Ages of American Capitalism

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Jonathan Levy. Ages of American Capitalism: A History of the United States. New York: Random House, 2021.

I found this book to be a remarkable work of economics and American history. A lot of economics consists of ahistorical models intended to describe economies in general but no one time and place in particular. Such abstract models are useful tools, but need historical context to bring them to life. On the other hand, many historical accounts do not demonstrate a very good grasp of economic principles. Jonathan Levy is one of those rare scholars with both a fine command of historical facts and great insights into the workings of capitalism. The fact that he has accomplished this at an early stage of his career is all the more impressive.

I cannot do justice to the entire book (over 900 pages long with notes and index), but I will discuss selected chapters. Here I start with the Introduction, which sets forth Levy’s assumptions about the nature of capital and the capitalist economy.

Capital and capitalism

Levy presents three main theses, the first of which is:

Rather than a physical factor of production, a thing, capital is a process. Specifically, capital is the process through which a legal asset is invested with pecuniary value, in light of its capacity to yield a future pecuniary profit.

The first things that come to mind when one hears the word “capital” may be capital goods like the steam engine, which Levy describes as the most important capital good of the Industrial Revolution. But capital is anything that can generate a return greater than its cost. That includes financial capital like stocks and bonds, intellectual capital like software and data, or human capital like educational credentials. In the antebellum South, slaves were the most valuable capital, more costly in total than southern land or northern factories. Many forms of capital produce marketable goods, but capital assets can also appreciate in value while not producing anything at all. What capital assets always have is some “scarcity value” because some people own more of them than others. Those owners are, of course, the people we call capitalists.

Levy defines a capitalist economy as “one in which economic life is broadly geared around the habitual future expectation that capital assets will earn for their owners a pecuniary reward above their cost.” The term expectation is key. A future reward is always uncertain, since it depends on the “flow of historical events.” What drives capitalism is investment, and what drives investment is confidence in some future. Andrew Carnegie could only sink massive quantities of financial capital into steel mills if he believed in the future demand for steel. In the twentieth century, when the economy produced far more consumer goods, business confidence became more dependent on consumer confidence, which depended in turn on consumer income and its security. People can buy more if they have a reliable income and are confident they can make next month’s rent.

Another important form of confidence is faith in the value of the nation’s currency, especially on the part of financial investors. Lenders would like to know that the dollars they lend will come back to them—with interest or dividends, of course—in dollars that have retained their value. They want the government to maintain the scarcity value of money through relatively tight control of the money supply. A challenge for monetary policy is to maintain the confidence of lenders while allowing the money supply to grow along with the expansion of domestic product and commerce. “Because a capitalist financial system is a perpetual leap of faith, over and over again, confidence becomes the emotional and psychological mainstream of economic activity.” The corollary to that proposition is that every financial crisis is a crisis of confidence. That’s why financial crises have often been called “panics”.

I would add that capitalism may require a modern culture that encourages faith in a worldly future, one imagined as better than the present. That view is in contrast to a static conception of life or a preoccupation with an otherworldly afterlife. (Although that is a secular vision, the historical religions of Judaism and Christianity may have prepared the way with their belief in a future “promised land.”) Interest in a worldly future was a feature of the Enlightenment, and one of its proponents was Adam Smith, a major figure in the Scottish Enlightenment and the father of classical economics.

Profit motives in political and social context

The second of Levy’s three theses is:

Capital is defined by the quest for a future pecuniary profit. Without capital’s habitual quest for pecuniary gain, there is no capitalism. But the profit motive of capitalists has never been enough to drive economic history, not even the history of capitalism.

The pursuit of profit, while central to capitalism, is normally part of some larger project. Henry Ford had a vision not only of selling automobiles, but of helping create a society of mass production, consumption and leisure, a vision he got partly by reading Emerson. He also rather heavy-handedly imposed a vision of the ideal worker, characterized by self-discipline, sobriety and frugality and enforced by visits of company representatives to workers’ homes. In an earlier time, southern plantation owners were motivated by white supremacy as well as economic profit. Among the many ill-gotten gains were sexual privileges for white males.

Major developments in capitalist history have been political as well as economic projects. When the Republican Party came to power in 1860, its political agenda included stopping the spread of slavery into the West, thus both striking a blow for free labor and undermining the value of slave capital. Republicans also supported the Homestead Act of 1862, which made 160-acre plots of federal land available for western settlers. Since farmland was also a form of capital, this was a contribution to a democratic “politics of capital.” But that was before the huge concentrations of capital in the latter part of the century. As the nation industrialized and urbanized, and mechanization reduced the need for farm labor, the portion of the population that could own land or businesses declined. Political debate eventually came to focus more on a “politics of income.” The New Deal was a political project with large economic implications, as the Roosevelt administration tried to boost incomes by supporting job creation, labor unions and the ideal of the male breadwinner. The “Reagan Revolution” of 1980 was a very different political and economic project, turning away from the democratic politics of income to provide more support for capitalists in the form of reduced taxes and regulation. These interconnections allow Levy to assert, “The history of capitalism must be economic history but also something more.”

Economic growth and the liquidity problem

Levy describes capitalism as having two different dynamics related to time. The first is a long-term, linear pattern of economic growth, driven by technological improvements and increases in productivity. The second is a cyclical pattern of boom and bust, driven by fluctuations in confidence that affect lending and investment. That brings us to Levy’s third thesis:

The history of capitalism is a never-ending conflict between the short-term propensity to hoard and the long-term ability and inducement to invest. This conflict holds the key to explaining many of the dynamics of capitalism over time, including its periods of long-term economic development and growth, and its repeating booms and busts.

The key concept for understanding these dynamics is liquidity. The capitalist economy needs liquid assets, which are assets that hold value but can also be readily exchanged for other assets. Cash is the best example, but financial assets that are easily traded, like Treasury bills, also qualify. But here’s the other side of the coin, no pun intended. For capitalism to work, someone must invest in “relatively illiquid factors of production,” like factories! Up to a point, liquid and illiquid assets work together in capitalism. One kind of liquidity is transactional liquidity, which means that buyers have the cash to buy the products that a capitalist enterprise produces when it invests in the (illiquid) factory or other capital goods.

In other ways, liquidity can be the enemy of long-term investment. In the case of precautionary liquidity, people hoard capital because of a lack of confidence in the future. They are reluctant to invest because of a fear of losing their money. In the case of speculative liquidity, capitalists maintain a large cash position so they can jump in and out of short-term investments, seeking the quickest return. The day trader buys stocks in the morning and sells them in the afternoon, ready with the cash to repeat the process tomorrow. (That works best when prices are generally rising, but as they say, you should never confuse genius with a bull market.)

Historically, investment booms have usually involved both long-term fixed investment and shorter-term speculative trading. When speculation bids assets up to unrealistic levels, the cycle ends in an economic bust, at which point the loss of confidence discourages investment and encourages precautionary liquidity. At the beginning of a boom, confidence is high, based initially on some realistic expectation of production for profit. But the accumulation of profits finances a speculative frenzy, ending ultimately in a crisis of confidence—a panic—and an economic contraction.

In Chapter 7, for example, Levy describes the railroad boom of the 1860s, which ended in the Panic of 1873. Building railroads for steam-powered trains was a pretty good idea, especially to move agricultural produce from midwestern farms to eastern cities and ports. It was a political as well as economic project, with the federal government chartering railroad corporations and granting them millions of acres of land. Soon, however, railroad entrepreneurs—most notably Jay Gould and Cornelius Vanderbilt—were speculating in railroads as well as building them.

Why go through the time, hassle, and uncertainty of actually building a railroad and running it on a profitable basis when credit was readily available (for these men at least)? If the right rumor gripped the trading floor, they could turn a fast buck through leveraged speculation on a financial asset, without ever having to part with liquidity, and put capital on the ground where it became a fixed, running cost.

Notice that this was “leveraged speculation.” The most lucrative way to speculate is to make money with borrowed money (just as a home buyer can do by making only a downpayment, but immediately getting the right to any appreciation). But when doubts appear that a boom is sustainable, credit dries up, debts are called in, and panic-selling devastates asset values. In the Panic of 1873, which began with a credit crunch and higher interest rates in Britain, railroad stocks lost 60% of their value, and half of American railroad corporations went bankrupt. That same year, by the way, Mark Twain and Charles Dudley Warner gave the era its name when they published The Gilded Age.

Similarly, the “greatest leap forward in productive capacity in world history” occurred when Henry Ford introduced his moving assembly line in 1913—another useful idea, although not much loved by those who had to work on it. But this was quickly followed by the frenzied stock market speculation of the 1920s, the crash, and the Great Depression of the 1930s. Most recently, the housing boom of 2003-2006 turned into the Great Recession of 2007-2009.

The “key economic problem,” according to Levy, is the perennial weakness of investment resulting from the hoarding of capital for purposes of precautionary or speculative liquidity. He sees this as an especially acute problem in our economy today. The assumptions he lays out in this Introduction—a broad definition of capital, a conception of motivation that includes but goes beyond financial profit, a conviction that economics and politics are always intertwined, an appreciation of the importance of expectations and confidence, and the tension between some forms of liquidity and long-term productive investment—enable Levy to tell the story of American capitalism in an exciting and insightful way.

Levy’s main message is that a capitalist economy is not a standalone machine that automatically produces general prosperity if it is left alone, as some economists in the neoclassical tradition still teach. Rather he says:

History does not confirm the belief in the existence of some economic mechanism through which the pattern of capital investment will simply lead to the best possible outcome so long as it is not interfered with. One likely outcome, among others, is that the propensity to hoard will win out, exacerbating inequality and crippling economic possibilities. As the profit motive is not enough, a high inducement to investment must come from somewhere outside the economic system, narrowly conceived. History shows that politics and collective action are usually where it comes from.

In other words, getting the economy to work for all of us is a continuing challenge for society in general, and democratic politics in particular.


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