Carroll Quigley - Tragedy and Hope - A History of the World in Our Time

The Economic Factors

From an analytical point of view there are a number of important elements in the economic situation of the twentieth century. These elements did not all come into existence at the same time, nor did any single one come into existence everywhere simultaneously. The order in which these elements came into existence is roughly that in which we list them here:

1. rising standards of living

industrialism

growth of size of enterprises

dispersal of ownership of enterprises

separation of control from ownership

concentration of control

decline of competition

increasing disparity in the distribution of incomes

declining rate of expansion leading to crisis

1. A rise in the general or average standard of living in modern times is obvious and, with intermittent breaks, goes back for a thousand years. Such progress is welcome, but it obviously brings with it certain accompanying factors which must be understood and accepted. A rising standard of living, except in its earliest stages, does not involve any increase in consumption of necessities but instead involves an increase in the consumption of luxuries even to the point of replacing basic necessities by luxuries. As average incomes rise, people do not, after a certain level, eat more and more black bread, potatoes, and cabbage, or wear more and more clothing. Instead, they replace black bread with wheaten bread and add meat to their diet and replace coarse clothing by finer apparel; they shift their emphasis from energy foods to protective foods.

This process can be continued indefinitely. A number of students have divided goods from this point of view into three levels: (a) necessities, (b) industrial products, and (c) luxuries and services. The first would include food and clothing; the second would include railroads, automobiles, and radios; the third would include movies, books, amusements, yachts, leisure, music, philosophy, and so on. Naturally, the dividing lines between the three groups are very vague, and the position of any particular item will vary from society to society and even from person to person.

As standards of living rise, decreasing proportions of attention and resources are devoted to primary or secondary types of products, and increasing proportions to secondary and tertiary types of products. This has very important economic consequences. It means that luxuries tend to become relatively more important than necessities. It also means that attention is constantly being shifted from products for which the demand is relatively inelastic to products for which the demand is relatively elastic (that is, expansible). There are exceptions to this. For example, housing, which is obviously a necessity, is a product for which demand is fairly elastic and might continue to be so until most persons lived in palaces, but, on the whole, the demand for necessities is less elastic than the demand for luxuries.

A rising standard of living also means an increase in savings (or accumulation of surplus) out of all proportion to the rise in incomes. It is a fairly general rule both for societies and for individuals that savings go up faster than incomes as the latter rise, if for no other reason than the fact that a person with an adequate supply of necessities will take time to make up his mind on which luxuries he will expend any increase in income.

Finally, a shift from primary to secondary production usually entails a very great increase in capital investment, while a shift from secondary to tertiary production may not result in any increase in capital investment proportionately as great. Leisure, amusements, music, philosophy, education, and personal services are not likely to require capital investments comparable to those required by the construction of railroads, steel factories, automotive plants, and electrical stations.

As a result of these factors, it may well arise that a society whose rising standards of living have brought it to the point where it is passing from emphasis on secondary to emphasis on tertiary production will be faced with the necessity of adjusting itself to a situation which includes more emphasis on luxuries than on necessities, more attention to products of elastic demand than inelastic, and increased savings with decreasing demands for investment.

2. Industrialization is an obvious element in modern economic development. As used here, it has a very specific meaning, namely, the application of inanimate power to production. For long ages, production was made by using power from animate sources such as human bodies, slaves, or draft animals, with relatively little accomplished by power from such inanimate sources as wind or falling water. The so-called Industrial Revolution began when the energy from coal, released through a nonliving machine—the steam engine—became an important element in the productive process. It continued through improvements in the use of wind power and waterpower to the use of oil in internal-combustion engines and finally to power from atomic sources.

The essential aspect of industrialism has been the great rise in the use of energy per capita of population. No adequate figures are available for most European countries, but in the United States the energy used per capita was:

Year

Energy per Capita

Index

1830

6 million BTU

1

1890

80 million BTU

13

1930

245 million BTU

40

As a result of this increase in the use of energy per capita, industrial output per man-hour rose significantly (in the United States 96 percent from 1899 to 1929). It was this increase in output per man-hour which permitted the rise in standards of living and the increases in investment associated with the process of industrialization.

The Industrial Revolution did not reach all parts of Europe, or even all parts of any single country, at the same moment. In general, it began in England late in the eighteenth century (about 1776) and spread slowly eastward and southward across Europe, reaching France after 1830, Germany after 1850, Italy and Russia after 1890. This eastward movement of industrialism had many significant results, among them the belief on the part of the newer countries that they were at a disadvantage in comparison with England because of the latter’s head start. This was untrue, for, from a strictly temporal point of view, these newer countries had an advantage over England, since their newer industrial installations were less obsolescent and less hampered by vested interests. Whatever advantage England had arose from better natural resources, more plentiful supply of capital, and skilled labor.

3. The growth of size of enterprise was a natural result of the process of industrialism. This process required very considerable outlays for fixed capital, especially in the activities most closely associated with the early stages of industrialism, such as railroads, iron foundries, and textile mills. Such great outlays required a new legal structure for enterprise. This was found in the corporation or limited-liability joint-stock company. In this company large capital installations could be constructed and run, with ownership divided into small fractions among a large number of persons.

This increase in size of units was apparent in all countries, but chiefly in the United States, Britain, and Germany. The statistics on this are incomplete and tricky to use, but, in general, they indicate that, while the number of corporations has been increasing, and the average size of all corporations has been falling, the absolute size of the largest corporations has been increasing rapidly in the twentieth century, and the share of total assets or of total output held by the largest corporations has been rising. As a result, the output of certain products, notably chemicals, metals, artificial fibers, electrical equipment, and so on, has been dominated in most countries by a few great firms.