, was time consuming – i.e., productivity in the wool business was low and the resulting price of the finished product was relatively high. Then the new technology of the steam engine powering textile machines increased productivity in making a new consumer product – cotton textiles.

• Often new technology increasing productivity leads to cheaper prices.

• The cotton textiles were cheaper than the hand-spun wool products.

• Over time consumers bought more cotton textiles and the wool industry suffered. Many merchants in the wool industry lost business; many hand weaver and spinners lost their jobs, and many wool famers lost money.

The term “creative destruction” describes this process of new technology destroying jobs while creating new industries.

• The “creative” part is this: New technologies increasing productivity in making new consumer products create a lot of new jobs. The new jobs included more miners in the iron and coal industries, workers making the steam engine and steam locomotives as well as machine tool mechanics servicing the engines, and workers in more textile mills. (We’ll return to these new jobs of early industrialization at the end of this lecture.)

This content is protected, and may not be shared, uploaded, or distributed. Early Ind. part 2- 3

• The “destructive” part is this: New technologies destroy some existing jobs, such as weavers and spinners in the wool industry, and lead to bankruptcies such as the merchants who depended on buying and distributing wool products.

• The key to this economic process – the self-sustaining growth of capitalism – is that 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.

Let’s further explore the economic progress of creative destruction by asking “who benefits” from this process.

Who Benefits?

Over time – across generations – the economic growth of creative destruction increases the standard of living for entire societies.

• For example, the process of creative destruction has been going on for a long time in developed societies like Great Britain, the United States, and Germany. It has increased the wealth of these societies.

• As a result, the average standard of living for the poor in a developed society is higher than the average standard of living for the poor in a developing society.

• In fact, the average standard of living for the poor in a developed society is often higher than the standard of living for the majority in an underdeveloped society.

Each of us likely has deceased family members whom we never met, but who lost their job generations ago because of creative destruction. We have benefited greatly by the economic growth that has occurred between then and now. We enjoy a much higher standard of living – i.e., we are able to consume more valuable goods and services because society can produce more valuable goods and services. So when we think about who benefits from creative destruction, we can say that across generations society in general benefits. If we shorten our time framework, we can say that many also benefit immediately – within one generation – from the economic growth of creative destruction. Those who help invent new technology certainly benefit. They make a lot of money. They tend to create new jobs, which means people working in those new jobs may also benefit – see the end of the lecture on this point. Consumers also benefit by new consumer products, often at cheaper prices.

• In thinking about consumers and prices, consider smartphones again.

• Though we might complain about the price of smartphones, think instead about the price of computing power.

• Smartphones have thousands of times more computing power than computers costing $2,500 when I was in high school. The cost of computing power has decreased dramatically.

This content is protected, and may not be shared, uploaded, or distributed. Early Ind. part 2- 4

So in addition to society as a whole benefiting across generations from creative destruction, many also benefit within one generation from the creative part of a growing economy. But others do not benefit in the short term. Those whose jobs and businesses are destroyed by the destructive part of creative destruction certainly do not benefit in the short term. A particularly hard fact to accept is that this immediate destruction cannot be avoided if there is to be economic growth. Remember, that’s key – the creative part cannot happen without the destructive part. An economy that is not creating and destroying jobs at the same time is an economy which is not growing. The “destruction” side of the equation indicates that economic growth is multi-dimensional. Economic progress benefits consumers and those involved in new technologies while at the same time causing economic pain to those in jobs and businesses destroyed in the process. In fact, economic growth is multi-dimensional even if we focus just on the new jobs created by creative destruction. Let’s return to early industrialization and think about the news jobs created in this early period of the industrial revolution. The new jobs varied greatly. Some were decent jobs with decent pay. Others were not. Consider the examples below. They highlight the multi-dimensional nature of the new jobs created by early industrialization.

• Being the captain of a steamboat or engineer of a steam locomotive was a decent job. These new forms of transportation led to the creation of new towns and cities along transportation routes such as the Ohio and Mississippi Rivers. The new towns and cities accommodated travelers with lodging and food. Owning a new lodging establishment or restaurant could also be a decent new job.

• The steamboats, steam locomotive, and textile mills all required steam engines and other machines to operate them. Being a machine tool mechanic – servicing and fixing these machines – could also be a decent job.

• But other new jobs, especially for unskilled labor, were much less desirous. Men working in coal mines faced long hours and extremely unhealthy working conditions. Many young women and children worked in textile mills which included low wages and few safety protections. Some experienced serious injuries, such as the loss of limb, and many were way overworked resulting in various physical hardships.

• We should note here that children had worked throughout human history. Child labor was not invented by industrialization. Untold numbers of children had long faced intense rural poverty accompanied by long hours of agricultural labor. This was the norm for underdeveloped societies across the world. Still, though, the textile mills of early industrialization presented new types of drudgery and danger for the children working in them.

In looking at these new jobs created by early industrialization, we conclude the following: Creative destruction is not only multi-dimensional because it creates new technologies, industries, and wealth while destroying some existing jobs and businesses. It is also multi- dimensional because the new jobs it creates include more desirous (skilled) and less desirous (unskilled) jobs.

This content is protected, and may not be shared, uploaded, or distributed. Early Ind. part 2- 5

Let’s think this through a bit more before we end this lecture. In 1800, when early industrialization was just beginning, over 90% of world’s population lived in the most extreme form of poverty. And 99% lived in what today we would consider poverty.

• Remember, that’s why Adam Smith published his book, An Inquiry into the Nature and Causes of the Wealth of Nations (1776).

• Smith tried to explain the causes of wealth. It was wealth – what economists call wealth creation – that is abnormal in human history. It has to be explained.

• Smith did not try to explain the causes of poverty because poverty did not have to be explained. Poverty was simply the normal condition of human beings in human history.

What this means is that the difficult and dangerous jobs created by early industrialization – coal miners, textile workers – were filled by people leaving rural poverty and moving to emerging towns and cities. There is debate among historians whether these types of workers saw any increase in their standard of living in first half of 1800s. It’s not clear that they did. They worked long hours, with little safety, at low pay. The story changes when we look at the second half of the 1800s – later industrialization – which we’ll discuss in the next lecture. Later industrialization increased the standard of living for many industrial workers and created a new middle class of professional employees.