Lately economists have been comparing today’s digital revolution to the first industrial revolution (1790-1860) and the second (1870-1930). This granular, micro-economic analysis is a welcome respite from the absurdly abstract macro parlor games played by Keynesians and their adversaries. Three economists have weighed in:
- In The Great Stagnation Tyler Cowan takes a pessimistic view of the Internet and future economic growth, claiming that much of the” low-hanging fruit” that drove economic growth in the past has been picked and eaten.
- Robert Gordon argues the digital revolution is raising living standards far less than the “second industrial revolution” of 1870-1930, consisting of electricity, telephony, modern chemistry, indoor plumbing, autos, airplanes, movies, radio, etc.
- In The Second Machine Age, Erik Brynjolfsson and Andrew McAfee of MIT take a more bullish view of the digital revolution, highlighting such advances as the driverless car, robots, and computers than can win chess matches. They foresee dramatic improvement in digital capabilities as computing power advances at an exponential rate and discrete technologies are recombined to create revolutionary new capabilities.
Economists and Historians Debate the Gilded Age
Amidst their disagreements, these economist concur on two things: A) They all fret about the increase in inequality that has accompanied the digital revolution. B) They agree that the aforementioned “second industrial revolution” of the late 19th century greatly improved living standards. What is fascinating to me is that most historians take a far darker view of the “gilded age” of the late 19th century when, they argue, a vast increase in economic inequality—a yawning gap between colluding capitalists and ordinary workers—threatened American democracy. Let’s let the historians speak for themselves:
In his classic expose, The Robber Barons, Matthew Josephson wrote that over-investment in the 1890s was to be expected in a “scheme of distribution which brought to a few men incomes of from ten to twenty millions per annum, while even the skilled among the underlying population enjoyed a purchasing power of no more than $500 a year—and this by no means stable….[in 1890] Jay Gould’s income was approximately ten millions of dollars per year.”
In The Monied Metropolis, Harvard historian Sven Beckert spotlights the conspicuous over-consumption of Manhattan’s haute bourgeoisie, including extravagant balls such as the 1897 party that Cornelia Martin threw for 700 of her closest friends, who showed up at the Waldorf Astoria wearing costumes of historic figures. No less than 50 celebrants came as Marie Antoinette. The Park Avenue Armory at 68th Street, now a popular venue for over-priced antique shows, was built by Manhattan’s capitalist elite as a fortified castle that could, if necessary, hold off New York’s working class rabble.
Journalist Jack Beatty unambiguously begins his book, The Age of Betrayal: The Triumph of Money in America, 1865-1900 by announcing “This book tells the saddest story: How, having redeemed democracy in the Civil War, America betrayed it in the Gilded Age.” He agrees with popular economist Henry George that America had a government “by the corporations, of the corporations, and for the corporations.”
In Standing at Armageddon, Princeton historian Nell Irvin Painter notes that “from the 1870s to the 1910s (and beyond) some Americans feared that a society in which the privileged wielded enormous power to further own interests could not at the same time function as a democracy in which all were created equal.”
Clearly there is a weird disconnect between historians’ hand-wringing about the first “Gilded Age” and economists’ judgment that the living standards of the average American improved dramatically. Perhaps, a century from now, there will be similar disagreement about whether the benefits of the Internet ultimately outweighed rising income inequality.
The Free Stuff Problem
One huge problem in assessing the benefits of the Internet is that, in economics, something does not exist unless someone buys it. But much of what is available on the web is free—books, music, maps, news, stock charts, games, etc. etc. In emerging markets, users of the WattsApp service that Facebook just acquired can get two years of texting (text, photos, video) for just $1.00. Economists are well aware of the problem but ultimately end up ignoring it. So we are told that the median income of American males has not increased since 1973 even though their living standards have, in many respects, improved dramatically.
Let’s Get the History Right
The aforementioned economists forget that the first “industrial revolution” was not all about technology. Initially it involved increasing specialization of production (using traditional technology), made possible in the late 18th century by the expansion of the market. Adam Smith described how pin production became much more efficient when it was broken into separate steps performed by specialized workers. In the U.S., specialization transformed the shoe industry without the aid of much new technology. The industry shifted from an artisanal craft where one cordwainer made the whole shoe to a “putting out system” where some people made the “uppers,” some made the sole, and still other workmen assembled the final product.
Brynjolfsson and McAfee think the steam engine initiated and drove the “First Machine Age.” Wrong, at least for the U.S. The first wave of industrialization in New England and the mid-Atlantic Region, between 1790 and 1830, had little to do with steam engines. Mechanization of textile production — spinning thread, weaving cloth, and then finishing and dying the cloth – transformed the industry at a time when textiles were the most important manufactured product in international trade. High-tech textile mills used water power, not steam engines. The most sophisticated mills were constructed in Massachusetts by the “Boston Associates”—Boston Brahmins who made their first fortunes in international trade, stole textile manufacturing secrets from Britain, and built large integrated textile mills on the Charles and Merrimac Rivers. (Come on guys, the Lowell Historical Site is only 38 miles from MIT. You should know this stuff.) The machinery in these water-powered factories required advanced mechanical engineering.
Most other “high tech” Northeastern factories used water power in the first third of the 19th century. In this period of American history steam engines were mainly used not in factories but on steamboats. Relatively light, high – pressure steam engines powered boats on the Mississippi and other western rivers. Unfortunately they had an annoying tendency to blow up. After 1830 steam engines gradually became more important in factories, and they were also used on railroads which began to proliferate in the 1830s. But the first railroads were used by passengers. Until the 1850s most freight was moved on wagons, barges, canals and sailing ships.
The Second Industrial Revolution (1870-1930): A Protracted Affair
If the “first industrial revolution” (1790-1860 in the U.S.) involved the mechanization of textiles and other manufacturing using water power, gradual introduction of steam engines, and development of railroads, the second industrial revolution involved a diverse collection of new technologies, including telephony, electricity, automobiles, modern chemistry, movies, and radio. It took a long time for new technologies to transform the broader economy. Electric lights began to appear in major cities in the 1880s, but as late as the 1920s manufacturing productivity was being driven by construction of modern factories that used electric motors rather than steam power. (Electric motors scattered along the assembly line were more flexible than a centralized steam engine.) Automobiles were developed in the 1890s but Ford’s Model T was not introduced until 1907 and autos did not really transform the lives of middle class Americans until the 1920s.
Copyright Thomas Doerflinger 2014. All Rights Reserved.
