US Economic Model

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THE AMERICAN ECONOMIC AND FINANCIAL MODEL

Bibliographie

Daniel Boorstin, Histoire des Amricains (essais sur des lments historiques importants)

Gary Cross, An all-consuming century

Stiglitz Quand le capitalisme perd la tte

Emmanuel Todd, Aprs lempire. Essai sur la dcomposition du systme amricain

Galbraith, Economie Heterodoxe , Seuil 2007


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Introduction

The American economic model is the capitalistic model . The economy in the US is mixed with the

American culture, civilization and identity. The Americans believe that there is no equivalent of their economic model in the world. The American identity is based on economic achievement andon their economic system. Understanding this system, its creation, the beliefs and values thatfounded this system, is something necessary to understand the American identity. But this systemis not universal. To talk about the economic model is to talk about exchange, about our vision of work, wealth, success and failure. The economic system in which we live has a great impact uponthe way we live.

The capitalist system is the putting-in-common of economic resources with the aim of creatingnew wealth . At the very origin, the capitalist system is a generous idea and isnt very different

from communism. The fundamental difference is that the driving force behind the collective useof these resources is self-interest. This gives us the difference between a market society andcapitalism. The market society existed long before capitalism.

How economic factors affect the US economy?

The US economic system is not a standard. There is no one single way to organize it. There are greatsimilarities between the US capitalist system and the other capitalist countries.

Nowadays, there are many economic factors affecting the US economy. For instance, the president of the European Commission, Durao Barroso, and Barack Obamahave stated about the issue of payment given to traders anddecided that there has to be a limit for the additional payment of traders. Those additional payments, or bonuses, are closelylinked with the economic crisis. Traders are given extra moneydepending on how much they bring back to the bank they tradefor. As a result, traders are encouraged to do risky actionsbecause it is on their personal interest. The most profitableinvestments are also the most risky. Barroso and Obama issuedthe possibility of regulating bonuses, but it brings an ethical issue,as regulating them would go against the tradition and thecustom. From the point of view of the economic aspect of thecrisis, how culture and civilization, politic and religious values areaffected? Societies have a degree of resistance. The communitiesshould take measures to adapt the economy to their culture orthe other way round, so for the next crisis they are able to pay their loans.


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1. Foundations

a. The Ethic of prosperity: a critical approach to Max Weber's thesis

Capitalism is the product of western cultures. Protestantism is said to be at the origin of capitalism.According to the Protestants, personal gratification should be connected with the public good. If youhave wealth, you should use it to produce more wealth. The Calvinist ethic creates the mentalstructures that are necessary for capitalism. Calvinism is the teaching of John Calvin, laying emphasison mankind's inability to repent and believe in Christ without God's help, and on predestination. Butcapitalism already existed in Europe before Protestantism.

Protestantism emerges along with rationality. Financial capitalism already existed in some parts of

Europe before the protestant revolt, like in Venice. There are two reasons for the emergence of Protestantism against Catholicism in the US:

- The Protestants criticized the Catholic Church for being rich and having a magical vision of theworld (miracles, virtues of the different Saints, visions) . The Protestants thought it wascomparable to idolatry.

- There should be no medium between God and the people; there is a strong concept of individualism. They thought the way people acted towards religion had to be more rational.

Capitalism greatly benefited from the rejection of the Catholic Church: it gained an international

realm.

Webers rationalist element in capitalism and the organization of economy explained th at the input of rationality in economy thanks to capitalism made rationality accepted by people. The capitalist systemwas based on an attempt to rationalize economic consumption while maximizing the efficiency of theactivity.

How does this affect the birth of capitalism in the US?

Protestants of different nationalities saw themselves as members of a community as they were oftenoppressed by the others. The concept of community led to a concept of internationalisation beneficialto capitalism. This enabled the development of a business spirit and a fast development of capitalismwithin protestant countries.

According to Protestants settlements, their project was to create a new country based on Calvinistprinciples. As a consequence, the early settlers in the US were not motivated by tolerance andfreedom. Those who disagreed with the community were left apart from the community. The earlysettlers were in America to strictly apply the rules of Calvinism. Besides, the conditions they foundwhen they arrived were harsh so life was very difficult. They realised that, because of the terribleclimate (cold winter, hot summer) , the crops they brought from Europe didnt grow. To survive in sucha harsh environment, they had to work collectively and to put their personal interests after the


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interests of the community. They had to maximize their efficiency, thats why Taylorism and Fordismwere born in the US.

The ideological basis of a spirit that encourages prosperity affects capitalism, and produces a profoundlink between the spiritual and ideological sphere and the material sphere of production, wealth

Because of the Calvinist ideology, the production of wealth and its accumulation became a centralelement of the American identity that brought economic growth. In the US, being wealthy is seen in amuch more positive way than in Europe. It is very American to become wealthy.

The Calvinist ideology contains a contradiction within itself: it is good to accumulate wealth andaccumulating wealth to use it correctly gives a measure of your moral quality; but wealth can also veryeasily provoke your moral downfall. Wealth makes you vulnerable to temptation. This contradiction isstill very much alive in the American society. As an example, the extreme difference between themoral rigid attitude of religious conservative movement which is very much alive in the Bible belt andunrestrained hedonism in the east and west coast. This causes a society that is in perpetual imbalance.

This imbalance is the reason for many of the problems we can note in the American society, but it isalso the reason for its dynamism. Nevertheless, within the protestant community people spent lessand reinvested more (bourgeoisie increased their wealth by reinvesting).

b. Two visions of capitalism: the open field and the zero sum game

The capitalist organization of activities started mainly in Europe but in the US capitalism is seen in amuch more positive way than in the old continent. One reason for that is that capitalism is seen as partof the American experience. The way it developed in the US is much different from the way itdeveloped in Europe, but both of them share the principle of profit .

In Europe, countries were fully developed, production systems already existed. There was a vast scopeof activities operating with employees working under a weak hierarchy and in a decentralizedorganization. But that was about to change. Industrialization produced goods much cheaper than whatthe craftsmen produced. As a consequence, working as a craftsman became impossible. It was alsoimpossible to live from the land as it did not produce enough. So, people left their land and moved tothe cities to work in factories. Some people became much richer because they had a Masters andworked as supervisors of employees or teams; others became much poorer and lost their statement of an individual worker as he usually worked in a team. They were impoverished both economically andsocially. They lost their independence and their freedom. Capitalism and industrialization in Europeseemed to work as a zero-sum game : when somebody wins, somebody else has to lose. Basically, anew class took the money from another class. Nevertheless, this class was the larger one in society.

In the US, industrialization made it possible to open the new territories that were little by littleconquered towards the west and to have the railroad industry, which enabled the connection betweencompanies from west to east of the country. Capitalism opened a vast new range of economicopportunities for many people. These are conditions of economic growth, giving a large amount of opportunities to many people. The development of wealth of successful businessmen opened newopportunities for other potential businessmen. Here capitalism works as an open field game. But as in


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all games, there are winners and losers. There were victims of capitalism in the US. The main loserswere the newly arrived immigrants and the Indians, who were invisible for the Americans. Some of them were facing the issue of survival. The development of fortune came along with the establishmentof service. When somebody became rich, everyone benefitted from it. It gave opportunities to others(job opportunities, for example in transportation).

At the end of World War II, there were a number of opportunities that had to be filled. So it was muchmore difficult to fail, everyone could easily find a job in something else. There was a very high growthrate of economy: when someone was not satisfied with their activity, they could easily change to doother things. And today it still is quite difficult to fail in the US, but if you are not being your own boss,you are then a belonging of a lower society. It is easier to succeed at the early stages of economicgrowth.

c. The frontier spirit

The best illustration of the myth can be seen in westerns movies about the conquest of the West. Thefrontier is the limit between the part of America that has been civilised and the part that hasntbeen, it is a scene where good and evil forces take place. The American civilisation has been given amission to civilise the land. The myth of the frontier spirit gives a positive value to strength andviolence (cowboy).

In westerns, exploring and achieving new territory brings the necessity to fight evil only by gaining-inthe explored territory.

This can be extrapolated to todays economic markets and technologies. It is also the idea that creatingsomething new is one of the main functions of business. In 1998, China and the US had a deal aboutinternet but Chinese government complained to the American government about the fact that theinfrastructure of the internet was in the hands of American companies. The response of the US was:Just like the Wild West, the one who gets first on the internet rules it ; which is a reference to themyth of the frontier spirit. Ronald Reagan made reference to this myth many times.

Competition is part of war and part of the game: the competitor who loses is eliminated or not.Economic rules balance the relation between competition and survival. The only rule about economic

competition is that it should exist. The vocabulary of war is very present in economy (cru sh). BillGates said : Microsoft deserves a fair share of the market, which will bring an attempt to crush thecompetitor, to try to eliminate them and obtain the monopoly.

The American market is a very competitive place, where the operative quality of the myth is obvious,as it has to be conquered. It is a country with a demographically large and efficient workforce, wherepays go to retirement pensions. Therefore competition is linked with morality, whereas in Europethere is a different view harsh competition is seen as an immoral aspect of capitalism (ex: in the 80s,many European companies felt that they had to fight against Japanese competitors when Japan livedits very fast transition).


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d. The self-made man

The self-made man is another important myth to which many Americans have been linked (CharlieChaplin, Buster Keaton...). The self-made man is hard-working, persistent and he has got a certainamount of moral rectitude.

He experienced life from rags (no education, protestant background) to riches because he is clevererthan others, even though cleverness is not his main feature in the US. He felt something or sawsomething that pushed them to decide to reach a particular goal that he will achieve. It is related toGods election through luck. This concept is preferred to the new rich concept, which has noequivalent in the US because for them its not a reason of laughter, but a reason of pride . In fact, he isnot a new rich, as he doesnt act like a rich man. Throughout the 19 th century, it became the dominantmodel of success. The success was linked to the ability of creating and running successfully your ownbusiness. Failure was seen as a lack of quality at a mans level, so if someone failed, there wassomething wrong with them. This concept didnt disqualify some people be cause of their religion ormoral values. At the time in the US, many things needed to be created so it was easy to find its ownspecific field of action.

The problem is that this model is sustainable only in the context of early economic development.When an economy is mature, it becomes harder and harder to create its own business. 90% of newlyopened businesses fail, because there is no room for these businesses as the economic conditions areless and less operative in the concrete world.

How the self made man is connected to the economy today?

The model of the self-made man still is one of the major imaginary constructions of success in the US.The consequence is a tendency to glorify the achievement of great success starting from nothing (Ex:Bill Gates and his Microsoft empire, built to supply the operating system for the IBM monopole forsome time with some help of his father, a lawyer; Steve Jobs and Apple).

Organisations that employ people have to provide some amount of progression in the course of theprofessional life of the employees, not just financially, but also socially. In the evolution of this modelof success and achievement, consumers play an important role. Success is not just the matter of improving economically, but also socially. It is essentially true in a culture marked by Calvinist values.Becoming wealthy is not good in itself, what counts is what we do with our wealth. Wealth opens thedoor to new social statuses. In the US, you might say that becoming wealthy allows you to define thetaste habits and style of the upper-class. In that sense, the Americans live in a classless society. Of course this is not true; there are classes in the American society. But because of this vision of whatdefines the upper-class, the Americans are not prepared to look at themselves in terms of classes. Inthat way, we might hold a key of some phenomenons in the US (ex: the gated communities). Oneessential quality of consumerism, at least at the beginning, is to blur the difference.

Both the myths of the self-made man and the frontier spirit embody various technological fears. The

myth of the self-made man is a major embodiment of a success story. A myth can only operate if it isseen as a common belief of the people, but it cant really become true.


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2. The advent of modern business

a. The railroad industry: from businessmen to professional managers

The railroad industry enabled the extreme embodiment of the self-made men. It was the first industrythat required a big amount of resources. This industry triggered a huge development in the steelindustry and brought major social changes, positive and negative. The advent of the railroad industryin the US took place in a context of rapid development of the population, largely due to immigrationand rapid urbanization (in the background of economic development).

In 1860, the population in the US was 31 million people.

In 1900, the population in the US was 76 million people.

This industry concerned all sectors as it helped the development of other industries. There was a greatneed for transportation. In that context, the railroad industry became the first legend of phenomenalsuccess. In 50 years, there was an economic yearly growth of 4% because of the emergence of new jobs and the industrial development provided by railroad industry, which multiplied by more than 5. Inthe last 30 years of the 19 th century, the whole economic growth had been of 300%.

In 1850, there were 48,000 kms of railroad.

In 1900, there were 320,000 kms of railroad, more than all the railroads together in the rest of theworld.

American railroads were built by 100 companies but in 1900, 2/3 belonged to only 7 companies. Onlythe most dominant companies will survive. Companies fought at all cost using over investment whichwas financed by financial markets to raise fast money (heavy debts).

We can note a difference between the legend and reality. Bold adventurers risked all they had inextremely uncertain enterprises. In reality, they might have risked some of their money, but also themoney of many other people, because the project was largely sponsored by the State. The Federalgovernment granted to the railroad companies stripes of land along the railroads. At the time, manylands were unclaimed. People and industries started establishing around the railroad to get connectedto the web and the land became very valuable. This gave much money to the railroad industry.

The railroads were confronted to problems that no other companies had faced before. They had toorganize long-distance transportations, with logistical issues. So, many people had to be employed,doing a large number of different jobs, with a need to coordinate all of this very strictly, in order toprovide reliable services. People who organized it looked for a model facing the same kind of problems. At the time, the only organization to do that was the army. Hierarchy was introduced. Thearmy defined the basic model of management of big corporations. A worker who was hired at thebottom of the pyramid was facing a number of steps that led towards the top. The pyramidorganization made it possible to offer promotion possibilities. It was possible to motivate the workers


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by giving them hope that, little by little, they were going to move up the pyramid, become managers,increase their salaries and increase their social status. This supposed a huge change for them, asbefore the advent of the railroad industry, companies were typically small (the founder, businessassociates and the workers) and an ambitious worker had very little chance to be promoted.

The railroad industry also offered a possibility for life-time employment. The model was spectacularlysuccessful and influential. The concept of professional manager was created with the railroad industry.In small businesses, the director could keep an eye on the organization: he had a small number of associates (shareholders) who assisted him in managing the company. In the railroad industry, theorganization was much too big for a man to manage it, so managers paid people to supervise theworkers. This was a completely new way of managing, inspired by the armys organization.

Before the railroad industry the way companies were credited limited the number of partners who ranit, who put much of their money in that company. With the growth of the industry, motivatedinvestors became the managers of the companies and they paid themselves with the dividends of the

company. After 1850, the investment needs of the industry were much bigger than anything that hadexisted before: it was more than what investors could bring and so it limited the number of peopleable to manage the whole scope of the company in a whole new type of work organization. The moneywas found by issuing bonds and shares on the stock-exchange. The investment became profitable onlywhen the railroads were built and in use. Wall Street became a large international market place thanksto the railroad industry. The investors were not just Americans but international, mostly Europeans,who werent comfortable keeping their assets in Europe as it brought less profit than in the US . Itbrought a rush from the railroads companies and investors to gain the largest possible market bonds,which enabled a bigger control of their companies. The money carried from the first wave of bondswas quickly spent by mortgage bonds ( if the money wasnt reimbursed, they would sell off assets of the company). In 1850, 100,000 of these shares/bonds were trade on the market.

Traders began to use new techniques (short selling: vente dcouvert ). This situation led companies toacquire market shares to all cost and many of them went into an increasing debt. At the end of thecentury, with overinvestment (many of the railroad structures became redundant) and all the debts,the market collapsed and many companies went bankrupt and freed from their obligations towardstheir debtors. As time went by, part of the debt accumulated moved and the investors got a largersqueeze in the process in the 1990s.

In the United States, finance is highly linked to the frontier spirit and it has a democratic access for any

man who wants to participate in the business. Business is seen as operative for the improvement of the community. It is also a republican matter: government can buy a land on which there is a railroadto then sell it to private investors, so it is a 0-cost investment. There are also investment organizationsthat pick up the project of a new company and finance it until it reaches profitable status. Thereforethe railroad industry was the cleverer way to make money, as it gave huge value to the land. In Europethey have a different vision of the economy as the protestant and the catholic approach has influenceddifferently economic models.

To avoid a new crisis, some people have thought of regulating the banking system but bankers haveissued 3 arguments to prevent it:- Its really hard to put in place


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- Derivatives ( produits drivs: products deriving their value from other underlying assets andthat derivative traders agree to exchange it for cash or other assets at another date) are goodbecause it raises the level of liquidity on the market. Liquidity means that is easy to buy orsell an active asset ( un actif ). For instance, shares and buildings are not liquidities, but stock-options or securitized loans ( titrisation: transformation de dettes en titres) are . This is a sillyargument because to increase liquidity on the market limits the risk, but too much liquiditybrings a risk too. We use derivatives to protect ourselves from the fluctuation of the market.Its a vicious circle, instable and volatile.

- Increasing reserves in relation to loans that the banks have issued increases the stability of thebank but reduces the loans handed out.

Difference between shares, bonds and dividends:

Share (actions): a small part of the profit generated by the company that somebody buys. As ashareholder you may sell your actions to somebody else so you can get the money that you paid forback. You have the right to vote about the management of the company. They are anonymousbecause of that. Americans are comfortable with anonymous share-holdings because they seebusiness as operative for the improvement of society. The attractiveness of the shares appears whenthe prices of the shares increase. There are also o rdinary shares, which are shares that cant be sold.The disadvantage is that it creates a capital delusion: as the company grows, people own a smaller andsmaller part of the company without noticing it.

Bond (obligations, financements privs): debt security, in which the authorized issuer of the bond inneed of money (usually the government or companies) owes the holders of the bond (the ones whobuy the bonds, usually individuals) a debt and, depending on the terms of the bond, is obliged to payinterest and/or to repay the principal amount at a later date given, called maturity (ex: thegovernment needs money so he asks individuals to lend him money in exchange of a bond, which isa paper declaring that the government will pay back). A bond is a formal contract to repay borrowedmoney with interest at fixed intervals; it is a loan with interest rates from individuals to governmentsor companies that are in need of money. Like with all loans, a bond has a default risk ( risque dedfaut ): the issuer of the bond (who can be the government or a company) may not be in the positionto pay back. The higher the risk of non-payment, the higher the interest rate is. The very safe loans

(those from government or very large corporations, like IBM) pay low interests rates. If the issuer of bond cant reimburse it, bonds can be turned into shares. Bonds are more beneficial than shares,which take time to bring money back and are not practical if they belong to a company far away, soshareholders are afraid of lose control of their shares. With bonds people are sure that they will bepaid back. It is a much more stable value.

Dividend (dividendes): small part of the profit done by the company that is given to shareholders toreward them for their loyalty.


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Venture capitalism : venture capitalist companies are financial companies. Their business is to look for newly created businesses which are developing an entirely new product or service. When they find one,they become the majority shareholders of the business. For 4 or 5 years, they finance the businessentirely and they provide the business with advice. They help people developing their product until it can be presented to the market.

IPO (Initial Public Offering) is the process through which a company sells its shares to the stock-exchange for the first time. When a company has generated a lot of interest, people are interested inbuying the shares. The venture capitalist, during the IPO, will get rid of its shares and will sell them inthe stock-exchange. The shares climb and he makes a huge profit (ex : Google). Its a businessspecialised in newness. The unexploited is an opportunity for profits.

The railroad industry in the US was responsible for the establishment of the contemporary capitalist organization and had an impact on finance management, business and workforce concentration.

b. The oil industry: concentration or the dilemma of success

Concentration is a process through which the dominating companies in a sector tend to eliminatesmaller companies. As an example, the automobile industry started with hundreds of carmanufacturers but today, there arent so many car manufacturers all over the world. This processhappened with the railroad industry. Today, there are 7 companies leading the market.

It is difficult for people to achieve full employment. This feeling is due to a fundamental change in theUS economy. The change of mind of the Americans is closely linked with the advent of consumerism.

How can the myth of the businessmen (rags-to-riches) and concentration be both connected and fuelled by real events? How did it stimulate the imagination of the people?

The development of the oil industry in the US stimulated the collective imagination of the people. Itproduced examples that seemed to prove that America did offer anyone the opportunity to become amillionaire. As a result, it is not surprising that today the oil industry is so important is the US, as it is avery rich and influential industry. Oil is considered to be a myth in itself and its influence goes beyondits real weight. It was easy for the oil industry to influence other industries, such as the aerospace

industry.


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Oil was known by the Indians and was used for medical purposes, as a curative product. It wasgathered at the surface of the ground or lakes by throwing fabrics on the flooding oil, so that it couldbe absorbed.

In 1830, a small group of businessmen acquired brine wealth ( saumure ), which was a valuable asset at

that time. They realised that brine wealth was useless as it was contaminated with oil. To save money,they extracted the oil from the brine wealth. It was the first commercial effort with oil. Several othercompanies did the same. But quickly, some managerial problems appeared: large quantities of brinewere collected, whereas the medical market for oil was small, so profits were not important. Theyneeded to find a new market that would absorb the large quantities of oil.

In 1850, people discovered that burning oil produced smoke and that oil was a good product forlighting.

In 1854, the Pennsylvania Rock Oil Company of New York was created by Mr Bissell. His goal was to

find a way to increase the production of oil. The oil naturally gathered at the surface of the lakes wasenough for medicine but not for lighting.

Edwin Drake created his own company, and hired William Uncle Billy Smith, who was an experienceddriller ( foreur ). His reasoning was: if you see oil appear at the surface of lakes, rivers or ground, it hasto come from somewhere under. Why not drill and find the source of oil ? That is what they starteddoing in Pennsylvania. The first derrick (from Drake) was created. All this triggered an oil rush. EdwinDrake turned to Wall Street and became an oil trader.

In the meantime, there was another businessman who, at 20, was already a millionaire: JohnRockefeller . He was not involved in oil but he noticed that, in the mid 1850s, a drill could producemore than 1,000 litres a day. There were rumours that you could become a millionaire overnight if youfound the right spot of oil.

In 1860, everyone was trying to produce oil. But few people were interested in carrying and exploitingoil.

The prices of oil collapsed, because too many people were drilling. Rockefeller knew the profits werenot in the drilling. He invested in oil refineries that processed the crude oil and he took shares in theserefineries. Then he sold his shares in 1863. After only 2 years, he had made a profit of $1.2m. Hecreated his own carrier company which had barrels and wagons but no transportation system. That is

why he had to go through the railroad to have all the barrels carried. He obtained the lowest priceswhich created a monopoly for the train transportation of oil between the drills and the cities. He coulddictate the prices to the oil producers. With the profits, he bought forests to hold the wood for themanufacturing of the barrels. He gathered all these activities (refineries, transportation, distribution)in one company: the Standard Oil Company. He said to the producers how much they had to sell theiroil and how they had to control the production of oil to avoid over-capacity. He had many enemies andbecame very unpopular as the oil producers realised they were under his control. However, he wasconvinced he avoided anarchy.

But he did not anticipate the backlash: in 1892, the Sherman Act made it illegal for one company to

use its dominating position so as to fix prices to avoid competition, and made trusts illegal (so the


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Standard Oil was dismantled). Rockefeller managed to create a holding company (whose aim was tohold shares in different companies) which enabled him to keep control on his dismantled companies.

Two movements appeared following Rockefellers success :

Pros : Rockefeller was the symbol of the US success. It was un-American to take away fromhim what he had gained through entrepreneurship. His imperialistic approach was one of the bases of the American success.

Cons : What Rockefeller had done was un-American because he let no equal opportunitiesfor other people because of his monopoly. The same criticism can be heard today aboutMicrosoft.

Another fundamental contradiction in the American identity (along with the contradictionhedonism/Puritanism) is that:

- On the one hand, there should be no constraint on aggressive entrepreneurship because peopleshould be free to succeed, and governments should not interfere.

- On the other hand, free aggressive entrepreneurship necessarily results on a stifling ( touffement )of the market under the domination of very few entities.

c. Taylor and Ford: mass production and consumerism

Taylor and Ford are closely connected as they represent a specific interpretation of Americanpositivism which is the focus on efficiency. Very quickly in the US a link appeared between progressand efficiency. The focus of the Americans was much more on efficiency than quality, because of thechallenges the American society was facing. The American economy and society lived under a regimeof workforce deficit, because in an economy that was developing, there were huge needs. Many thingshad to be done, such as infrastructures. You need to produce more to improve services for thepopulation. Taylor introduced the rationalization of work in view of efficiency. Being efficient meansusing the resources at their best. This became a new priority.

In this context, Taylor , a young engineer, in the late 19 th and early 20 th century, devised a number of principles known as the scientific management of work . He created the basis of a system. At thetime, all human activities were working at the Bethlehem Steels (steel corporation). This companyemployed many unskilled workers. Taylor spent 5 months studying how they used their shovels


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( pelles ). He managed to define the best possible shovels and gestures so that the workers could bevery efficient. There were 600 men employed and 3 years and a half later, they were only 140 doingthe same job. Their salaries were 60% higher, while the company was making more money. Manypeople had lost their jobs but in a context of workforce deficit, they could work somewhere else.

In the 19 th century, the Europeans who travelled to the US attributed the higher efficiency of theindustry and the resulting higher standards of living to a disregard for habits and routine and a generalsense of initiative. However, in the context of the scientific management of work, initiative meant aloss of time and efficiency. Each process was divided in basic units. Each unit was defined precisely andthe workers had to execute these tasks in a precise way. This was a basis for the scientificmanagement of work. If a good is produced more efficiently, its price decreases. The scientificmanagement of work resulted into an increased production of cheap standardized goods.

Workers were confined to extremely repetitive and unimaginative processes: they had to do the samethings, the same way, over and over again.

This fundamental change in the organisation of work and society would change the vision of the worldand the expectations people had. The gratification of the self-made-man came from an increasedsocial status. And for the salaried man, standardised gratification gave him the illusion of anequalitarian society. It was the very beginning of mass consumption.

Within a generation, the change was completed: the American society was not equalitarian, as therewas a large number of poor immigrants living in terrible poverty and a small class of very rich people;but the perception of reality for a large number of people was that, all of a sudden, a large amount of goods associated with the upper-class became affordable by the middle-class (ex: the automobile).

The problem was that in that case, work became a completely ungratifying and not very motivatingexperience. The advantage of an empirical approach is that giving initiative to the workers creates anemotional link. Some researchers tried to work on this issue: how do you make work more appealing ina Taylorist process? Many experiments were carried out.

In 1930, Elton Mayo worked for the Western Electric Corporation. During weeks he studied femaleworkers working on the assembly lines. He tried to change some factors (breaks length, temperature of the rooms, different seats), but this had no direct effect on the way the workers did their work. But during the whole experiment, they worked more efficiently than the other workers. The conclusion of Mayo was: that the crucial factor regarding their efficiency is that they had been studied. To increasethe efficiency of the workers, you have to give them the feeling that you pay attention to them. Thistheory made Mayo become a pioneer in human resources.

The advent of consumerism turned a historical page for capitalism. The most specific feature for thechange between the modern era (1980s) and the post-modern era (1990s) is the dematerialisation of the economy.

There are 4 different phases in the development of the capitalist market, defined by researchers:

Phase 1 : Prices and profit merges are high. Production is mostly local. Markets are

fragmented because of the high costs of transportations. (Taylor)


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Phase 2 : The railroad unifies the markets thanks to cheap transportation. This allows massivecentralised production with low profit merges. (Ford)

Phase 3 , the Marketing Phase : Markets are analysed and segmented along numerous criteriawhich allows the producers to target their customers more specifically (age groups,

features...), this along with technical progress that allows a less standardised production,more diversified, a higher level of personalisation without losing the advantage of mass-production. The other feature of this phase is that profit merges depend on what theconsumer is ready to pay: market analysis determines how much you can take from theconsumer. There is no relation between the production cost and the price of the products.

Phase 4, the Internet phase / Immaterial Phase : The organization of markets has changedbecause people have access to a whole new range of information (for instance, purchasing anobject depends on the different prices on the internet). There is an immaterial quality of theeconomy from that phase: internet reinforces the bond between supplier and consumer.

Ford (XXth) was trained as an engineer from 1891 and, before founding the Ford Motor Company in1903 with $150,000 of capital, he had already worked in other fields like the Thomas Edisons companyin Detroit in 1891. When he set up his company, his goal was to sell cars for the great multitude, below600 dollars. This was a very ambitious goal. At that time, cars were luxury items, unaffordable for themasses. In effect, only a car was a definite sign that you belonged to the upper-class. Ford wasinterested in taking this symbol of luxury and making it available to the average American. Fordinitiated the very first marketing approach to production (he defined a market he wanted to reach anddeveloped his product specifically with his target in mind). This was entirely new at the time.

He had to divide the production costs of the cars by ten. To do this, he had to change the productionmethod completely. He did not invent the assembly line at that point, but later on. The production wasfully standardised to save time and money, so Ford could apply the Taylorist methods to his hierarchyof workers. He had to try many different things to finally pick the right production method, as the car isa high-tech product, not simple to produce. The first Ford-T cars were only produced in 1908 as hespent years trying to find a proper production method. The Ford-T was not a revolutionary model but ahighly customized item, whose selling price was between $850 and $950, which was a revolutionarypoint compared with standard cars which were between $5,000 and $7,000. Each one of his cars at$600 was worth 1.5 years of income for an average worker. He brought a deep change into themethod use to produce cars and companies were advice to use the same type of standardization. Asproduction increased, the Ford-T was worth $290. More than 15 million copies were sold and the carwas produced for 19 years. He had maximised the cars production with a less effort made.

Ford triggered a revolution:

In 1910, 180,000 cars were produced in the US.

In 1924, 4 million cars were produced in the US.


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In 1927, the US produced 85% of all cars in the world.

In 1929, there was 1 car for every 5 citizens in the US, 1 car for every 43 citizens in GB and 1 car for every 335 citizens in Italy.

Ford did not just innovate in production but also in distribution. He initiated a system of exclusivecontracts with dealers, giving big discounts to those who were willing to buy large numbers of cars. Hebelieved that when a consumer was ready to buy a car, he should not wait. Ford also invented theassembly line. He thought the work should come to the man, not the contrary.

His major contribution is in social economic field. One severe problem was worker turnover. In 1929,for 1 job you created, you had to fire 4 workers. For d thought his company couldnt work that way,because he was wasting the cost of the 4 people he had fired. Workers also left the companies theywere working in, because they were in high demand and could find better opportunities somewhereelse. Ford increased the wage paid to the workers to $5 a day (more than twice the average salary).The Wall Street Journal called it an economic crime at the time. In the three years after Ford took thismeasure, its after tax profits were $30m the first year, $20m the second year and $60m the third year(huge profits). The reason was that his training costs for the employees diminished as the workers hehired stayed in the company thanks to high wages. Because of this initiative, Ford became so popularthat he did not have to pay any advertisement to promote his cars for years.

The advent of Ford and the establishment of mass-production and mass-consumption are due to

various factors:

The rapid growth of the American population put pressure on the production system. There was aneed for radical changes in production, especially in a context of lack of workforce.

The size of the American territory created a big demand for cheap individual transportation. The closing of the frontiers (end of wilderness and no more places to conquer) had a great

psychological impact. At the same time, the American economy reached a stage of economic maturity: it became much

harder to set up your own business successfully as nearly everything had already been done. Thiscaused the end of a model of success based on the myth of the self-made man, of which Ford was

one of the lasts to succeed. There was very little chance in terms of social and personal improvement. Simple workers didn t

really have a chance of becoming rich businessmen and their work was usually frustrating and notgratifying. At that time, Ford arrived and offered the ultimate luxury item to the lower-middle-class and he reinjected respect into the average experienced worker . In doing this, he achievedseveral goals: he made technical progress the new frontier and triggered a thirst for novelty(transposition of the frontier spirit into technology). This was one step in solving the frustration of the middle-class at the term of the century.

He created a system where the acquisition of new goods that were previously unavailable, was all

of a sudden possible. The acquisition of these goods became associated with social improvement.More and more people could afford these objects because they became much cheaper. An


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equalitarian feeling was created (Calvinist ideology). He basically brought purchasing power to theworking class and created the first mass-market in history.

None of this would have been possible without the advent of something Ford did not like: the credit,which is the driving force of American economy. For people, granting credits for cars represented ahuge potential for profit. But for Ford, it had no guaranty because many objects bought could losevalue and because credits could be hidden (pack and leave if no way to pay it back).

The mass consumption initiated by Ford brought cultural changes (20 th century). Between 1905 and1920, there were economic consequences based on sociological changes: mass consumption,

consumer credit, centrality in consumption

d. The advent of credit: perfecting consumerism

Between 1910 and 1920, electric appliances became available for the average American. Consumerismallowed the embodiment of the American beliefs in a completely different environment. Life becamemore comfortable.

In 1905, some banks began to understand the advantage they could take from credit. Credit existedalready, but it was used for the payment of very expensive items, not easy to displace (houses forexample). Bankers thought the profits they could win with credit were worth the risk so they startedanalyzing the revenues and the expenses of the client and seeing if they were compatible with thereimbursement of the credit. Credits became very quickly successful to buy more expensive valuables,

like houses or cars.

In 1923, 80% of cars bought in the US were bought on credit ( Instalment Plan , which means a monthlypayment). This also brought a profound change of attitude towards work and money. Credit madeinstant gratification possible. Within the public and the press, the idea that credit was good emerged.In effect, credit benefited consumerism and the economy in general. The one who bought wasconsidered as a good citizen. Credit dematerializes money and creates a link between the reward youget from your work (salary) and how you can convert this reward into consumption.

But, in the 1930s, the level of indebtedness among American households was high and people begansaving less money. And again in the mid 1990s, American households were spending more money thanthey were making. This is a burden which is growing little by little. One reason why American


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households would save money was to hand something to their children. Nowadays, a lot of people donot hand anything.

The idea of home equity extraction (extraction de la valeur immobilire) was born at that time . Ithappens when an ordinary man buys a house with a mortgage credit, which was the case of more andmore people at the beginning of the 20 th century . Lets say that he buys the house for $100,000 withthe mortgage credit. With the flow of mortgage credits that are on the market, his house is nowestimated at $150,000. That means that, as more and more people want to buy houses, the prices of houses increases, along with the price of mortgage credit. Thats because houses have an increasingvalue asset but, unless you sell the house, you dont have money that you can use. A broker ( courtier )comes to his and offers him a loan for the $50,000 extra value of his house : its a home equityextraction loan. That loan will be used for individual consumption and that makes the owner of thehouse happy even if they dont win anything else than the excess value of the house. The concept of

home equity extraction means that loans are given based on the asset of the house. When the marketcollapses and the house loses value, the borrower has a default risk. So now there are two issuers of loans that fight to get the money that the man wont be able to pay: the bank that issued the initia lmortgage credit and the broker who issued the home equity extraction loan. The problem is that if there is no mass demand, the system collapses. This is why there is a strong link between this conceptand the demand crisis, like in the 80s ( see conclusion of the course ).

e. Consumerism: redefining success and social achievement

If we look at the social structure of the American society in the 1920s, compared with Great Britain, wecan see that skilled workers (blue-collars) were much better off in the US than in Great Britain. Ineffect, in Great Britain their lifestyle tended to be identical to the white- collar workers. On the otherhand, British unskilled workers were in a better position than the American unskilled workers. Thiscreates a different perception of class-identity: in Great Britain, there is a strong class consciousness,

whereas in the US, there is a weak class consciousness and a high consumer consciousness.As a consequence, there is a disconnection from patrimony ( construction du patrimoine ) throughcredit. Parents no longer save money to help their children achieve a better status than they havebecause now anyone can buy his way up by acquiring the symbols of the upper-class. Thisphenomenon that started in the 1920s has not reached its total effect until the 1990s.

All of these phenomenons linked with credit are still at work today. But there is just a sharp difference:in the 1920s, these phenomenons were reinforcing the equalitarian feeling of the society. Today, the

gap between the upper-class and the middle-class seems to be increasing.


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3. US financial markets : the greatdepression

How the US economy has functioned since the 1920s?

a. Speculation: the panics of 1907 and 1929

In the 1907 crisis , there were problems in technical aspects of banking (compensation). The bankJPMorgan Chase did a great job saying that bank deposit will not be lost and it brought trust back intothe system, with no massive money withdrawal to the clients.

The 1929 crisis applies to what has happened recently. It was one of the major financial and economiccrises in the US and has become a major event in American history, as important as WW2.

In the 1920s, during the Roaring 20s , an unprecedented cycle of fast growth took place in the US andpossessed the market with a consumerist fever. This growth gave great confidence to the economicsystem. There were many innovations: automobiles, growth of the movies industry (first golden age of

Hollywood), airplanes, air-conditioning, the radio industry (stations, manufacturers...), phones Allthat emerging industries created new markets and therefore new job opportunities, which gave asense of endless optimism.This brings a parallel between the 1920s crisis and the 1990s crisis:technology changed how people traded on the stock-exchange. Radio systems that allowed the instanttransmission of telegrams made it possible for people far away from Wall Street to give orders to thebrokers. It also provided instant information for all the country. Brokerage firms ( firmes de courtage )began to open offices all over the country, which brought many new clients. The 1927 market wascalled the great bull market.

People thought it would continue endlessly. But after a period of growth, there is necessarily a periodof recession; economists studied the question and this phenomenon has been proved several times.They warned that there was too much speculation in the new markets, which were too high to be real,and they advised the public to stop investing because the stock-exchange was over-valued. Thiswarning had no effect and the stock-exchange continued to increase. The prices of shares increasedvery fast because of the high demand. When the speculation craze really started (1928), there weredistinct signs that the economy was entering a recession phase.

But where did the huge amounts of money invested in the stock-exchange come from?


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At the beginning of the 20 th century, there was an equilibrium between the buyers of and the sellers of cars (Chicago industry). But in the 1920s, there was an inflow of money in the stock exchange becauseof a group of powerful speculators from the car market who had already made a huge amount of money buying too much shares thanks to the large profits they had made and that had to bereinvested. The reason why brokers (courtiers en bourse, who sell shares for their clients) had obtained so much money was because they had given the shares they were trading as guarantees for their bankers. This worked as long as shares increased. The speculative fever should have stopped in anatural way as speculative leaders were exhausted.

What triggered the peak of the speculative craze was a phenomenon of euphoria from ordinary people,who seeing that, started wanting to be part of the game and to invest money. Their success fed new speculation and so on (snowball effect). When new investors enter the market, the demand was higher,so it pushed up the prices. Therefore, people needed more money to invest again on new shares. Thatswhy credits started to be very demanded too. This phenomenon is called the leverage effect (effet levier): euphoric speculators have the opportunity to borrow money to invest on assets that they feel will generate more money. Because the economic growth is fine, bankers say yes to a collateral credit (prt garanti). The problem with credit is that it helps hiding the problems and distorts the economy. At the beginning of the stock exchange success, 20% of the money flowing in the stock exchange wasborrowed money and 80% was real investment. Right before the krach of 1929, 80% of the money flowing in the stock exchange was borrowed money. The leverage effect fed the speculative bubble and when the bubble bursted, people couldnt reimburse the money they have borrowed.

There is another way of getting money; its the mutual funds, financial entities with capital divided inshares. It sells shares to people interested in it. When a company is going well , the share prices

increases, shareholders receive a dividend.

Beginning of 1928, unemployment was higher than at any other time since the World War. Soupkitchens were created.

The Federal Reserve (Banque Centrale ) was the only authority that could do something to avoid theleverage system and limit speculative bubbles. When people wanted a loan, they went to the bank.Usually, banks did not have much cash in their buildings and asked money to the Federal Reserve. TheFederal Reserve had to increase the interest rates (discount rates or taux descompte ) on the loansthey gave to the banks. It decided to increase the base rate from 3.5% to 4.5% because they knew thata lot of money that was fueling the 1928 rise was borrowed money. This caused a brief slowdown andthen the stock-exchange went on again. This fluctuation is one of the signs of a market collapse.

Herbert Hoover, a notorious business candidate, won the November 1928 election by a large majority.That caused the market to break all expectative, because Hoovers policies were favorable toeconomy. On February 1929, he issued a statement that forbade banks to give loans with the moneyof the Federal Reserve to their clients if the purpose was to invest in the stock-exchange. It was aclever move, that didnt aff ect all of the economy, but the market went down.


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In response to that, a group of New York banks decided to create a fund to help banks to financespeculators, in order to replace the Federal Reserve. The market recovered, however it implementedvery high rates (to make profits but also because they agreed with Hoover on the need of limitingspeculation). But the craze was so out of control that people bought shares of companies they did noteven know. The government was not able to sustain the economy; its efforts have been defeated bythe financial industry. Less and less shares found buyers, which is the starting point of the crisis. Asmall number of large investors became scared and decided to leave the market. In a speculativegame, the first who gets out makes a lot of money as shares are sold at the right moment.

To give an idea of the role of investment trusts at that stage, they had bought about 500M dollars instocks but they had sold shares out to the public for about $3b. This represents a leverage effect of 6.

On September 2 nd , market reached an ultimate peak and at that point the behavior of the stockexchange weakened.

A few days later, Black Thursday occurred: on October 29th, 13 million shares were thrown into themarket and only half of them were bought. This was the beginning of the collapse. People who hadgone into extreme speculation were not very numerous. Unfortunately, they had triggered aphenomenon that had a great impact on what happened next.

The collapse of the financial markets does not necessarily trigger a large-scale economic recession. Thedecreases of the revenues and of the prices of the shares are signs of economic recession. The collapsewill obviously affect demand, but it doesnt necessarily affect demand on a large scale and for a long period of time. In the case of the 1929 crisis, the demand was affected. There are many different kindsof investors in the stock exchange, all pursuing different goals. Some are speculators who want tomake large profits in the short term, while others invest to make savings for their retirement; they invest in the long term and are usually careful. When these investors are profoundly hurt by thecollapse of the market, this is most likely to hurt demand. The crisis of 1929 was a combination of ordinary people who had lost money and, as a consequence, stopped consuming.

When a bank gives out loans, by law it must have some cash in guarantee. But, in the 1920s, the banksinvested their own reserves in the stock exchange.

For example, there is an investment of $20,000 and $10,000 of them is borrowed money. The price of stocks decreases (deflation, which is more dangerous than inflation) and the parts that the investor had bought with the $20,000 are only worth $7,000. Banks ask the investor to pay the difference of price($3,000 left to pay to the bank). To reimburse it, the investor is going to have to sell other shares( deleveraging effect : levier invers) at a high price to avoid selling the one at $7,000. This important sale decreases the prices again, and the investors share is only worth $5,000 now, so he has to sell again and again, pushing each time the share prices down. The massive sale of stocks from different investors decreases the stock price, and therefore brings the collapse of the market. Banks have nomoney left because their clients- investors couldnt pay back the loan. This provokes a chain reaction of

banks going bankrupt and a destruction of money.


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Banks tried to limit the crisis by back-firing the shares not sold or by buying other banks. As bankscollapsed, a bank panic occurred . A bank panic is when clients line up and ask the bank to withdrawtheir money. The payments were in loans so people could nt take back their money. The banker forcedthe investors to face their loss and asked them to reimburse the margin (deleveraging). As a result,banks could not survive. Besides, even if the banks were healthy, clients asked their money backbecause they were afraid of losing everything (paranoiac atmosphere).

The example of the American investment bank Goldman Sachs represents one of the most problematicelements of the 1929 crisis. The company was one of the first banks to collapse. The federalgovernment had an overbeating influence on the rest of the industries but Goldman Sachs held a keyposition in economy and finance, so they did some things they way they wanted and not the way theyshould. For example, they paid bonuses to top employees like no one had seen before. This is one of the elements that took the company to bankruptcy.

In 1929, 659 banks defaulted. The total loss was $200m.

1930: 1350 banks called for bankruptcy.

In 1931, there were 2294 banks that filed for bankruptcy, with a total loss of $2b (vicious circle).

b. The Great Depression

These events were the starting point of the Great Depression . The economic growth had started toslow down long before the market collapsed but the speculation in the stock exchange made thisdepression invisible. But there were signs of a crisis: house building slowed down after 1927, there wasa deep crisis in agriculture In 1910, the average farmer revenue was only 40% of the average urbanrevenue. In 1930, it was only 30%. The farming population was in a state of impoverishment. Recoverywas thought to be impossible.

In 1930, there was a liquidity crisis: there was no liquidity to reimburse loans and people lost all theirsavings. Banks were extremely vulnerable to clients. So people stopped consuming except for theabsolute necessity (food for example). In 1932, wholesale prices ( prix de gros ) decreased by 31% andconsumer prices decreased by 25%. Quite logically, this deflationist spiral caused damage: the salarieswent down the same way and less money was produced. The liquidity crisis affected not only theselling sectors but also the building sectors, because if people didnt have money to buy houses or carsthen there were no houses nor cars built.

There are 2 ways of looking at this:


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Monetarist explanation: the decrease of the money supply caused the loss in demand and as a result,the depression.

Keynesian view: the loss in demand is at the heart of the depression.

What could have been done to avoid the depression?

Nevertheless, there was no State interv ention in 1929. The Hoover Administration adopted a Laissez-Faire program. They did not realise the sco pe of the depression. Some people thought that any intervention of the State was counter-productive. Besides, according to the logic of cycles, there is agrowth cycle after a depression cycle. According to the Keynesians, the government should have tried to do something in order to slow down the collapse of the banks by guarantying the savings in thebanks (this would have brought confidence back to the banking industry). They should also have produced more money, even if there was a risk of creating inflation. The protectionist wave that followed the crisis made the situation even worse.

In the 1930s, the Glass Steagall Act finally regulated the banking industry in the US. This is an initiativethe Hoover Administration had never taken before in order to guarantee bank deposit but peoplewere starting to think that banks have taken advantage of their clients, hence the compulsoryseparation in a very strict way of the activities of the investment (or business) banking and the depositbanking. The deposit branch had become extremely capitalized with the crisis because it was used torecover the investment branch so it collapsed. The Glass Steagall Act restricted the ability of banks to

speculate.

An ordinary bank client has a savings account and his bank is both a business and a deposit bank.Banks want to sell the shares of their business clients. So, they ask ordinary people if they want toinvest in shares (business bank) instead of saving money (deposit bank). Money of ordinary people canbe found in trust funds for example. When the bank goes bankrupt, people lose all their savings. Ex:when French EDF was privatized, French banks tried to influence people to buy shares but a few monthslater, shares were devaluated.

After the separation, deposit banks and investment banks role were very clearly defined:

- Deposit banks: could receive deposits and order consumer or housing loans for ordinary clients.The deposit banks finances the operations of the bank of investment.

- Business banks: could issue trust loans with very high interest rates to powerful investors andcorporations. They were completely banned from taking any deposit. They run trust funds. It isuseful to the stock exchange.

In 1934 and because of the liquidity crisis, of the wealth in the USA had just disappeared. The GNPdecreased of 25%.


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The Great Depression was experienced by the American society as a deep trauma. It is the only period in the Hollywood production when many films had no happy ending. Besides, the movies contained many economic hints. Maybe, what people experienced in the late 1920s and early 1990s was not very

different, but the two crises did not affect people the same way.

c. The end of the 1930s and the 1940s

The market in the 1920s was going up as the economy was going down. People who had a lot of money were looking for new places to invest their money and not reinvest it in the real economy

because it wasnt profitable. The labor unions power increased in 1932 with the Norris-La Guardia Act.After WW2, collective bargaining became very usual between trade unions and CEOs to renegotiatethe conditions of the employees in a collective agreement valid for 2 years. This brought stability tothe economic system. Between 1945 and 1970, there were no speculative bubbles and there was astable economic growth which helped the rise again of trade unions after the war.

The Roosevelt administration reacted to the 30s crisis by a strictly Keynesian analysis of the crisis: asystemic unbalancing do esnt correct on its own so help was to be provided:

- Regulation of the finances by the government: it established long term conditions to avoid piling-upof savings in the hands of few, because that created stagnation in economy.

- Regulation between providers of supply and providers of demand (bosses and public).

If the free-enterprise and economically liberal system before the crisis worked well, why wasit dismantled?

One of the reasons is the investment interest, because the system enabled a way of piling up wealththat was impossible previously. There was a general shift in values, perspectives and culture that madethe change possible.

If companies are trying to increase their profitability, their trying to reduce their production costs,usually by avoiding salary increases. Companies think that they are becoming more competitive in theshort term this competitive improvement is off-set by the stagnation and diminishing demand, and therefore, salaries. People who are at the top of the economic pyramid are on the contrary making very good profit. They are not connected to the demand. They can maintain the corporate level and redistribute it for company shareholders. This is called the unequalitarian imbalance (dsquilibre

ingalitaire): people at the top of society, which represent a minority of people, are interested in the fact that corporations remain wealthy and profitable. What keeps the system running healthy is the


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way profits of corporations are distributed: a bit of it goes to economy and a part of it goes to the topclasses of society.

In the 20s, no one had come with an explanatory framework to how this system could be thrown off-balance. The common thought was that the free market automatically balanced the system because

there was a fundamental link between supply and demand: if there is a change between the 2 thatcaused disequilibrium, this one would be balanced by market forces. Depression, recessions and crisiswere seen as temporary unbalances that were fixed on their own by market forces, without any otherhelp.

Explaining how profit may be used depends on the economic situation:

- It can be reinvested within the corporation.- It can be used as payment for shareholders.

The system goes from creating real wealth to creating a delusionary wealth in the speculative bubble.It forces people to reinvest in real economy and rebalance the economy (because the speculativebubble is linked to a system of unbalanced economy).

d. 1950s-1970s: the peak of the Keynesian model

The period starts with the triumph of Keynesian ideas and ends with their collapse. These ideas werebrought by the traumas of the great depression and WW2, which produced new economic policies asthe population was realizing that the US were not invincible.

The very basic foundations of Keynesian ideas insist in a perception of capitalism which is obsolete. It isbased on a redefinition of the role of the state and management of the economy.

The New Deal was based on Keynes view and put in motion a number of initiatives to bring a general

increase of wealth:

The government had a regulatory role in economy , which means that it shouldnt interfere ineconomy as it is naturally balanced by market forces

Government had to regulate the equilibrium between supply and demand Regulation of financial sector so financial investments were not too profitable and the

equilibrium between finance and production was kept. Shares become financial investment, andthats good for manufacturing capacities because it brings capital and enables the payment of increasing salaries.

Reinforcing the power of trade unions to regulate prices and get better salaries with the help of the government.


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Government interferences in some sectors of the economy were new in the 1930s but became regularmethods in western countries throughout the 50s and 60s. Keynes said that government should have adeficit during crises, so when there was a deflational spiral, the governments budget should not bevery tight or it could have consequences on the demand. He launched public work ( travaux publics ).Companies and people benefited from public spending.

During the 1950s, 1960s and 1970s, the US experienced an important growth of wealth. After thoseyears, there was an economic crisis and inflation (because of the oil crises).

The 1950s were a period of prosperity and not a period of reconstruction. It is also a period of demographic expansion: the population grew 19% during the decade thanks to the baby-boomphenomenon, whereas the population growth was of 7% in the 30s and of 14% in the 40s. The generalfeeling was of being in a dynamic society. The corporate gigantism participated in the feeling of power, comfort and stability:

The 30 largest American corporations represented 40 % of all investment in the US

0.1 % of the total companies, 25 % of all workers, 1/3 of the money-making (added value), 1/3of all salaries.

The standardization of consumption brought a decrease in inequalities within society. All Americansbought the same things across the country and this brought a uniformization of consumerism and

society.In 1947, 5% richest Americans had 17% of all revenues

In 1957, the same 5% had only 15% of all revenues

The bottom of the ladder had seen its revenue increases and this stimulated a dynamic consumermarket.

In 1956, 96% of all households had a fridge,

67% of all households had a vacuum cleaner

89% of all households had a washing machine

In 1955, the US population represented 6% of the world population but produced 50% of all goods.Demographic growth has a really strong impact on economic. In constant economy (taking in accountinflation), between 1950 and 1959, the GMP practically multiplied itself by too and the GNP per capitaincreased 30 %. In 1958, the balance of payment became low. The huge superiority the US was alreadydiminishing.


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The civil rights movement: why after such stability during the 1950s, protest movementstook place in the 1960s?

Behind the positive figures, something was going wrong. There were many claims by ethniccommunities who thought that they also should have their shares of prosperity. During the war, the

black community got well integrated but after the war they went back to their pre-war social position.Many black workers were fired after the WW2. The economic stability reached its peak in the 60s butracial minorities lived in a different economic world. It triggered and intellectual revolution in the USconcerning equality and brought a new perception of reality. Before that, the question of equality inthe USA was really different than in Europe, because it was seen as a non -issue and definitely not asa social issue. For Americans, inequality existed because of individual responsibility to succeed or not,so if you were treated differently, it was because you hadnt succeeded. In the US, poor peoplewerent considered as really poor, because they werent as poor as people in India or in Africa. Infact, 50% of them had a washing machine and 70% owned a car. The new concept of poor people,app lied to the developed world, emerged during Johnsons presidency.

The Civil rights movement did not only show that there was racial inequality but also brought to theattention of the living people that minorities were excluded from the economic prosperity. There wereclasses of people who were facing difficulties in the economic and even the legal system. Inequalitiesbecame a social problem and then a public issue. The myth of the self- made man (from rags toriches) didnt apply to the black community.

In 1947, 20% of the poorest received 5% of national revenue.

In 1962, 20% of the poorest received 4.6% of national revenue. of the kids had a raincoat.

Lyndon Johnson and his Great Society:

Lyndon Johnson (1963-1969, 2 mandates), who was less charismatic than Kennedy, was much moreclever. He manipulated the congressmen and came up with the idea of a Great Society , which is acommitment of the society to destroy inequalities. It is the last great participation of the wholecountry to a program launched by the government. A study in Detroit on 19,000 families showed that

1 family out of 9 had a telephone. This was the basis of the establishment of a large social program runby the federal government and the state government to fight poverty.

In 1954, there were 40 different programs implemented to fight poverty.

In 1971, 1/3 of the federal budget went to social issues and poverty fight, which represents about 8% of the GNP.

All of the programs were successfully accepted and implanted. He created Medicare and Medicaid, theUS social security organizations. During this period the liberal view was triumphing in politics andeconomy. They had a left view of state economy.

In 1959, 22% of the people were living under the poverty line.


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In 1973, 11% of the people were living under the poverty line.

The Civil rights movement became more radical in political actions because the program didnt bring asignificant change for Blacks, so their frustration increased. Johnsons policy was contradictory becauseit followed the left wing in domestic policies and the right wing overseas (with their increasing

involvement in the Vietnam War). A student movement emerged (like May 68 in France), maybebecause young people didnt want this type of involvement in the Great Society ideas. People becamemore individualistic. Everybody wanted to be special (black/white). There were free speechmovements on American campuses and the number of students exploded. A larger portion of population had the will to become literate to progress towards an equalitarian ideal . This expressionbecame in political ideas the idea of a right of citizenship for everybody, and citizenship was linked towealth, literacy and education. Blacks could now get into American universities. The number of peoplewho reached the higher education is of 15% of the whole population of the US. A new type of collective identity emerged. Those people had distinctive view towards the society and differentaspirations that the rest. This changed deeply the vision the society had of itself. A new brand of individualism had appeared.

What took place in the 1960s is the questioning of the society. According to Keynes, capitalism could berun on the interest of everyone and was linked to classes and to other people. There was a general change of the neutrality that prevailed in society (Keynes). Those movements brought a holistic and egalitarian approach. Neoconservatives still thought that the pursuit of profit was in the general interest and that the enemy was also in the middle class. They had a particular type of unequalitarianvision of the society. Those changes prepared society for the emergence of an economic change which

would bring the classical ideas of economy in the front of the ideological scene.

Johnsons economic policies increased the federal deficit. The Vietnam War, that took everyone bysurprise in March 1973, could no longer be an excuse for the US to be the guardians of theinternational order. The Brettonwoods agreement, which brought a new organization for theinternational monetary order and which gave its supremacy to the dollar right after WW2, was nolonger in place and the gold standard was given up during Johnson.

The crisis of the 70s: stagflation and Keynes

In the 1970s, a neoliberal system (that would be followed by Reagans neoliberal administration) gained power and Keynes theory couldnt explain what happened. In Keyness system, when thegovernment interferes in correcting inequalities, it is good, but in the neoliberal system it is bad for theeconomy. So the social and economic situation made it possible for this new type of economy in the1980s. As government couldnt interfere, p eople that suffered from poverty had to be let down sothey were pushed to get out of their situation.


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In 1973 with the oil shock, the price of oil multiplied by 4. There was a sharp increase of basic goods ineconomy that caused inflation. Inflation is usually followed by stagflation, which means low economicgrowth, high inflation and high unemployment. In this case, there was stagflation because the increasein prices of basic goods in economy by a multiplicity of factors can slow down the economy and bringprice inflation of basic goods. At that time, people started asking for higher salaries to buy goods.

Differential accumulation theory ( la thorie du differentiel daccumulation ) theory sees stagflationoscillate inversely with periods where mergers and acquisitions are dominant as a major strategy of dominant capital groups to "beat the market" or exceed the normal, average rate of return oninvestments. If too many people try to "beat the average" a market imbalance results. Stagflation,which appears as a crisis at the societal level, contributes significantly to differential accumulation atthe disaggregate level, that is, of dominant capital groups accumulating faster than smaller businesses.Since the 20th century, the dominant capital group which has benefited from stagflation has been the"weapon-dollar-petrodollar coalition" during periods of Mid-east crises and rising oil prices. Theseperiods have oscillated between periods of relative "peace" during which mergers and acquisitionshave been the dominant strategy for beating the average.

The external factor that brought this delicate economic situation is the Kippur War between Egypt,Syria and Israel (continuation of the 6 days war of 1968) made it complicated to solve the crisis. OnOctober 6 th 1973, Israel attacked Egypt thinking that Egypt was going to do the same. Before the war,there was no peace treaty or diplomatic arrangement. Egyptian president wanted to negotiate withIsrael in Kippur. He had 2 diplomatic goals: to wash the humiliation from 1968 and to force Israel intonegotiation. On October 17 th there was an embargo from the Arab members of OPEC on oil productionby 5% per month and on the 19 th the embargo was enforced against the US in response to theirsupport of Israel and it was then extended to Europe (the Netherlands), causing the 1973 energy crisis.On October 22 nd, the Israel army became successful again and Russia and the US imposed a cease-fire.On October 26 th the war ended and on November 23 rd the embargo was extended to many countriesin Africa. It took end in 1974.

John Maynard Keynes was a chief negotiator at Brettonwoods (July 22 nd 1944). He thought it was amistake for dealing countries to have only one national currency by country. An international centralbank created a new international currency called Bancor. This bank lends a certain amount of money(bancors) to countries. Those countries dealt between them at a stable tax fixed by the Central Bank.

When those countries pay back, they have to pay interests that are calculated depending on theeconomic growth. The countries that have made too much money have to pay a tax on the extra-money theyve made, and those who are in deficit have to pay a tax because they didnt reach thelevel of wealth required. States commerce between them but at the end of the year there aredifferences between the countries (disequilibria) and Bancor has to pay for those differences. Usually,when a government equilibrates its account, there is a flow of money that circulates and that avoidscompetition with private investors. Those ideas are Keynes ideas of necessity of equity. It forced thecountries to keep the balance and not try to be the richest ones. This system naturally broughtcountries to a right use of international commerce.

The result of this agreement was that the dollar became the international currency of reference. It wasthe only currency pegged to the price of gold and all the other currencies were pegged to the price of


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$US. In order to reach that position, gold had to be devaluated. At that time, Nixon was borrowing andprinting a lot of money to spend it in the Vietnam War: the weapon industry was highly financed a lotby borrowed money in the Nixon administration. The Vietnam War was one of the most expensive($100b spending in defense). The US government ran an increasing deficit throughout the 70s and the80s. To pay for the deficit, the government printed more dollars and at the end there was more dollarsin the market that gold in the Federal Reserve. To maintain the parity between gold and dollars, thedollar had to be devaluated in 1971. Some people asked to have their dollars changed into gold (likeDe Gaulle), so the dollar was devaluated very quickly, because of the high amount of dollars that werecirculating.

The working class was organized in such a way that it was easy to influence her. The working class hadthe ability to operate as a community and they thought that the community shared the same interests(values, self- esteem). In the 1960s, the working class had social protection and access to education.

They lived in concentrated areas with public areas (cinemas, bars). At the end of the 70s, the situationhad changed. Inflation and unemployment had risen partly due to the new technologies and as therewas no economic growth because of the crisis, there were no new jobs created, and that hugelyaffected the working class. Before the 70s there was much more stability because unemployment wascompensated by the created of new jobs thanks to the growth of production. But we cant only blamepoor economic performance for this situation, because it wasnt that bad excepted for i nflation. 1975was a recession year but in 1977 the growth was of 5.5%.

GNP in 1971: $1,122b

GNP in 1980: $1,474b

The essential problem of the period is the combination of 2 negative phenomenons in economy: highinflation and high unemployment. People did nt have the bargaining power to request higher salaries.It was a temporary increasing crisis that saw the emergence of a neoconservative revolution as aneconomic factor. The government should intervene as little as possible on the market and should onlycorrect inequalities in order to increase the efficiency of the economy. This element goes against theneoconservative ideology, so intervention has to be used with parsimony.

Issue of moral individuality:

In a more individualistic approach people fear that their fate is disconnected from the rest of the world.If you approach a higher consciousness, why should they consider others? Because they have toconfront with people who claim that they want to live in values and a lifestyle totally different. Themore individualistic culture had an important impact on the working class, who tended to have acommunity life style. So people rejected working and middle-class values because they were dmod

and when the same people entered the working life it was a big shock. The economic justification and


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philosophical and sociological justification corresponds to a new vision of society. The moral element isquite visible in a number of studies.These are ideas take the phenomenon of poverty away from its social dimension and back to itsindividual dimension. In the 50s, poverty was made by a departed form of Calvinism theory a social issue that had to be treated socially and politically. These ideas were criticized because the individual vision of poverty had been a self-inflated hardship (caused by poor people for not doing the right thingto avoid poverty ).

In the 1970s, the 19 th century ideology of a social Darwinism dominated the economical andphilosophical sphere. Specialists thought that government programs to fight poverty in effectmaintained people in a state of poverty because it is economically unwise not to let people suffer the

full consequences of their poverty when they don t take their fate in their hands and find solutions to fight it . The original moral justification of Darwinism to the issue of poverty was abandoned andtreated again on a strictly economic term. This basic change in ideology allowed the emergence of economic ideas later on the 1980s. Without these changes, society wouldnt h ave been ready for thisshift. The economic revolution can t be seen as a phenomenon up-down (neo-conservative revolution:political leaders and economic leaders imposing ideas on middle-class) because the middle classaccepted those measures.

How economic structures and companies evolved after the eco revolution?

The stratification of society in the US caused a disconnection between the lower and the upper middleclass. The top class is the one that really benefited. Those changes affected the working class who sawthe emergence of an equalitarian society . The working class was now allowed to try to influencepoliticians and managers and to operate as a community. This idea relates to a number of values andtook place in the concentrated areas.

In the 70s the situation became stable. There were some technical progresses, like the creation of

higher new jobs that affected the working class as well. Unemployment grew among them. It was amore individualistic culture than the 60s culture of community lifestyle. Jobs were lost in large scaleindustries. Urban structures gradually disappeared. There was a high social instability and a loss of values. This brought the emergence of an underclass, composed of class people left outside thesociety, and living under economic conditions in contradiction with the social mainstream. They hadpractically no relation with the rest of the society.

The urban structure rapidly disappeared, people found themselves isolated because of the newstructure of production. The environment and culture disappearance brought loss of values and thereemergence of an underclass (something that had disappeared after the WW2 in a developed

country) Urban ghettos appeared in the 80s.


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US Economic Model

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