XXX ACKNOWLEDGMENTS Pavy (AFL-CIO); James Polito (Byrum Business School); Jared Ragusett (Central Connecticut State University); Michael Reich (University of California at Berkeley); Peter Rosset (El Colegio de la Frontera Sur, Mexico); Juliet Schor (Boston College); John Schmitt (Center for Equitable Growth. Washington, DC); Eric Schult/ (Rollins College); Ibrahim Tahri (The New School University); Joe Von Fischer (Princeton University); Jim Weeks (ATL International); Edward Wolff (New York University); Martin Wolf son (University of Notre Dame); and the immensely helpful and patient staff of the U.S. Bureau of Economic Analysis. Last but not least, we thank the following professionals at Oxford University Press who made possible the publication of this book: Ann West, our highly competent acquisitions editor; Alison Ball, editorial assistant; and Michele Laseau, Holly Haydash, and PaUy Donovan, who shepherded the book through the process of its production. Of course, the authors retain responsibility for any remaining errors. Samuel Bowles, Santa Fe, New Mexico Richard Edwards, Lincoln, Nebraska Frank Roosevelt, New York, New York Mchrene l.arudee, Amherst. Massachusetts Capitalism Shakes the World For more than four decades following World War II, Germany was divided: East Germany was a dictatorship, while West Germany was a democracy. The economic systems of the two Gcrmanys were as different as their systems of government. In the East, the economy, like just about everything else, was run by the Communist Party. Decisions about who should produce what, how, when, and for whom were made by the government and carried out under orders. Communism was not simply a form of government, it was also an economic system based on centralized direction of economic decisions. By contrast, West Germany had what is termed a capitalist economy. West Germans for the most part made economic decisions independently, guided in most cases by what they needed to do to turn a profit, to get and keep a decent job, or to have a particular kind of lifestyle given their means. In October 1989 the general secretary of the East German Communist Party, Erich Honecker, grandly celebrated the founding of Communist East Germany forty years earlier. He proclaimed that it had been both a "historical necessity" and a "turning point in the history of the German people." Parades and demonstrations commemorated the anniversary. But twelve days after the celebration, Honecker suddenly stepped down as prodemocracy demonstrations broke out first in the East German city of Leipzig and then spread throughout the country. A million and a half Germans participated in these demonstrations in October, and twice that number attended them in November. Less than a month after Honecker's resignation. East and West Germans danced together on the Berlin Wall and then dismantled it. Less than a year after the grandiose celebration of its fortieth anniversary. East Germany passed out of existence, its territory joined with that of West Germany, and the combined parts became once again simply Germany. As a result, the citizens of the former Communist nation passed from one economic system to another, from communism to capitalism. At about the same time, prodemocracy demonstrators toppled their Communist rulers in the Soviet Union, Poland, Czechoslovakia, Hungary, and, indeed, in all of the remaining Communist-ruled countries except Cuba, Vietnam, 1 PART 1 Political Econo Capitalism is an economic system in which employers, using privately owned capital goods, hire wage labor to produce commodities for the purpose of making a profit. The capitalist epoch began in some parts of Europe around AD 1500, when capitalist organization of labor processes first appeared. It continues to the present in most of the world. CHAPTER 1 Capitalism Shakes the World 3 Laos, North Korea, and China. The demonstrators rejected not only Communist dictatorships but also the centralized organization of their economies. All adopted some form of capitalist economic system. Like communism, other economic systems had earlier fallen to the capitalist onslaught. An economic system based on slavery in the U.S. South ended with the victory of the Union troops in the Civil War and Lincoln's emancipation of the slaves. As a result the South ceased to be a slave economy and became capitalist. Similarly, the simple economics of hunting and gathering—what most humans did to make a living for most of our time on earth—has been abandoned in most parts of the world, lo be replaced by other economic systems, and eventually, in most parts of the world, by capitalism. And the process continues. Capitalism is on a roll and has been since its birth. Nevertheless, capitalism is new. having been a moving force in world history for only the past five centuries or so—less than l percent of the time that humans have inhabited the earth. During this relatively short period, however, the world has changed more quickly, more constantly, and more profoundly than during any earlier period of human history. And now the pace of change appears to be quickening, so even greater transformations will most likely occur in our lifetimes. Tn this chapter we look at the evolution of capitalism in some detail. We define capitalism as an economic system in which employers hire workers to produce goods and services that will be marketed with the intention of making a profit. The main idea of this chapter is that wherever capitalism has taken root, it has left no aspect of society unchanged. This main idea is expressed in four key points: 1. Capitalism has brought with it unprecedented advances in scientific and other kinds of knowledge, astonishing developments in technology, previously unimaginable ways of sharing information, and rising standards of consumption, health, and education in most of the world. 2. Capitalism has also led to fundamental realignments of power and redistributions of wealth, the abolition of slavery and other archaic forms of bondage, and radical changes in family life, ideals, and beliefs. 3. Since we have lived with rapid change all of our lives, we tend to think of it as normal, even natural. Yet from a historical perspective, rapid and relentless transformation of the social and physical world is anything but normal. Far from being driven by change, earlier economic systems were bound by inertia. The capitalist epoch began in some parts of Europe around AD 1500. The capitalist organization of work—employers hiring people for wages to make a profit—first appeared in parts of England, the Netherlands, Belgium, and Italy. Initially the new way of organizi ng production affected few people, even in the countries where it first appeared, but as it spread and became stronger, the transformative power of capitalism also grew. It would eventually revolutionize the world. 4. Capitalism's development and the social changes accompanying it occurred at different times in different places, and its impact was highly uneven. In some places capitalist development occurred quickly, in other places very slowly, and in some regions of the world, capitalism is only now replacing other economic systems. Europe at the Dawn of the Second Millennium A mere handful of folk—unending emptiness stretching so far west, north, and east that it covers everything—fallow land, fens, and wandering rivers, heaths, woods and pastitreland, every conceivable type of erstwhile forest leaving behind it brush fires and the woodburners' furtive sowing— clearings here and there, wrested from the forest but still only half tamed; shallow pitiful furrows that wooden implements drawn by scrawny oxen have scratched in the unyielding soil.. . huts of stone, mud or branches, clustered in hamlets surrounded by thorn hedges and a bell of gardens; sparsely scattered towns, streets in ruins, fortifications haphazardly repaired, stone structures dating hack to the Roman Empire that have been turned into churches or strongholds. Such is the Western world in the year 1000. Compared with Byzantium, compared with Cordoba, it seems rustic, very poor and defenseless. A wild world ringed round by hunger, its meager population is in fact too large. The people struggle almost barehanded, slaves to intractable nature and to a soil that is unproductive because it is poorly worked. No peasant who sows one grain of wheat expects to harvest much more than three—if it is not too bad a year that means bread to eat until Easter time. t-tom George* Dubv. the oj ike Culhettrah (Chicago: UimerMty of Ch,c 1 The Permanent Technological Revolution To see more clearly the changes that have come with capitalism, consider what lite was like in Europe before the dawn of the capitalist age. In the year 1000, people there had short life spans; they had almost no experience with people or places farther away than the nearest town; and they depended on the food and other things they could produce by their own efforts, supplementing their consumption with only a few items available in local markets. During most of human history, people lived in societies that had not changed much since the lime of their parents, grandparents, or earlier ancestors. For generation after generation, sons made their livings in much the same ways as had their fathers before them, and daughters also followed in their mothers' footsteps. Tools and utensils, stories and beliefs were passed on from parents to children, just as they had been a century, or even a millennium, before. Good years and bad alternated with the weather, but continuous, rapid, and systematic change would not become an ordinary fact of life until the emergence of capitalism. Around the world societies were organized in many different ways, but most people were only dimly aware of this diversity because their horizons did not extend beyond the small communities in which they lived. By the beginning of the fifteenth century, however, Europeans began to explore other continents and '"discovered" what they called the "New World." Before long, traders and colonists, often financed by investors seeking fabulous riches, were intruding on indigenous peoples in areas located in what is now Virginia, Peru, Barbados, South Africa, and India, The dynamism unleashed by the advent of capitalism in Europe soon began to impinge on the rest of the world. 4 PARTI Political Economy II is hard to know which came first capitalism or the great spurt of technical change that came along with it. Whatever the truth may be. the continuous, rapid, and far-reaching scientific discoveries and technological innovations that are now accepted as a permanent feature of modern life emerged more or less simultaneously with capitalism. And, of course, these discoveries and innovations made possible the remarkable economic advances of the last five centuries. In 1500 goods were made almost entirely by hand, using simple tools. Power machinery consisted of such devices as the water wheel that turned a miller's grinding stone. People's understanding of the physical world was so rudimentary that births, deaths, and harvests, whether abundant or meager, were frequently interpreted with recourse to magic, superstition, or reference to God's will. As late as 1800 traditional craft-based techniques, using skills that had been handed down from generation to generation, still prevailed in most production processes. But the new era brought new ideas, new discoveries, new methods, and new machines in every field of endeavor, making old ideas and old tools obsolete. And the new ways were in turn quickly made obsolete by even newer ones. As technical change revolutionized production, it reduced the amount of time required to produce most products. The most important increases in labor productivity were those that occurred in the agricultural sector. As fewer people were required to produce the same or greater amounts of food, more labor could be devoted to the production of other things, particularly in the manufacturing sector. Thus, increases in agricultural productivity had to be achieved before the Industrial Revolution could take place. To illustrate the rapidity with which farm output has increased during the capitalist era, Figure 1.1 shows the growth of productivity in U.S. agriculture during the past two centuries. There have also been dramatic improvements in methods of transportation during the past five centuries. In 1500 people either walked or used wagons to get themselves and their possessions or freight from one place to another on land. Wagons were pulled either by people or by animals, and the movement of people or freight overland was arduous, costly, slow, and sometimes dangerous. For all but a very few wealthy people, travel beyond a short distance from home was virtually impossible, and shipping freight was so expensive that it did not pay to send anything but very valuable and lightweight goods such as spices and silks. Water transport on rivers and along coasts was easier, but ships were smal 1, slow, and unsafe. In 1500 there had been few advances in maritime technology beyond what was available to the Romans 1,000 years earlier. Within a century, however, sea transport was greatly improved. Ships began regularly crossing the Atlantic or rounding the Cape of Good Hope en route to the F,ast Indies. By 1800 clipper ships raced from China to London in eighty days and from New York to San Francisco (around the southern tip of South America) in twenty-two days. At the same time, sailing across the Atlantic became almost routine. The opening of the Sue/ Canal by 1870 and the Panama Canal by 1914 greatly shortened world trade routes, while coal- and oil-fueled engines made sailing ships obsolete. Before the end of the twentieth century, oil tankers, each carrying 2,500 times the cargo of Columbus's ships, clogged the shipping arteries of the world and became too large to enter all but the largest and deepest harbors. Until the Concorde was grounded for economic reasons in 2003, those who could pay the $9,000 required for a reservation on this aircraft could travel from London to New York in three hours, moving at twice the speed of sound, overtaking the sun, and arriving "earlier" than when they had left. CHAPTER 1 Capitalism Shakes the World 5 1830 1890 1930 1955 1965 1975 1987 FIGURE 1.1 Productivity increases in U.S. agriculture, 1830-1987. J;ocusing specifically on wheat production, this figure shows how hibor productivity in U.S. agriculture has risen during the past two centuries. In the eighteenth century American farmers used crude wooden plows, sometimes drawn by horses or oxen. They sowed seeds by hand, cultivated them with hoes, cut the wheat with sickles, and harvested their grain from the wheat using manual threshing devices called Hails, iron plows were introduced early in the nineteenth century, but as lale as 1830 it still took about three hundred hours of labor to produce one hundred bushels of wheat on a five-acre farm. In the mid-nineteenth century farmers began to use chemical fertilizers, and soon came to rely more and more on factory-made agricultural tools und later machinery. Over the next century agricultural productivity rose dramatically. By 1987. on a large, highly mechanized American farm, one hundred bushels of wheat could be produced with only three hours of labor on three acres of land, one hundred times more outpul per hour than could be produced in 1830. Source: U.S. Department of Agriculture. Hcoiiomic Research Service, "A History of American Agriculture 1776-iyyU" (Washington. DC: US Department of Agriculture, hecmnmic Research Service, 1993). Land transport was revolutionized as well. First, inland canals were dug such as the famous 365-mile Erie Canal in New York State, finished in 1825. Barge traffic through canals greatly reduced the cost of overland haulage. Railroads further increased the speed and cut the cost of moving goods and people. In the United States, the transcontinental railroad was completed in 1867, and by the end of the nineteenth century tracks would crisscross all the world's industrial areas and penetrate the Canadian Rockies, the East African highlands, the Chinese hinterland, the vast Russian steppes, and the plain of northern India as well. Yet all this was but a prelude to the great twentieth-century land transport revolution based on automobiles, trucks, and highways. When air travel and transport, major innovations of the last century, were added to the mix. they partly displaced railroads in global shipping and travel. The technological advances in transportation were matched by equally significant developments in medicine, agriculture, and communications. Improvements in health care and agricultural productivity made possible the population explosion and urbanization discussed later in this chapter. Moreover, the communications revolution has been central to the process of globalization, also to be discussed later in this chapter. Less beneficial were certain advances in weaponry and the discovery and production of toxic chemicals and biological agents. Today, chemical, biological, and nuclear weapons, sometimes referred to as weapons of mass destruction, are PART 1 Political Economy CHAPTER 1 Capitalism Shakes the World 7 powerful enough to destroy the entire population of the world. Whether in production techniques, in transportation, in medicine, in agriculture, in communications, or in nuclear, chemical, and biological warfare, technical change has occurred with a speed and pervasiveness that is unprecedented in human history. The Enrichment of Material Life The technological changes of the past five centuries have been accompanied by significant increases in people's consumption standards. Before the capitalist epoch, living conditions improved or deteriorated with changes in the weather, epidemics, and other natural phenomena, because most people made their living by farming, herding, or hunting and gathering. But where capitalism took hold, average living standards began to rise in a sustained way, though with variations over space and time. Figure 1.2 shows the sharp upturn in real wages experienced by one group of workers after capitalism emerged as the dominant economic system in Great Britain in the nineteenth century. While Britain was the first capitalist country, the new economic system soon spread to other countries, producing comparable increases in average living standards wherever it went. In the United States, for example, as best we can measure, the buying power of the average income in 2002 was thirty-two times what it was in 1789 (the year the U.S. Constitution was adopted). This does not mean, of course, that Americans are now thirty-two times happier than they were in 1789, but it does indicate an unprecedented growth in the availability of material goods. With increasing material abundance, diets became more varied (with meat eaten more frequently) and housing larger and more comfortable (at least warmer in the winter). Why did the English Economy take off? Competition, Coal, or Colonies? Over the last live hundred years, small regional disparities in living standards grew into enormous gaps, and a large part of the world fell under the domination of Europeans and of Americans of European descent. Why did industrialization lake hold so rapidly in Britain and Europe? Was it coal? Colonization? Economic policies? At first glance England, and Europe generally, had no special advantages that primed these economies to make the leap. Before the "European miracle" Chinese scientific knowledge surpassed that of Europe in many fields and rivaled it in most. And Europe's scientific advances were in fields with few links to the technologies that propelled the industrial revolution there. Nor were the more advanced economic areas of China, like the Yangtze River delta, poorer than the advanced areas of Britain and Europe. Some economists say it was British economic institutions that made the difference: that the British government kept its hands off the economy, respecting property rights and refraining from setting prices or wages. But recent historical research shows that individual pursuit of economic gain was probably freer from governmental interference in China's Yangtze River delta in the eighteenth century than in England or Europe. Historian Kenneth Pomeranz concludes that neither scientific advances, nor riches, nor a laissez-faire environment explains why capitalism took root in England rather than flowering elsewhere and propelling some other people to world dominance. What the Yangtze delta lacked was natural resources. Unlike England, it had no rich coal deposits and little water power, and its hinterland was not prepared to supply sufficient raw materials for an expanding economy. By contrast. British military prowess, honed in centuries of Continental warfare, gave England cheap access to the raw materials of the New World, especially after France lost the Seven Years War (1756-1763). Sugar from Barbados, Jamaica, and the other British Caribbean colonies provided over 10 percent of the calories consumed by British labor. Slave plantations in British colonies fed raw cotton to the booming textile mills of Manchester. Britain's farmland could not have produced enough sugar for British workers or enough fibers for British cloth production, Without the colonies, economic expansion would have pushed up the prices of cotton, sugar, and other raw materials, driving down profits and prematurely grounding the British takeoff. Pomeranz uses these arguments to dispute other historians' claim that institutions gave Britain the edge: that strong property rights, effective competition, and limited government drove the Industrial Revolution. Instead, he wrote, England and Europe had institutional advantages that seemed "applicable to very few endeavors in the pre-1800 world besides war, armed long-distance trade and colonization." Source: Kcmielh Pomerani I Princeton: Princeton Univ . The Grti :rsiL> Prt'> Divergence. China. Europe, and the Making ofthe Modern World Eiu 2111)0). The quuie is from p. 166. Figure 1.3 shows how the rise of productivity in Europe eventually helped to lift output per person in the world as a whole. The main part of the figure shows that the dramatic increase in output per person, averaged for the world as a whole, did not occur until after 1820, while the smaller (inset) chart shows in detail the relative contributions of different regions to the world's total output during the past five centuries. To simplify this chart, the nations of the world have been divided into three groups. The first group, called "Western world," includes western Europe and the largest nations of the former British empire—the United States, Canada, Australia, and New Zealand—where English-speaking settlers rapidly became a majority of the population. The second group includes all of Asia, including China, India, and Japan. The third group consists of all the nations in Africa, Latin America, and the former Soviet Union countries of eastern Europe, including Russia. It can be seen that the "Western world" was responsible for most of the growth of world output between 1500 and the early 1900s, its share of world output increasing from less than 20 percent in 1500 to more than 55 percent in 1913 and 1950. But, as the chart shows, its relative share has been falling since 1950. While the West's share of world output was increasing, that of Asia was declining. This was due in part to the fact that the absolute amount of output being produced in the West was growing much faster than the amounts being produced in other regions, so the percentage of world output attributable to the other regions had to be falling. Because Asia produced most of the world's output in 1500, it was the region with the most to lose. Most of the decline in Asia's share was due to the spectacular economic success of Europe and North America. But there were other reasons for the precipitous decline in Asia's share of world output between 1820 and 1950. For one thing, British imperialism had a devastating effect on the productivity of India, a major contributor to Asia's output. Whereas India had had a strong and diversified economy in 1800, by the mid-nineteenth century its British rulers had begun to 8 PART 1 Political Economy CHAPTER 1 Capitalism Shakes the World 9 i—I—r "i i I i I—I—I—i—I—r FIGURE 1.2 Real wages in London over seven centuries. This figure shows the average real daily wage of skilled construction workers in London heiwecn 1264 and 1999. The term "real" means lhat the monetary wage in each year has been corrected for price inflation, so that il measures ihe buying power of the wage in that year. The data are presented here as an index. They show what the average real wage was in each year relative to whai it was in 1850. the arbitrarily chosen base year Tor which the index is set at 100. For example, if the real wage in the 1930s was twice what it was in 1850, it is shown here as 200: if in the mid fourteenth century il was half of its 1850 level, it is shown as 50 in that period. While the data are subject to error, they do make clear that real wages did not rise consistently prior to the full development of capitalism. Variations in the real wage before 1800 often resulted from sudden population changes. For example, the Black Death (bubonic plague) killed many in Great Britain and elsewhere in the mid-fourteenth century, creating a labor shortage in Great Britain and driving up wages. Gains made between 1300 and 1500 were eroded after 1500 by rapid price increases caused by the sudden inflow of gold to Europe from the Americas. Inflation often reduces real wages, at least if workers lack organization and bargaining power. But afler 1800, and particularly after 1900. increased labor productivity and greater bargaining power of sume workers led to dramatic increases in real wages lor people like the skilled construction workers represented in this figure. Source. Ruben Allen. "Wages, Prices and Living Standards: The World Historical Perspective." available at hups:// w w w, n ufri e I d. ox, ac. u k / Peop I e/s i t e s /A 11 c n /S i tePagc $/B iog ia phy. cripple lhat naiion's colton textile industry in order to gain the entire Indian market for their own cotton textile products. At the same time India was forced to specialize in producing (less valuable) raw cotton for export to English textile factories. Since 1950. the rising Asian share of world output and the simultaneous decline in ihc West's share stemmed largely from economic expansion in Japan and China. Measured by total output, the United States has the largest economy in the world, and China (officially the People's Republic of China) is second, with nearly one-fifth of the world's population and with average growth rates of output of 10 percent since 19X3. Also importanl is the contribution of some Asian "tigers"—notably South Korea, Thailand, and Singapore—all of which achieved a 9 percent average growth rale from 1987 through 1996, followed by somewhat slower growth. FIGURE 1.3 Two centuries of world GDP per capita. The larger chart presents inflation-adjusted estimates of output per person (GDP per capita) for the whole world during the last two hundred years. These estimates come from over half a century of research by Ihe late Angus Maddison, an eminent scholar of global population size, technical change, and productivity growth, and his fellow economic historians, who are continuing the project. Maddison estimated thai world output per person rose only slightly from the year ADO to I820; his successors agree, estimating it at $600-$700 in ADO and $712 in 1820 {in 1990 international G-K dollars). For 1820. among countries for which data exist and have been analyzed, average incomes are estimated from over $300 in Korea to over $2,000 in the UK. For eighteen centuries, global output rose about as fast as global population. But since 1820. technical changes accompanying the rise of capitalism have greatly expanded output per person. The smaller (inset) chart shows how in the past two centuries the share of world output produced by each region has changed. These changes have many causes, including diverse population growth rates, technology, war or peace, and the organization of production and exchange. Sources'. The Maddison-Project, hiip://www.cf.cli:-net/niaddisoii/i]iaddison-projetl/honie.htni, 2013 version; Angus Maddison, Monitoring the World Economy. M20-I992 (Paris: OECD. 1995), 19, Table 11(a); Angus Maddison. The World Economy: A Millennial Perspective (Paris: OECD, 2001), 2fi, Table 1-2. available at http://www.oocd-library. org/devdopmeni/lhe-world-cconnmy_97R9264]04143-cji: World Economics: Measuring Global Activity. Maddison Historical GDP Data, Downloadable Data (to 2008); h tip://www. world economic Madibuit%20Historical%20GDP%20DatS.efp. :oiii/Data/MadisonHistoricalGDP/ One can also see from the inset chart in Figure 1.3 that the nations of Africa, Latin America, and eastern Europe started out with the smallest share of world output in 1500, and increased their share slightly between 1820 and 1950, but ended up again (in 2010) with the smallest share. The recent decline here is mostly a result of the catastrophic fall in output associated with the difficult transition from central planning to capitalism after the upheavals of 1989 to 1991 in eastern Europe and Russia. It is also partly a result of the very rapid growth in China and other Asian countries, which mean that even the Western world's share of global output shrank. The data presented in Figures 1.2 and 1.3 showing vast increases in wages and output in much of the world over the pasl few centuries may actually understate 10 PARTI Political Econorr the associated improvements in living standards if the overall quality of goods has increased dramatically, an increase that may not be adequately accounted for when wc measure prices and output. Qualitative improvements can be seen most strikingly in the production oi'light, starting with the camplires of our distant ancestors and then moving on, with the passage of time, to oil lamps, candles, kerosene lamps, and, ultimately, to modern lighting technologies such as filament and fluorescent light bulbs. These changes brought an extraordinary increase in the efficiency of light production. Engineers define lighting efficiency with reference to how much light, measured in units called "lumens," can be produced using a certain amount of energy (measured in watts). Figure 1.4 charts the advance of lighting technology from 1700 to 1993, showing the lumens per watt of each new lighting source. Not shown in the chart is the fact that the lighting power of a campfire is between .002 and .003 lumens per watt. By 1800 a light source, the tallow candle, had been developed that was more lhan thirty-two times as efficient as a campfire: it emitted light at nearly .076 lumens per watt. With the coming of electric power in the late nineteenth century, lighting technology began to improve rapidly. By 1900 an advanced carbon filament lamp could light up a room (or a street) at 3.7 lumens per watt. A century later, a 100-watl tungsten 1992: First generation fluorescent bulb 68.3 - 1930-1990: I m prove men ts in tungsten filament lighting 30: Sperm whale oil candles 10AO: Whale oil lamps 1B83: Electric 0.13 carbon filament lamp 1750 BC-1B00AD: Sesame oil lamps and paraffin candles - .05 - 1B00 AD: Tallow candles 1875: Town gas lamp 0.35 FIGURE 1.4 Improvements in lighting technology, 1700-1992. * »" • » * W» measuring ,bc power of a So„ree