Economic Evolution

In the Beginning

When I was young for a time I thought that the economy worked precisely one way and it was immutable. Boy was I wrong.

When I understood that laws shaped how things could be done in the economy, I began to think about how it did or should work. This inexorably led to consideration of how some key elements like energy played a big role.

 

Energy

I start here by talking about energy and how it was, and is, used and how that related to major changes in Society.

Mankind went from picking berries and nuts to use of fire to farming using domesticated animals for energy to using human slaves for energy to using peat, coal, oil, natural gas, and even radioactive materials for energy.

All of us are fed by foods needing oxygen, water, and sunlight, so before the use of carbon-based fuels, we were using sunlight energy and nature. Domesticated farming made the outcomes better, but the fuel was still sunlight. It may surprise some people to think that peat, coal, oil, and natural gas are in the same category as the non-carbon-based nuclear fuels like uranium. Despite their differences (solid, liquid, gas, radioactive) they are all used to produce heat which moves the wheels of a steam locomotive train or the turbine in an electricity generation plant or the internal combustion engine of an automobile. Radioactive fuels heat water, produce steam, and the pressure from that expanding gas turns a turbine.

Coal as a transportation fuel goes back to the early 1800s [see Wikipedia]. And use of coal to produce electricity began in 1878 [see Wikipedia]. Use of oil to make transportation fuels like gasoline began in the 1840s-50s [see Wikipedia]. It is of obvious significance that the last society to use human slavery as a major component of its economy was the United States and the U.S. Civil War was in the 1850s. The so-called Victorian era in England and La Belle Epoque in France were also occurring in the 1800s. There is a huge correlation to these.  Europe and America flourished in the 19th and 20th centuries because of the new fuels and technologies to use them.

At the beginning of World War II (1941) American military ships used diesel fuel (from oil). Nuclear fission was first developed in 1938 and during the war the atomic bomb was developed (used in 1945) and soon after (1951) the nuclear-fuel-based electricity-generating plant was developed. That same technology runs the United States nuclear-powered military aircraft carriers and powers grid-type electric utilities today.

We still use coal, oil, natural gas, and radio-active fuels and the common technology to convert heat to motion of heating a water to produce steam and using the pressure of the expanding steam gas to push a crank. So, we have come from the 1800s until today with one major technology for producing motion or electricity and it is based on heating water. That seems pretty old-fashioned to me.

 

The Major Factors

Can it be of much surprise that after the Gutenberg Revolution to print books for the masses began around 1600, the Scientific Revolution should follow soon(!) after and that the economies should flourish. But, when the energy sources and technologies are improved many other things change too. We have had the biggest fastest development of technologies known to mankind in this 180-year span (1840-2020). Naturally all this wealth creation was enabled by changing economic systems.

Economic Systems

When wealth is created (for example when a company makes a profit) someone has to be in charge of deciding which bills to pay and how much to expend for capital or whether to go into debt or what to pay workers. There are various ideas about this and the primary ones all allow ownership, trade, contracts, markets, and limitations on participants. A key reason is that those had already developed naturally in prior centuries.

When the carbon-based fuels became available and human slavery was no longer needed or desirable the cost of getting work done went down and everyone got some share of the savings or the new wealth from more being done. The availability and cost of energy has been a huge factor.

The idea of free trade is ancient, but how does it work when you have companies and corporations? These became more common as larger and larger tasks began to be done. Imagine an individual trying to build a railroad across the continent without a tremendous amount of wealth at the start. But, if many individuals can work together (as stockholders or lenders to a corporation) then it becomes much easier. The creation of law allowing for corporations and corporate contracts were essential -- and it worked tremendously.

Over time in America and Europe we became used to being wealthy and we (the American people) demanded more control over or limits on corporations to end child labor, to end 7-day work weeks, to end discrimination against people of color or immigrants. People wanted to be able to have vacations or more pay. This led to the Union Movement and from the end of World War II to about 1975 the new wealth of America was divided relatively evenly between labor and capital (stockholders lent capital and bond holders lent capital). This was a major time period, despite being short, which showed The American Dream was a reality. It was in some part begun in the 1930s during the Great Depression when changes were made to improve banking and other aspects of the finance side of the economy.

There are always limitations in the economy. It was far too prone to quick increases and then quick collapses. There was a major recession in the 1890s and again in 1929 with high unemployment for a good part of the time. While the Federal Reserve had been created in 1913 [see Wikipedia]. It had not solved all the issues needed for greater growth. Note that the technological changes came first and the economic system changes came later. The use of carbon-based fuels began in the 1840s and changes to the economic system happened off-and-on thereafter. Slavery was ended in the 1850s, the Federal Reserve was created in 1913, The New Deal was in the 1930s-40s and the best part of the prosperity was from about 1900-1929 and 1946-1970. At that time the government decided that remaining on the Gold Standard was too limiting. They floated the dollar.

Add to the variable amount of cash in the economy the fact that banks used a fractional lending system and that later when computers became common in banking that the credit availability and speed of banking became much easier and faster and cheaper. The economy sped up and grew quickly with computers helping it along in the 1980s and later.

The Federal Reserve also learned at that same time how to regulate interest rates to assist while keeping unemployment lower. The quick jumps and collapses of the Gold Standard era quickly disappeared. It doesn't mean all the problems disappeared and in fact some new ones appeared.

Globalization of trade was another major factor. It began officially in 1995 with the World Trade Organization (WTO), but it had really begun to take shape during the 1980s and was only formalized in 1995. The process of corporations moving work from states with strong unions to non-union states to other nations with far fewer labor and trade laws was assisted by the Republican Party and President Ronald Reagan whose first action in office (1981) was to end a strike and essentially kill a union for airplane traffic controllers. It became a major issue in the 1992 presidential campaign, where Ross Perot ran as a 3rd party candidate and received about 20% of the vote. People were clearly very concerned.

The globalization of corporate production meant lower costs, but much larger profits back in America. In America workers had lower wages and fewer benefits and less rights in the workplace. The distribution of wealth, a core idea of Reaganomics, was sufficient for 99% of the people (workers mostly) was to match the inflation rate and no more (the Federal Reserve saw that it all worked), but all the new wealth went to the super-rich stockholders and corporate executives.

What we can see in this graph is that from 1950-1970 the share of GDP production in the nation which went to labor was between 63% and 65%. It only deceased (nearly) to 60% in 1985 and again in 2008-10. I tend to believe this is a key statistic of Reaganomics because Reagan began in 1981 and George W. Bush (son of Reagan's vice president) ended in 2008. But, if you look at the entire graph you can see from 1952 when the share was above 64% there is a general trend downward for that entire time. There was a boom in 1965-1970 (the Johnson presidential era) and again from about 1996-2000 (the second Clinton presidential term). They were not long-lasting and the declines afterward were quite severe.

I can be noted that the invention of the Integrated Circuit (IC) upon which modern computers are based was in the mid to late 1970s and the first personal computers became available in the very late 1970s. Their impact on the economy was large and helped to counter all the job off-shoring being done. The Clinton administration was very good for the economy and wages went up while unemployment went down. A big part of this is attributed to computer technologies and the opening up of the Internet to the public in the early 1990s. As you can see, from the 1990s until today the labor share of GDP does not reflect an upward trend, but downward because the stock & bond holders are reaping all the rewards while the real economy and the many of the workers are barely surviving.

Why?

The new GDP growth is going to a small percentage of our population. This is Reaganomics.

Let's look first at corporate profits.

The era of President Reagan looks strong for corporate profits. It's no wonder they thought the economic system was in great shape and Reagan should be highly praised. But this was just corporate profits, not personal incomes, jobs, lives. A lot of people were losing their jobs to off-shoring. The recession of 2000 was intentionally made to happen for political purposes and the economy took off again in a very big way for George W. Bush. But, it couldn't be sustained and the mortgage crisis began about 2007 and really hit hard in 2008 -- in the middle of the presidential campaign. President Obama went into office in 2009 and the economy recovered and has kept going strong ever since. What happened in 2000-2002 to put the economy on this stronger upward path? Even the coronavirus pandemic of 2020 hasn't stopped the economy and corporate profits.

Let's see how individuals have done in this same time period.

The Median Household Income looks pretty good. Except for the serious recession of 2008-10 it has gone up or at least stayed steady. Remember, this is while the percentage of GDP is going down from about 60%, up to 64%, and then back down to 59% of GDP in 2010. This is a large increase and then decrease for the share of GDP going to labor.

But, if incomes are rising, then why are savings going down?

From 1952 or 1965 when savings were at an all-time high of national GDP, they have sunk to below zero and are extremely low today.

The economy is very complicated. From the 1960s when you could earn a fairly good interest return on savings to post-Gold-Standard the interest one could earn decreased and savings were reduced and people on the low end of the income scale began to live more from paycheck to paycheck. It became a much more fragile existence and the loss of a job (for any reason) could mean disaster. The fact savings went to below zero at the time of the 2008-10 recession is only because it was already low when the recession hit.

So, why when GDP, corporate profits, and personal median income are growing were people saving less? And why did we still seem to always have recessions when the Federal Reserve was controlling interest rates to prevent out-of-control inflation?

When the GDP was growing the benefits of that went somewhere. A little went to the 99% of people who are workers. Despite that their savings went down down down. A lot of profits went to corporations, particularly since 2002. One can only assume that the stockholders of the corporations made a lot of gains from their stock prices going sky high. Let's look at stock prices as indicated by the Dow Jones Index.

Yes, that went up very steadily. So the rich are getting richer and particularly since about 1990.

Let's see how the corporate executives are doing --

CEO pay has skyrocketed 1,322% since 1978 

Is it bad for a small number of people to make this much new profit from corporations they own? If you don't think that making a profit on business is wrong, then it is in no way wrong. But, what do they do with all that new wealth? Is it useful? How does the economy react? Perhaps they are reinvesting that wealth in their companies? Perhaps, but with the globalization of trade, many hire workers outside of America to keep their costs low. The net effect is to improve wealth around the world, but not for the American worker. Remember, their savings have gone down down down.

Conclusions

Wealth has been produced by new ideas and technologies and an evolving economic system which enables it. In America we have been riding a wave of success and productivity on carbon-based fuels, nuclear fuel, and the motors they drive; the Integrated Circuit used in computers; globalization of world trade, combined with an evolving economic system which moved from stronger banking & finance laws to moving away from the Gold Standard to shrinking bank savings to Reaganomics (which combines stabilized wage growth for American workers [to restrain real economy inflation] with globalized production) to give corporations and their stock & bond holders tremendous new wealth (not shared so much with their US workers). Though I didn't detail this, it has come along with a shrinking corporate tax rate and growing federal government debt.

How long will the U.S. workers stand for being treated like robots which are merely maintained and do not share in the tremendous growth in U.S. productivity?

Why is the labor participation rate so low and what does that portend for America?

Will the split between rural and urban wealth and productivity continue to widen? 

Will the dependence of "red states" on the largess of the "blue states" continue despite red state politicians claiming to be Libertarian and against big government spending?

There are many concerns that the rate of change has outstripped our political system and the leaders who must make adjustments to keep everything working.

Proposals

I suggest taxing corporations heavily to pay down the federal government debt and to pay for various kinds of infrastructure or investments in education and new business development or non-cash benefits for everyone. To avoid destroying the one key benefit of Reaganomics to keep inflation under control we have to control income growth and non-cash benefits is a key, along with taxation of the rich. But this alone does not solve the problem of high-income earners who also receive non-cash "compensation". How can we prevent them from merely hiding their wealth from the tax man? I suggest a strong IRS to determine if LLCs or other means are being used to hide wealth (domestic or foreign) and to determine value of new income or compensation of a non-cash nature to enable proper taxation. I would also like to see everyone receive a large tax deduction to write off the cost of living in America. We have to let people keep more, so they can grow wealthier and more secure. I would also like to see the minimum wage increased to keep the income levels of the 50 states closer together. An income in one state may not be sufficient to live on in another. That is a problem. Similarly, I propose one, and only one, personal tax rate, so that everyone can feel they are equal to the other and are not being punished for their efforts to become wealthier.