Economic Theory in the Early 20th Century

1
Economic Theory in the Early 20th Century

• Struggling to Explain Economic Problems Part 1

2
New Wave Utilitarianism

• As the 19th century ended, a movement of
  economists -- headed by John Bates Clark, Leon
  Walras and Carl Menger -- resurrected the
  utilitarian principle that man always seeks
  pleasure and avoids pain
• They developed sophisticated theories of marginal
  utility
• And asserted that price has the power to clear
  virtually all markets

Leon Walras
John Bates Clark
Carl Menger
3
Economics in Defense of the Status Quo
THE LAST THING THE INDUSTRIAL AND FINANCIAL
GIANTS WANTED WAS COMPETITION, PARTICULARLY FROM
EXTERNAL COMPETITORS

• Mercantilist notions, universally discarded
  though they are by the well-informed, affect the
  policy of nations, not only by strengthening the
  movement toward protection, but in other ways
  also.
• Complex political and social questions present
  themselves, quite beyond the scope of a book on
  economics.
• Frank Taussig, Principles of Economics, 1911

Frank Taussig
4
Economics in Defense of the Status Quo(continued)
AND THE DEFENSE OF CORPORATE INTERESTS OVER THE
COMMON GOOD
Herbert J. Davenport

• Economists of all people dread the stigma of
  radicalism. Far better to elucidate and emphasize
  the excellent aspects of things as they are
  than to question the economic harmonies, or to
  doubt the validity and the beneficence of natural
  law, or to bring in question the deft guiding of
  the divine hand.
• Herbert J. Davenport, The Economics of
  Enterprise, 1925

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Economics in Defense of the Status Quo(continued)
ONLY A FEW DARED TO DISSENT

• Ricardos distinction of unearned rent
  disappears because all future incomes, no
  matter how monopolistic, discriminatory, or
  unfair, are looked upon as future rents, to be
  paid for the use of any and all kinds of
  property, so that capital become the present
  discounted value of those future rents.
• John R. Commons, Institutional Economics, Vol,II,
  1934

John R. Commons, who taught economics for 30
years at the University of Wisconsin
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Economics in Defense of the Status Quo(continued)
AND, ALSO, ONE RATHER INTERESTING VOICE COMING
FROM THE POLITICAL WILDERNESS

• It is quite true that land monopoly is not the
  only monopoly which exists, but it is by far the
  greatest of monopolies -- it is a perpetual
  monopoly, and it is the mother of all other forms
  of monopoly. It is quite true that unearned
  increments in land are not the only form of
  unearned or undeserved profit which individuals
  are able to secure but it is the principal form
  of unearned increment which is derived from
  processes which are not merely not beneficial,
  but which are positively detrimental to the
  general public.

Winston L.S. Churchill
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Economics in Defense of the Status
Quo(continued)
MORE FROM CHURCHILL ...

• Land, which is a necessity of human existence,
  which is the original source of all wealth, which
  is strictly limited in extent, which is fixed in
  geographical position -- land, I say, differs
  from all other forms of property in these primary
  and fundamental conditions.
• Winston S. Churchill, 1909

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Economics in Defense of the Status Quo(continued)
ECONOMISTS FOCUSED ON MARKET FORCES BUT BEGINNING
TO BE EMPLOYED BY GOVERNMENT ALSO HAD TO RESPOND
TO CONTROVERSIAL CHALLENGES TO PUBLIC POLICY

• Should a nation restrict immigration, or even the
  out-migration of population?
• Do tariffs and quotas actually stimulate the
  development of new domestic industries?
• How should government raise its revenue?
• How should infrastructure be paid for?
• Are industrial and other monopolies harmful to an
  economy?

9
Economics in Defense of the Status Quo(continued)
ONE MAJOR POLITICAL FIGURE IN THE UNITED STATES
WEIGHED IN ON THE QUESTION OF IMMIGRATION

• We cannot have too much immigration of the right
  sort and we should have none whatever of the
  wrong sort. It is our right and duty to consider
  his moral and social quality. His standard of
  living should be such that he will not, by
  pressure of competition, lower the standard of
  living of our own wage-workers for it must ever
  be a prime object of our legislation to keep high
  their standard of living.
• Theodore Roosevelt, Annual Message to the
  Congress,1905

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Economics in Defense of THE Status Quo(continued)
PROGRESSIVE JOURNALISTS CALLED FOR NEW LAWS TO
TAME THE MONOPOLISTS

• What big and little businesses all had in
  common was not size but the need of privileges
  franchises and special legislation, which
  required legislative corruption protective
  tariffs, interpretations of laws in their special
  interest or leniency or protection in the
  enforcement of laws, calling for pulls with
  judges, prosecutors, and the police.
• Lincoln Steffens, Autobiography

11
Recovering from Global Warfare
THE COST OF WAR IS RARELY PAID FOR BY TAXATION OF
THOSE WITH THE MOST TO GAIN OR LOSE

• In 1918, Britains national debt exceeded 7
  billion pounds
• The war did raise nominal wages for workers, in
  part to meet rising costs of everything
• The need for industrial calm strengthened the
  negotiating ability of the trades unions
• Rural agriculture also expanded to replace the
  loss of imports, driving up agricultural land
  prices so that farmers took on higher levels of
  debt (exposing them to the risk of losing their
  farms should commodity prices fall

12
Recovering from Global Warfare(continued)
FRANCE ENDED THE FIRST WORLD WAR IN MORE
DESPERATE CIRCUMSTNACES THAN BRITAIN

• The wealthy in France had moved over half of the
  nations financial reserves into overseas
  investments
• Frances national debt had skyrocketed

13
Recovering from Global Warfare(continued)
AND, IN RUSSIA, THE STAGE WAS SET FOR A BOLSHEVIK
TAKEOVER

• Russias Minister of the Interior, Peter
  Stolypin, hoped to stem peasant unrest by
  creating a class of market-oriented smallholding
  landowners. Failing this, he predicted the
  worst
• The legislative institutions and the
  intellectual opposition parties, lacking real
  authority in the eyes of the people, will be
  powerless to stem the popular tide aroused by
  themselves, and Russia will be flung into
  hopeless anarchy, the issue of which cannot be
  foreseen.

Peter Stolypin
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Recovering from Global Warfare(continued)
THE END TO CZARISM FOR THE RUSSIAN PEOPLE

• After riots occurred in Petrograd, the autocracy
  fell
• Alexander Kerensky became head of a new
  government as chaos spread throughout Russia
• Under Leon Trotskys leadership, the Bolsheviks
  emerged as the dominant revolutionary group
• In November Lenin arrived in Petrograd to head a
  new government

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Recovering from Global Warfare(continued)
LENIN CLEARLY UNDERSTOOD THE NEAR IMPOSSIBILITY
OF BRINGING THE MARXIST VISION OF SOCIALISM TO
RUSSIA

• Only by the hard and long path of
  self-discipline would it be possible to overcome
  the disintegration that the war had caused in
  capitalist society, that only by extraordinarily
  hard, long, and persistent effort could we cope
  with this disintegration and defeat those
  elements aggravating it, elements which regarded
  the revolution as a means of discarding old
  fetters and getting as much out of it for
  themselves as they possibly could. ...

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Recovering from Global Warfare(continued)
AND, THIS MEANT A LONG PERIOD OF HARDSHIP,
DEPRIVATION AND RELENTLESS ELIMINATION OF ANY
RESISTANCE TO THE NEW REGIME OF STATE-SOCIALISM

• The emergence of a large number of such
  elements was inevitable in a small-peasant
  country at a time of incredible economic chaos,
  and the fight against these elements that is
  ahead of us will be a hundred times more
  difficult it will be a fight which promises no
  spectacular opportunities.

17
Wilsonian Pragmatism
WOODROW WILSON DETERMINED TO USE THE POWERS OF
GOVERNMENT TO CREATE A MORE LEVEL PLAYING FIELD

• Tariff reductions were implemented early in 1913
• The 16th Amendment to the U.S. Constitution was
  ratified, allowing a 1 tax on individual incomes
  above 3,000, an additional 1-6 tax on incomes
  above 20,000 and up
• The Clayton Antitrust Act was passed late in 1914

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Wilsonian Pragmatism(continued)
WILSON APPOINTED DAVID HOUSTON, PRESIDENT OF
WASHINGTON UNIVERSITY IN ST. LOUIS, TO HIS
CABINET. HOUSTON HELD AN M.A. IN POLITICIAL
SCIENCE FROM HARVARD UNIVERSITY

• Houston became Secretary of Agriculture, then
  Secretary of the Treasury in 1920
• His tenure in the cabinet occurred during years
  of great challenges and controversies

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Wilsonian Pragmatism(continued)
WILSON REALIZED HIS SUCCESS DEPENDED ON
CONSOLIDATION OF HIS POWER WITHIN THE RANKS OF
THE DEMOCRATIC PARTY. TO JOSEPHUS DANIELS
(SECRETARY OF THE NAVY), HE SAID

• I would rather trust a machine Senator when he
  is committed to your program than a talking
  Liberal who can never quite go along with others
  because of his admiration of his own patented
  plan of reform.

20
Wilson Challenged
AS THE U.S. EMBARKED ON A MILITARY BUILD-UP IN
1916, PROGRESSIVES AND ISOLATIONISTS JOINED
FORCES IN PROTEST OVER HOW THE COSTS WOULD BE
PAID FOR

• The group the Association for an Equitable
  Federal Income Tax -- included John Dewey and
  Frederic C. Howe
• They demanded that the burden be carried by those
  who stood to gain most form wartime expenditures
• A bill to this effect was passed by the Congress

John Dewey
END