What Most People Don’t Know about Our 250-Year History, Part II

As we approach our country’s 250th birthday, there is no better time to reflect on where we have been and how we got here. Yet Americans are surprisingly ignorant about our past.

As I noted in Part I, the book The Triumph of Economic Freedom by Phil Gramm and Donald J. Boudreaux is a useful remedy. Together the authors have combed through the scholarly literature and savagely dismantled myths about our economic history—myths that are routinely taught in high schools and colleges across the country.

Here are a few more examples:

The Birth of Capitalism in England

About the fourth decade of the 19th century, something happened that had never happened before in the history of the world. The income of the average worker in northern Europe rose to a higher level than it had been the year before. Then it rose again the year after that. And it kept on rising—year after year, thereafter.

For the first time in the history of the human race, people experienced the effects of economic growth.

For the previous 200,000 years or so, human beings who populated the earth lived at the subsistence level. That’s the rough equivalent of about $2 a day at today’s prices.

Suppose you had only $2 a day to secure all the food you eat, all the clothing you wear, and all the shelter you have access to. Imagine what your life would be like. That was how your ancestors lived for almost all of human history.

Deirdre McCloskey calls the 19th century the “Great Enrichment.” She writes, “the Industrial Revolution initiated the greatest concentration of material blessings ever experienced by ordinary men, women and children.”

But that is not how other writers described the period and it’s not what has been taught in high schools and colleges in the 20th century and even today. According to the philosopher Bertrand Russell, “The Industrial Revolution caused unspeakable misery both in England and in America.” Frederick Engels contrasted the pleasure and ease of rural life with the hell of factories in which “workers treated like brutes, actually became so.” In A Christmas Carol, Charles Dickens depicts a world in which the unemployed scavenge for potatoes that have fallen off a wagon, and people live in squalor. The historian Arnold Toynbee describes the Industrial Revolution as:

[A] period as disastrous and as terrible as any through which a nation ever passed; disastrous and terrible, because, side by side with a great increase of wealth was seen an enormous increase of pauperism; and production on a vast scale, the result of free competition, led to a rapid alienation of classes and to the degradation of a large body of producers….

Like any good economist, Gramm and Bordeaux ask, if things were so bad in the cities, why were so many people migrating there from the countryside? After all, by the mid-19th century, half of the population in England were urban dwellers. When they looked at the scholarly evidence, they were not surprised to find that however bad life in the cities may appear to modern observers, it was better than in the areas people were leaving. Here is some of what they found:

• From 1830 to 1900, per capita income in England more than doubled.
• From 1840 to 1900, the real wages of skilled and unskilled builder craftsmen rose by 113 percent and 124 percent, respectively.
• From 1841 to 1901, life expectancy for males rose by 20 percent.
• Life expectancy for females rose by 24 percent.
• The literacy rate, which was 64 percent for men and 55 percent for women in 1851, improved to an almost universal 97 percent by 1900.

McCloskey writes, “Because he produced two-and-half-times more than his grandfather produced in 1780, the average person in 1860 could buy two-and-a-half times more goods and services.”

Remember: Nothing like this in history had ever happened before.

The Birth of Capitalism in America

America’s Industrial Revolution is often called the “Gilded Age,” and the most successful entrepreneurs of the period are often called “robber barons.” In a popular high school history text, Howard Zinn writes:

Ordinary people who lived through the Gilded Age… experienced tremendous hardships and losses…. While they got poorer, the rich were getting richer…. And so it went, in industry after industry—shrewd efficient businessmen building empires, choking out competition, maintaining high prices, keeping wages low.

Yet Gramm and Bordeaux find that far from restricting output and raising prices, the reverse happened in the supposed monopoly industries. Between 1880 and 1890, output of these industries increased by 175 percent–seven times the increase in real GDP over that period. Prices in these industries fell three times faster than the overall consumer price index.

As was the case in England, the Industrial Revolution in America led to broad economic benefits for the population as a whole.

• Between 1865 and 1900 per capita income in the US almost tripled.
• Real annual earnings for nonfarm workers rose 62 percent.
• Between 1860 and 1900, life expectancy increased by 13.7 percent.
• Infant mortality declined by 34 percent.
• From 1870 to 1900, the illiteracy rate fell by 47 percent.

And, as was the case in England, these changes were unprecedented in all of human history. The authors write:

The average daily hours of work in manufacturing facilities fell, and life’s staples—food, clothing and shelter—became far more plentiful, higher in quality and significantly cheaper. The cost of food, textiles, fuel, and home furnishings fell in inflation-adjusted dollars by 45 percent, on average.

The Progressive Era

There are two myths about the era that followed the Gilded Age.

The first myth asserts that in the late 19th century and early 20th century the American economy was dominated by large trusts that abused workers and consumers alike in pursuit of monopoly profits. The second asserts that government responded to these abuses by protecting the public with strict regulations on an otherwise laissez-faire economy.

The paradigm case is meatpacking. In Upton Sinclair’s muckraking book The Jungle, the author describes “piles of meat” coated with “the dried dung of rats”—rats that were then poisoned by the workers and ground up with other meats that were then sold to consumers. In response to Sinclair’s revelations, Congress passed the Meat Inspection Act of 1906—which was designed to protect the public from such abuses, even though there is no record of any major health event tied to meat consumption at the time.

Yet as Gramm and Boudreaux correctly point out, the large Chicago meat packing houses actually supported the legislation! The reason: Any restrictions under the act were restrictions they could easily adapt to or were already following, but would increase costs (and perhaps drive out of business) their smaller competitors.

In other words, a law that was supposed to rein in dog-eat-dog competition was actually a vehicle that protected vested interests against competition from smaller rivals.

Something similar happened with the Interstate Commerce Commission (ICC)—our first federal regulatory agency. The complaint from customers was that the railroads were engaged in price discrimination—charging different (per mile) rates to different customers. For the railroads, the problem was price-cutting (including secret rebates) by rival companies. And that produced what they viewed as ruinous competition.

So, like the meat packers, the railroads supported federal regulation of their industry. The agency never outlawed price discrimination, although it did outlaw cutthroat competition by outlawing secret rebates. Overall, the railroads benefited. In time, the regulatory authority extended to the railroads’ competitors—barges and trucking, for example—giving them, too, the benefits of federal regulation.

By the time of the Carter administration, economists became convinced that the ICC was acting as a cartel agent for the shippers rather than protecting consumers. That is why Republicans and Democrats alike supported deregulation of the ICC and other federal regulatory agencies.

Far from protecting the public from the excesses of capitalism, the Progressive Era gave us government regulations designed to help producers, not consumers, in the marketplace.