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Fluctuations in Chesapeake tobacco prices caused a prolonged economic depression from 1660 into the early 1700s. Sadly, disillusioned colonists took out their frustrations on the local Indians. In April 1676, Nathaniel Bacon, a relative of Virginia Governor William Berkeley, led three hundred settlers against peaceful local tribes, killing them all. When Bacon's force grew to twelve hundred men, he decided to drive all Indians out of the colony. Fortunately, Governor Berkeley decided that Bacon's actions were excessive and recalled him, but Bacon's army then rebelled against the colonial government and burned Jamestown. Bacon went so far as to promise freedom to servants and slaves of Berkeley's supporters, but he died suddenly, and his movement fell apart. Bacon's Rebellion illustrated the tensions between white and Indian, planter and slave, and have and have-not in the colony, tensions made worse by an economic depression that must have seemed without end.

Indentured servants and slaves. The Chesapeake region offered little economic opportunity to indentured servants who had completed their term of obligation. Even with the small amount of capital needed for tobacco cultivation, former indentured servants at best became subsistence farmers, a class ripe for such calls to rebellion as those proposed by Nathaniel Bacon. As the number of new indentured laborers declined because of limited chances for advancement and reports of harsh treatment, they were replaced by African slaves.

Early in the seventeenth century, the status of slave and indentured servant was quite similar. After 1660, the Chesapeake colonies enforced laws that defined slavery as a lifelong and inheritable condition based on race. This made slaves profitable because planters could rely not only on their labor but that of their children as well. The slave population, which numbered about four thousand in Virginia and Maryland in 1675, grew significantly to the end of the century.

Restoration Colonies

English settlement of North America was seriously curtailed by the conflict between king and Parliament that led to the English Civil War and the rule of Oliver Cromwell (1649–60). Once the monarchy was restored under Charles II, however, colonization resumed. The Restoration Colonies were all proprietorships granted by Charles to men who had helped him reclaim the throne.

The Carolinas. The Carolinas (from the Latin version of Charles, Carolus), which originally included the land from the southern border of Virginia to Spanish Florida, were given to eight proprietors in 1663. Settlers from Virginia came into the northern part of the territory in the 1650s, bringing with them the tobacco culture. Small-scale farming and the export of lumber and pitch (tar), much in demand by English shipbuilders, were the basis of the economy. North Carolina became a separate colony in 1691. In the south, where the proprietors focused their interest, things took a different turn. Rice became the staple crop by the 1690s. Because its production was extremely labor intensive, African slaves were imported to drain the swamps and work the fields. The reliance on slaves is not surprising. Not only was the supply of indentured servants limited, but many of the early settlers came from the English colonies in the Caribbean, most notably Barbados, where slavery was well established.

Like many Restoration Colonies, South Carolina attracted diverse religious and ethnic groups. In addition to colonists from Barbados, who were mostly Anglicans, there were German Lutherans, Scotch-Irish Presbyterians, Welsh Baptists, and Spanish Jews. This mix did not promote stability. Relations with the Indians often turned violent as whites enslaved native tribes as well as blacks. The inability of the proprietors to maintain order led to South Carolina's becoming a royal colony in 1729.

From New Netherland to New York. The Dutch established two trading posts in 1614: one on Manhattan Island and one to the north on the Hudson River at Albany's present location. A decade later, the newly formed Dutch West India Company set up the first permanent settlements, the most important of which was New Amsterdam on Manhattan; it became the capital of New Netherland. Although the fur trade stimulated Dutch expansion into Delaware and the Hudson River Valley, farming was considered vital to making the colony self-sufficient. Under the patroon system, individuals who brought fifty settlers along with livestock and farm implements to the colony received large tracts of land.

Administration of New Netherland was in the hands of governors appointed by the Dutch West India Company. The colonists had little loyalty to these often corrupt and dictatorial officials, and when the English fleet appeared off Manhattan in 1664, no resistance was offered. This was not a sign that the Dutch welcomed English takeover, however. The two countries had been engaged in a series of wars for commercial supremacy; in fact, the Dutch won the colony back briefly during the Third Anglo-Dutch War in 1673. Nevertheless, New York, renamed for its new proprietor, James, Duke of York, became an English royal colony in 1685.

New Jersey. New Jersey was based on land grants made in 1664 by the Duke of York to Sir John Berkeley and Sir George Carteret, two of his favorite supporters. Small farming settlements that were in fact religious and ethnic enclaves of Anglicans, Puritans, Dutch Calvinists, Scottish Presbyterians, Swedish Lutherans, and Quakers predominated. The colony was divided into West and East Jersey by the proprietors in 1676 and was not reunited until 1702, when it reverted to direct royal control.

Pennsylvania and Delaware. William Penn received his proprietorship from Charles II in 1681, quite possibly as repayment of the debt the royal treasury owed his father. A member of the Society of Friends, or Quakers, he saw the grant as an opportunity to create a colony in North America—a “Peaceable Kingdom”—as a religious experiment.

The Quakers were looked upon with some suspicion in England because of their religious beliefs, but the sect thrived in spite of official persecution. They were pacifists, preached to the poor, refused to take oaths or tip their hats or bow to their social superiors, and gave women a role in the church. To encourage settlement, Penn actively promoted the attractions of Pennsylvania, not the least of which were religious toleration and good relations with the Indians based on Quaker pacifism and his willingness to buy rather than take Indian lands. The strategy worked, and the colony's population ballooned to more than eight thousand by 1700.

The first important settlement in Delaware was founded in 1638 by the New Sweden Company, a joint-stock company with Swedish and Dutch investors. But this Swedish outpost in the New World was short-lived. The colony first passed to the Dutch (1655), who could trace their claims to Henry Hudson's voyage, and then to England (1664). In 1682, Delaware was made part of William Penn's proprietorship and remained under the political control of the governor of Pennsylvania until the American Revolution.

Georgia, the last English colony. Georgia (named for George II) was carved out of territory originally part of South Carolina as a buffer against the Spanish in Florida and as a place where the poor of Europe could get a new start. The trustees to whom the land was granted, most important James Oglethorpe, envisioned a colony of prosperous small farmers and imposed regulations to bring this about. The land was given away, but no one could own more than five hundred acres, and the sale of land to other colonists or the bequeathing of farms to women heirs was prohibited. Slavery was also banned. While the trustees brought over anyone willing to work, making Georgia England's most cosmopolitan colony with German, Swiss, Austrian, Italian, and Jewish settlers, strong opposition to the land-holding restrictions inevitably arose. All limitations were abolished by 1759, by which time Georgia was already a royal colony.

Colonial Society and Economy

Although the colonists enjoyed a good deal of political autonomy through their elected assemblies (for example, the Virginia House of Burgesses and the Maryland House of Delegates), the colonies were part of the English imperial system. The Navigation Acts, first enacted by Parliament in 1660, regulated trade by requiring that goods be shipped on English ships with predominantly English crews and that certain commodities, called enumerated articles, be shipped to only England or its colonies. The laws reflected the economic policy known as mercantilism, which held that colonies exist for the benefit of the mother country as a source of raw materials and a market for its manufactured goods. On the international scene, the colonies could not escape the great power rivalry between England and France. Each of the wars fought between the two countries in Europe had its counterpart in North America.

By 1750, more than one million people, representing a population increase of significant proportions, were living in the thirteen colonies along the Atlantic coast. Disease, which had threatened the survival of many of the early settlements, was much reduced. Infant mortality rates in the colonies were much lower than those in England, and life expectancy was considerably higher. Women married earlier, giving them the opportunity to have more children, and large families were the norm. It was not uncommon at all for a woman to have eight children and more than forty grandchildren. Natural increase, the excess of live births over deaths, was important to the population growth, but ongoing European immigration was a factor as well. Whether refugees from war (the Germans, for example) or victims of persecution or economic conditions in their homelands (the Irish and Scotch-Irish), the new arrivals added to the ethnic and religious mosaic of eighteenth-century America. The largest ethnic group to arrive—the African slaves—came in chains.

The expansion of slavery. At midcentury, just under a quarter million blacks lived in the colonies, almost twenty times the number in 1700. The slave numbers increased, as had the white population, through a combination of immigration, albeit forced, and natural increase. As the supply of indentured servants diminished, in part because work opportunities had improved in England, the supply of slaves either imported directly from Africa or transshipped from the West Indies was increased. Charleston, South Carolina, and Newport, Rhode Island, were important points of entry. Competition from Brazilian and Caribbean planters kept the price of male field hands high, however, and the planters' North American counterparts responded by buying women and encouraging slave families.

The overwhelming majority of slaves lived in the southern colonies, but there was regional variation in distribution. In the Chesapeake area, slaveholding was far from universal, and many of the plantations had fewer than twenty slaves. A typical South Carolina planter, on the other hand, might own as many as fifty slaves to work in the rice fields. In some districts of the sparsely populated South Carolina colony, blacks outnumbered whites by as much as eight to one, and they were able to retain their African culture more than slaves who were taken to Virginia or Maryland. Although a mainstay of the southern economy, slavery was not unknown in the northern colonies. Slaves made up twenty percent of the population of New York in 1746, for example. Working as domestics, assistants to craftsmen, or stevedores in the port cities, they lived in their master's home, as did indentured servants and apprentices.

The slaves' resistance to their situation was often passive, involving feigning illness, breaking equipment, and generally disrupting the routine of the plantation, but it occasionally did turn violent. Given the demographics, it is not surprising that the largest colonial slave revolt—the Stono Rebellion—took place in South Carolina. In 1739, about one hundred fugitive slaves killed twenty whites on their way to Florida and were killed themselves when captured. The rebellion sparked other slave revolts over the next few years.

Colonial agriculture. The overwhelming majority of colonists were farmers. New England's rocky soil and short growing season along with the practice of dividing already small farms among siblings led families to a barely subsistent living. The crops they grew—barley, wheat, and oats—were the same as those grown in England, so they had little export value compared with the staples of the southern plantations. Many New Englanders left farming to fish or produce lumber, tar, and pitch that could be exchanged for English manufactured goods. In the Middle Colonies, richer land and a better climate created a small surplus. Corn, wheat, and livestock were shipped primarily to the West Indies from the growing commercial centers of Philadelphia and New York. Tobacco remained the most important cash crop around Chesapeake Bay, but the volatility of tobacco prices encouraged planters to diversify. Cereal grains, flax, and cattle became important to the economies of Virginia and Maryland in the eighteenth century. Rice cultivation expanded in South Carolina and Georgia, and indigo was added around 1740. The indigo plant was used to make a blue dye much in demand by the English textile industry.

Population growth put pressure on the limited supply of land in the north, while the best land in the south was already in the hands of planters. With opportunities for newcomers limited in the settled coastal areas, many German and Scotch-Irish immigrants pushed into the interior, where available land was more abundant. Filtering into the backcountry of Pennsylvania, Virginia, and the Carolinas, they established farms on the frontier and grew just enough food to keep themselves going.

Colonial trade and industry. The colonies were part of an Atlantic trading network that linked them with England, Africa, and the West Indies. The pattern of commerce, not too accurately called the Triangular Trade, involved the exchange of products from colonial farms, plantations, fisheries, and forests with England for manufactured goods and the West Indies for slaves, molasses, and sugar. In New England, molasses and sugar were distilled into rum, which was used to buy African slaves. Southern Europe was also a valuable market for colonial foodstuffs.

Colonial industry was closely associated with trade. A significant percentage of Atlantic shipping was on vessels built in the colonies, and shipbuilding stimulated other crafts, such as the sewing of sails, milling of lumber, and manufacturing of naval stores. Mercantile theory encouraged the colonies to provide raw materials for England's industrializing economy; pig iron and coal became important exports. Concurrently, restrictions were placed on finished goods. For example, Parliament, concerned about possible competition from colonial hatters, prohibited the export of hats from one colony to another and limited the number of apprentices in each hatmaker's shop.

The social structure of the colonies. At the bottom of the social ladder were slaves and indentured servants; successful planters in the south and wealthy merchants in the north were the colonial elite. In the Chesapeake area, the signs of prosperity were visible in brick and mortar. The rather modest houses of even the most prosperous farmers of the seventeenth century had given way to spacious mansions in the eighteenth century. South Carolina planters often owned townhouses in Charleston and would probably have gone to someplace like Newport to escape the heat in summer. Both in their lifestyles and social pursuits (such as horse racing), the southern gentry emulated the English country squire.

Large landholders were not confined just to the southern colonies. The descendants of the Dutch patroons and the men who received lands from the English royal governors controlled estates in the middle colonies. Their farms were worked by tenant farmers, who received a share of the crop for their labor. In the northern cities, wealth was increasingly concentrated in the hands of the merchants; below them was the middle class of skilled craftsmen and shopkeepers. Craftsmen learned their trade as apprentices and became journeymen when their term of apprenticeship (as long as seven years) was completed. Even as wage earners, the journeymen often still lived with their former master and ate at his table. Saving enough money to go into business for himself was the dream of every journeyman.

Among the urban poor were the unskilled laborers, stevedores, and crew members of the fishing and whaling fleets. Economic recessions were common in the colonies during the eighteenth century, and they affected workers in the cities most. When the supply of labor outstripped demand, wages fell and the level of unemployment rose.

By and large, women in the colonies assumed traditional roles; they took care of their home and brought up their children. On small farms throughout the colonies and in the backcountry, they also worked the fields and cared for livestock alongside their husbands and children. Urban women, freed from such domestic chores as spinning and candle making (cloth and candles could be purchased in the cities), had somewhat more leisure time, and they might help their husbands in their shop or tavern. Although women gave up their property rights when they married, single women and widows could inherit property under English law. It was not uncommon for a woman to manage her husband's business after his death. Midwifery, which required years of training, was the one profession open to women.

Enlightenment and Religious Revival

Compared to England's literacy rate, that in the colonies was quite high. But while about half the colonists could read, their appetite for books rarely went beyond the Bible, the Book of Common Prayer, an almanac, and a volume of Shakespeare's plays. The better-educated elites among them were attuned to the new ideas that flowed into the port cities along with the products of English factories and the immigrants, including the ideas of the Enlightenment. Drawing on the Scientific Revolution, which had demonstrated that the physical world was governed by natural laws, men such as English philosopher John Locke argued that similar laws applied to human affairs and were discoverable through reason. Proponents of the Enlightenment also examined religion through the prism of reason. Rational Christianity, at its extreme, argued that God created the universe, established the laws of nature that made it work, and then did not interfere with the mechanism. This conception of God as a watchmaker is known as deism.

Benjamin Franklin. The Enlightenment in America was best represented by Benjamin Franklin, who clearly believed that the human condition could be improved through science. He founded the American Philosophical Society, the first truly scientific society in the colonies, and his academy grew into the University of Pennsylvania, the only college established in the eighteenth century that had no ties to a religious denomination. Franklin's new wood stove (1742) improved heating and ventilation in colonial homes, and his experiments with electricity led to the invention of the lightning rod (1752). Although a deist himself, Franklin was curious about the religious revival that swept through the colonies from the 1740s into the 1770s.

The Great Awakening and its impact. The Great Awakening grew out of the sense that religion was becoming an increasingly unimportant part of people's lives. In practical terms, this may well have been true. In Virginia, the most populous colony, the supply of ministers compared to the potential number of congregants was small, and churches in the backcountry were rare. The religious revival's leading figures were the Congregationalist minister Jonathan Edwards and the English evangelist George Whitefield, both dynamic preachers. Edwards was renowned for his “fire and brimstone” sermons that warned sinners about the fate God had in store for them if they did not repent. On numerous trips to the colonies beginning in 1738, Whitefield brought his message about the need for each individual to experience a “new birth” on the path to personal salvation (what today's fundamentalist Christians call being “born again”).

In sharp contrast to the Enlightenment, the Great Awakening took on the proportions of a mass movement. Tens of thousands of people came to hear Whitefield preach as he moved from town to town, often holding meetings in the open or under tents, and he became a household name throughout the colonies. Moreover, the Great Awakening appealed to the heart, not the head. One of the reasons for its success was the emotion and drama that the revivalists brought to religion. The highlight of many of the services was the ecstatic personal testimony of those who had experienced a “new birth.”

There is little doubt that the Great Awakening contributed to an increase in church membership and the creation of new churches. Congregations often split between the opponents (“Old Lights”) and the supporters (“New Lights”) of the religious revival. Slaves and Indians converted to Christianity in significant numbers for the first time, and the more evangelical sects, such as the Baptist and Methodist, grew. A rough estimate puts the number of religious organizations in the colonies in 1775 at more than three thousand. At the same time, the Great Awakening promoted religious pluralism. As the road to salvation was opened to everyone through personal conversion, doctrinal differences among the Protestant denominations became less important.

The religious movement is also often credited with encouraging the creation of new institutions of higher learning. Princeton University, founded as the College of New Jersey in 1746, grew out of the early revivalist William Tennent's Log College. Others established during the Great Awakening include Columbia University (King's College, 1754, Anglican), Brown University (Rhode Island College, 1764, Baptist), Rutgers (Queens College, 1766, Dutch Reformed), and Dartmouth College (1769, Congregationalist).

Rivals for Empire

England was not the only country with territorial claims in North America. While Florida and vast stretches of the southwest from present-day Texas to California were under Spanish control, Spain did not pose a serious threat to English primacy. The only possible area of contention was in the southeast, and Georgia proved to be an effective buffer. France was another matter, however. The French controlled much of the land west of the Appalachians to the Rocky Mountains and south from the Great Lakes to the Gulf of Mexico. The handful of settlers from the colonies who ventured beyond the Appalachians quickly came into contact with French trappers and their Indian allies.

The expansion of France in North America. From their settlements in Canada (New France), the French expanded throughout the Great Lakes and into the Mississippi Valley in the late seventeenth century. In 1673, the Jesuit priest Jacques Marquette and the fur trader Louis Joliet traveled by land and canoe from what is today Wisconsin down the Mississippi River to its juncture with the Arkansas River. Nine years later, La Salle reached the Illinois River from Lake Michigan, followed it to its confluence with the Mississippi River, and from there explored the Mississippi to the Gulf of Mexico. He claimed the territory for France, naming the millions of acres that composed the Mississippi River watershed Louisiana in honor of King Louis XIV. French settlement of their newly claimed lands, however, did not begin in earnest until the eighteenth century. New Orleans was founded in 1718 as the capital of a colony that became a royal province in 1732, and French forts were established throughout the Mississippi, Missouri, and Ohio river valleys.

Marquette and Joliet reflected the principal motives behind French exploration and settlement: bringing Catholicism to the native tribes and expanding the fur trade. Neither motive was intended to bring large numbers of colonists to North America. Royal policy was an inhibiting factor to settlement as well. Louis XIV opened the French territory to only French Catholics; no place was made for French Huguenots, who had helped settle South Carolina, nor were there proprietors like William Penn who throughout Europe actively promoted the colonization of his land grant. As a result, the population of New France and Louisiana was quite small compared to that of the English colonies in the eighteenth century. Another important difference between the two was their relationship with the Indians. In the English colonies, disease, war, and slavery sum up the experience of the native tribes. French trappers, on the other hand, adopted Indian ways and often married Indian women. Although conversion was certainly the ultimate goal, even the Jesuit missionaries respected Indian culture. Most important, the size of the French presence posed no immediate threat to either the Indians' way of life or their lands. The Indians proved to be valuable allies of France in its conflicts with England.

The wars between England and France. Between 1689 and 1763, England and France fought four wars. The causes of each one, with the notable exception of the French and Indian War (the Seven Years' War, 1754–63), lay in European dynastic politics, and North America was a minor theater of operations.

While the outcome of King William's War (War of the League of Augsburg, 1689–97) was inconclusive, England acquired longdisputed territory in Canada through the Treaty of Utrecht, which ended Queen Anne's War (War of the Spanish Succession, 1702–13). Newfoundland, Acadia (which was later renamed Nova Scotia), and the fur-rich Hudson Bay were ceded to Great Britain. (Great Britain became the official name of England, Scotland, and Wales following their union in 1707.) The impact of the wars on the colonies, particularly New England, which supplied the bulk of the troops for the Canadian raids, was significant in loss of life, increased taxes, and debt. The third conflict between England and France, King George's War (War of the Austrian Succession, 1744–48), involved only minor border raids and skirmishes between the two countries and their Indian allies, without any meaningful results.

During the 1740s, fur traders from Pennsylvania and Virginia began to move into the Ohio River Valley; Virginia was also interested in land for its large and growing population, and several land companies received sizable grants from the Crown in 1749. The French responded by building a string of forts in the disputed territory, including Fort Duquesne near Pittsburgh. Hostilities began in 1754. George Washington, then a young officer in the Virginia militia, experienced his first defeat in the Pennsylvania backcountry at the hands of the French. When France and Great Britain decided to commit troops, the conflict on the frontier became a contest for the control of North America that soon had even wider international ramifications.

The French and Indian War. The first few years of the French and Indian War did not go well for the British. Despite their inferior numbers, the French had success relying on their considerable Indian support. The colonists and the British, on the other hand, were unable to persuade the Six Nations—a confederation of the Mohawk, Onandaga, Oneida, Cayuga, Seneca, and Tuscarora tribes—which had fought alongside them in previous conflicts, to end its neutrality. British commanders were ineffective, not understanding that tactics used on European battlefields were not effective in the wilderness. In hope of turning the tide, War Minister William Pitt mobilized the British army and navy for action in the colonies, despite the spread of the war to Europe (1756), and he agreed to reimburse the colonial legislatures for the cost of more American troops. The strategy worked. Fort Duquesne fell and the Iroquois joined the British in a series of successful campaigns along the northern New York frontier. The decisive battle in North America was at Quebec in 1759, where the fighting was so fierce that the opposing generals—Wolfe for the British and Montcalm for the French—were both killed. Montreal, the last important French stronghold in North America, was captured in 1760.

Although the war continued for another three years in the Caribbean and the Pacific, the outcome was never in doubt. Through the Treaty of Paris (1763), Britain acquired all French territory east of the Mississippi River and French Canada, with the exception of a few islands off the coast of Newfoundland. Spain, which had entered the war in 1761 on the side of France and had lost Cuba in the process, ceded Florida to the British to get the island back. France compensated Spain for the loss of Florida by giving up all its lands west of the Mississippi River, known as the Louisiana Territory.

Discontent in the Colonies

In 1763, British power stretched from India to North America and the Caribbean, but the cost of creating the empire was high. Britain was facing an enormous postwar debt and already-high taxes as well as the need to finance the administration of its newly acquired lands. The British expected the American colonies, which prospered during the Seven Years' War through lucrative military contracts despite additional taxes, to assume at least part of the financial burden. The colonists had expectations as well: unfettered access to western lands, for example. Although most considered themselves English subjects and were proud to have helped Britain win an empire, a sense of American identity was developing. The colonists had gained greater control over their lives during the war, through their colonial assemblies' exacting concessions from royal governors as the price for raising revenue, and whether the colonists would again meekly accept the role of imperial subject was unknown.

The Seven Years' War had begun over control of the Ohio River Valley; affairs in that region became the first issue the British faced in governing their new empire. France's Indian allies certainly knew that the British victory meant more and more settlers would flood onto their lands. In the spring of 1763, Pontiac, an Ottawa leader, formed a coalition of tribes to drive the British off the western lands. Pontiac's Rebellion caused chaos in the Great Lakes region as his forces overran eight British forts and threatened both Detroit and Pittsburgh. The British fought back by giving Indians smallpox-infected blankets, an early example of biological warfare. Although Pontiac himself did not agree to peace until 1766, Parliament tried to placate the Indians through legislation.

The Proclamation of 1763. Intended to keep the colonists and Ohio Valley tribes separated as much as possible, the Proclamation of 1763 established a boundary running along the crest of the Appalachian Mountains. Unlicensed traders and settlers were banned west of the boundary. The colonists considered the proclamation a challenge to their land claims and continued pushing west, rendering its orders ineffective. Within a few years, British Indian agents negotiated treaties with the Iroquois, Cherokee, and other tribes, opening up large areas of western New York, Pennsylvania, Ohio, and Virginia to settlement.

The Proclamation of 1763 represented an attempt by Britain to exercise greater control over the colonies. The Sugar Act, passed by Parliament in 1764, had the same goal. For more than a century, the Navigation Acts had loosely regulated colonial trade to protect British commerce and manufacturing from competition; the duties imposed on the imports and exports were not intended to raise revenue. The Sugar Act reversed this policy; indeed, the law was officially called the American Revenue Act. By reducing the tax on molasses from the French West Indies and providing for stricter enforcement against smugglers through British vice-admiralty courts, Britain hoped to raise enough money to offset the cost of maintaining troops in the colonies.

The Stamp Act. The Stamp Act required the use of specially marked paper or the affixing of stamps on all wills, contracts, other legal documents, newspapers, and even playing cards. Any colonist who bought a newspaper or engaged in any business transaction was required to pay the tax, and violators faced severe penalties. In contrast to the duties charged under the Navigation Acts and even the Sugar Act, the Stamp Act charges represented the first internal tax, falling directly on the goods and services in the colonies.

Some British leaders, most notably William Pitt, objected strenuously to the Stamp Act because it raised the question of taxation without representation. Prime Minister George Grenville countered that all British subjects enjoyed virtual representation; that is, the members of Parliament represented not only the constituents of their district but the interests of British citizens everywhere, including those in America. The colonists, of course, sided with Pitt and claimed that if Americans were not sitting in Parliament, there was no way the members could know their concerns and interests.

The colonial reaction to the Stamp Act. To the colonists, the Stamp Act was a dangerous departure from previous policies, and they were determined to resist it. The Virginia House of Burgesses, led by Patrick Henry, passed resolutions against the legislation. Violent protests broke out in several of the colonies, led by groups calling themselves the Sons of Liberty. Stamp distributors were hung in effigy and suffered the destruction of their homes. In October 1765, representatives from nine colonies met as the Stamp Act Congress, which agreed that Parliament had the right to enact laws for the colonies but not to impose direct taxes. As the effective date of the Stamp Act approached (November 1, 1765), the colonists simply refused to use the stamps and organized an effective boycott of British goods. To prevent business from coming to a halt, royal officials backed away from requiring stamps on legal documents.

While Parliament was surprised by the extent of the colonial reaction, British manufacturers and merchants were distressed. Pointing out that the boycott could have serious economic repercussions at home, they demanded and got the repeal of the Stamp Act in March 1766. The revocation was more expedient than principled, and Parliament made it clear by passing the Declaratory Act on the same day that it still had the right to legislate for the colonies.

The policies of Charles Townshend. Charles Townshend became prime minister of Great Britain in 1767. He had opposed the Stamp Act, and the colonies initially hoped he would pursue more reasonable policies for North America. They were quickly disillusioned. Responding to protests in New York over the Quartering (or Mutiny) Act of 1765, which required colonial legislatures to pay for supplies needed by British troops, Townshend threatened to nullify all laws passed by the colony unless the payments were made. New York backed down but understood that the threat clearly interfered with colonial self-government. Townshend was just as committed as Grenville to raising revenues from the colonies. The Revenue Act of 1767, better known as the Townshend duties, taxed American imports of glass, lead, paper, paint, and tea. Because the new duties were external taxes unlike those of the Stamp Act, Townshend believed there would be little opposition; the colonists had moved beyond the distinction between internal and external taxes, however. John Dickinson, whose Letters from a Farmer in Pennsylvania was published in almost every newspaper in the colonies, argued that Parliament could not tax commerce for revenue purposes because that power resided in the colonial assemblies alone. Townshend had also created the American Board of Customs Commissioners to regulate the collection of the duties. Its soon-hated agents and commissioners used their office to enrich themselves by levying heavy fines for technical violations, to spy on alleged violators, and even to seize property for dubious reasons.

The Massachusetts House of Representatives circulated a letter, the Massachusetts Circular Letter, drafted by Samuel Adams, protesting Townshend's policies and again raising the issue of “no taxation without representation.” When the letter was not rescinded, the legislature was dissolved by the royal governor on orders from London. A boycott again proved to be the most effective weapon the colonists wielded in their ongoing confrontation with Parliament. Merchants as well as consumers in Boston, New York, and Philadelphia and then throughout the colonies agreed not to import or use British goods. Colonial women joined the Daughters of Liberty, supporting the boycott by making their own thread and cloth. As a direct result of the boycott, the value of colonial imports from Britain dropped significantly from 1768 to 1769, a loss far exceeding the revenue generated by the Townshend duties. Parliament repealed the law for all goods except tea in 1770.

The Boston Massacre. Rioting in Boston over the actions of the Board of Customs Commissioners brought British soldiers to the city in October 1768. Over the next few years, animosity toward the soldiers grew and finally boiled over on March 5, 1770, when troops fired on a crowd of rock-throwing demonstrators, killing five. Although the soldiers had been provoked, and several were later brought to trial, patriots Samuel Adams and Paul Revere tried to use the incident to stir up anti-British passions. In fact, the “Boston Massacre” did not trigger further resistance, and tensions between the colonies and Britain eased, although temporarily.

Drifting toward Revolution

Gregory Bodenhamer Mechanicsburg Pa However, he greatly underestimated the ability of American democracy to correct these abuses. None of Veblen's later works received the acclaim of his two earlier books. He remained a skeptic as he probed society's problems, and typical of his thinking is his Imperial Germany. Although the book is so critical of Germany that, at one time, the U.S. government wanted to use it for propaganda, the post office, for a time, barred it from the mails because it was uncomplimentary towards Great Britain and the United States. Veblen's Higher Learning in America (1918) was the strongest criticism ever leveled at the American university system. In the book, Veblen charged that the U.S. centers of learning were being transformed into centers of football and high-powered public relations. While given to extremes, Veblen retained his value by utilizing anthropology and psychology as better tools with which to study society than the impersonal and theoretical laws of economics.

Veblen believed that the robber barons were interested in producing profits for themselves rather than in producing goods. An example of artificially high capitalization is the founding of U.S. Steel in 1901.

Against real assets of some $682,000,000, almost twice that amount of stocks and bonds were issued — at a capitalization cost of $150,000,000, all of which was paid for by public investors. So there was justification for Veblen's scorn of the American entrepreneur.

However, he greatly underestimated the ability of American democracy to correct these abuses. None of Veblen's later works received the acclaim of his two earlier books. He remained a skeptic as he probed society's problems, and typical of his thinking is his Imperial Germany. Although the book is so critical of Germany that, at one time, the U.S. government wanted to use it for propaganda, the post office, for a time, barred it from the mails because it was uncomplimentary towards Great Britain and the United States. Veblen's Higher Learning in America (1918) was the strongest criticism ever leveled at the American university system. In the book, Veblen charged that the U.S. centers of learning were being transformed into centers of football and high-powered public relations. While given to extremes, Veblen retained his value by utilizing anthropology and psychology as better tools with which to study society than the impersonal and theoretical laws of economics.

Analysis

Veblen's two major works formed a keen description of the robber barons and their savagery. The phrase "robber barons" comes from the definitive and highly readable The Robber Barons (1934), by Matthew Josephson. Also highly descriptive of these titans of Big Business is Ida M. Tarbell's History of the Standard Oil Company (1903).

Veblen's "savage world" was savage on two counts. First, the practices of the actual business world which he observed were predatory. Second, in his examination into the nature of economy, Veblen concluded that by heredity, human nature itself is savage.

Thorstein Veblen has been largely ignored by many economists; however, it is fair to note at least two facts. In his Theory of the Leisure Class, Veblen coined the term "conspicuous consumption," and he anticipated the rash of current writings on "status symbols," which has proven correct. For example, Americans look down on physical work, compared with office work. Consequently, the executive and the financier enjoy a high prestige. Business executives continue to accumulate money beyond their normal needs. The modern-day status symbol, such as the sable coat, Lear jet, face-lift, or yacht, exemplifies the concept of conspicuous consumption.

As for his second major work, The Theory of Business Enterprise, Veblen foreshadowed "technocracy" — the belief in government by technical experts, with the use of work units of currency to be substituted for money. If alive today, Veblen would undoubtedly observe, with justification, the latest trend in the development and use of computers and robotics, as well as the fact that not only blue collar workers are being dispossessed from their jobs by the machine, but business executives find their positions increasingly threatened by computers.

Glossary

Robber Barons Unscrupulous titans of U.S. finance and industry, including Jay Gould, Jim Fisk, and Cornelius Vanderbilt. The term was derived from the title of a book by Matthew Josephson.

Conspicuous Consumption The use of material goods to flaunt a person's belonging to a moneyed or privileged class.

Technocracy Government run by technical experts, with money replaced by work units of currency.

Veblen died a few months before the "Great Crash" of 1929 — when stock values reached an all-time high before tumbling down. There were no official warnings that such a financial catastrophe could occur. In fact, quite the contrary. Prosperity was everywhere, from President Hoover down to the lowly clerk; optimism was the keynote. In the United States there were 45 million jobs, a total income of $77 billion, and the average American family enjoyed the highest standard of living in history.

Magazines featured articles on how everyone could get rich — the formula was to save a portion of one's earnings and invest regularly in good common stocks. The public listened, and not only bankers and businesspeople, but barbers, bootblacks, and clerks all rushed to place their orders on the stock exchange. It was easy to do, for they all could buy "on margin" — that is, for as little as 10 percent in cash.

Beneath this surface boom, however, lay disturbing, but unnoticed facts. There were two million unemployed. Banks failed at the rate of 700 a year. Ominously, the distribution of income placed 24,000 families at the upper level of income, and some 6 million at the bottom — a ratio of 1 to 250. In this era of prosperity, the average American family was heavily mortgaged from excessive installment buying. When the crash came, it caught the public by surprise, as well as titans of finance, government officials, and expert economists.

The crash occurred in late October. Within two months, losses in stock value were awesome. Forty billion dollars of value disappeared. The downward trend continued. Fortunes were lost; suicides rose in number. Nine million savings accounts vanished as banks failed by the thousands. Over 85,000 individual businesses were wiped out. Working women labored for 10-25 cents per hour. In New York City, breadlines formed at the rate of 2,000 people a day. The "Great Depression" loomed.

By 1933, the national income had dropped by almost half; the average standard of living declined to the level of 1913. There were 14 million unemployed. The economy lay like a fallen giant as a feeling of hopelessness swept the land. What no respectable economist admitted could happen seemed a reality — a permanent depression.

In this situation, one would expect a radical like Marx to appear to attack the plight of the unemployed and to offer a drastic remedy. On the contrary, a respectable Englishman offered a solution. Well-schooled in the theories of orthodox economics, John Maynard Keynes (1883-1946) was Alfred Marshall's most brilliant pupil. Nevertheless, Keynes proved adaptable enough to make a practical attempt at solving the problem of permanent depression.

In contrast to Veblen, John Maynard Keynes' life was characterized by good fortune. Born into an old traditional English family, he attended the best schools. Reminiscent of John Stuart Mill's intellectual powers, Keynes studied the meaning of interest at age four. He won a scholarship to Eton, where he earned superior grades and won numerous prizes.

At King's College in Cambridge, his grasp of economics was such that Marshall urged him to follow an academic career — which he declined in favor of something more lucrative. He placed second in civil service examinations for a position in the India Office but despised the work.

Resigning his position, Keynes returned to Cambridge, where he began a thirty-three-year stint as editor of the Economic Journal, England's most influential economic periodical. Keynes' diverse interests made him the exception to the saying "jack-of-all-trades and master of none." Indeed, he mastered debate, bridge, mountain climbing, modern and classical art, currency and finance, and economics. In later life, he became Lord Keynes, Baron of Tilton, and while serving as a director of the Bank of England, he also operated a profitable theater.

His greatest opportunity came with World War I when he undertook key roles in the Treasury and the Paris Peace Conference of 1919. Shortly afterward, he made a fortune of over $2 million by spending half an hour in bed each day studying and speculating in the international markets.

Keynes attained national fame with the publication of his book The Economic Consequences of the Peace (1919). He stated that peace treaties are unjust and unworkable, with their apparent solutions ending in fiasco. While he was not the sole possessor of this observation, his view was the first written version which encouraged a complete revision of the treaties. The book succeeded, and international developments confirmed his thesis.

Keynes' A Treatise on Money (1930) attempts to explain how the economy operates and to examine in particular the problem of unexplained bursts of prosperity followed by lows. Earlier writers accounted for this phenomenon by such theories as mental disorders of the economy or the effect of sunspots. Keynes returned to Malthus' warning — saving can result in depression.

To understand Keynes' thesis, it is necessary to grasp the meaning of prosperity in market economy. The true measure of a nation's prosperity is not gold and silver nor physical assets, but its national income, which is the total of all individual incomes in a country. The chief characteristic of income is its flow from pocket to pocket via daily purchases and sales. Thus, this movement is largely natural and arises from the use and consumption of goods.

On the other hand, one part of income which does not flow in daily transactions is savings, which represent the portion that is removed from the even flow of income. If that portion is hoarded, it serves no useful purpose. Significantly, no harm comes from the act of saving in modern nations because savings are usually put into banks and invested in stocks and bonds, becoming available when business wishes to expand production. In this event, savings flow into the economy. The increased capacity for production of more goods assures jobs and greater prosperity. Depression arises when savings are not invested into capitalistic expansion but are allowed to lie idle.

Keynes' line of reasoning, which he did not invent, but only helped to explain, is known as the see-saw theory of savings and investment. As a see-saw go up and down, savings goes up when investment goes down. The reverse is also true. In his polished examination of the see-saw theory, Keynes concluded that depression arises from a decline of investment on one side and an increased accumulation of savings on the other. However, depression is only temporary, for an abundant supply of savings reduces interest rates, leading to a higher rate of return to be gained from investment. Thus, prosperity returns.

Unfortunately, the see-saw theory has one shortcoming — its failure to explain a prolonged depression, such as the Great Depression of the 1930s. While interest rates declined during that period, no upswing of investment occurred. Recognizing this shortcoming, Keynes pondered the problem and published a revolutionary solution: The General Theory of Employment, Interest, and Money (1936). In it, he made the following pessimistic diagnosis of capitalism:

1.There is nothing automatic in economic developments which will relieve a depression. An economy in depression can remain so indefinitely.

2.Prosperity depends on savings being put to use. Otherwise, a descending spiral will result in depression.

3.Investment cannot be counted on, as it depends on the expansion of production. The entrepreneur cannot be expected to increase production beyond demand for goods, so the capitalistic economy continuously lives in the shadow of collapse.

Keynes described how savings, in a time of depression, cannot continue to accumulate. Savings actually dry up, reduced to a trickle rather than a flow. When funds are needed for investment to stimulate the economy, there is no savings accumulation available. So the seesaw theory is invalid — replaced by the elevator theory.

The elevator concept maintains that the economy, like an elevator car, can stall at any level. Even worse, a depression is a natural development, with every surge followed by a low. This phenomenon occurs because the economy, to avoid depression, must continually expand. However, capital expansion of any business is restricted by that business' market. So capital expansion does not move at an increasing rise, but in spurts. Understandably, Keynes' book proved as revolutionary as those of Adam Smith and Karl Marx. Keynes turned the classical view that depression is only temporary into the bleak conclusion that depression is inherent in the system itself and can be permanent.

Of course, Keynes' vigorous mind did not halt on a dismal outlook for the future. He provided a cure — government needs to "prime the pump" by deliberately undertaking heavy government investment to stimulate the economy. By absorbing capital goods and spending whenever private enterprise is unable to expand, government can insure a high level of economic movement. Therefore, governments should incorporate judicious spending programs into their permanent plans.

Keynes visited Washington in 1934 and observed President Franklin Roosevelt's New Deal methods to combat depression. This practical demonstration of Keynes' thesis became a defense for such policies. The WPA (Works Progress Administration) and a host of other New Deal projects existed specifically to "prime the pump." Such measures increased the national income by fifty percent and made a large dent in unemployment rolls.

Unfortunately, New Deal projects failed in the long run. The number of unemployed still amounted to around 9 million. What finally ended the Great Depression was World War II. Yet, the failure of pump-priming measures did not invalidate Keynes' thesis because government did not have enough funds to stem the tide and because opposition from the private sector feared government intervention in the economy.

Keynes next attacked one of the chief problems of World War II with his simple, original book, How to Pay for the War. He proposed a compulsory savings plan for wage-earners for the purchase of government bonds during wartime, to be reduced at the war's end. In this way, inflation would be defeated by putting into savings the extra war income. Prosperity at the end of the war would be stimulated by the flow of money available for the purchase of consumer goods from the cashing in of bonds. Ironically, this cure was just the opposite of Keynes' cure for depression because a wartime situation is just the reverse of an economic low. Nothing came of the plan, however, for political leaders preferred to use the old method of taxation and rationing, along with the purchase of bonds on a voluntary basis.

While labeled a radical by conservative economists, John Maynard Keynes had nothing but scorn for socialism and communism. Opposed to Marx's view that capitalism was doomed, Keynes believed in a policy of managed capitalism, one which would invigorate and save capitalism. Basically, he was a conservative with one major aim — the creation of a capitalistic economy in which its greatest threat, unemployment, would be forever eliminated. Consequently, he engineered a plan to foster a living and growing capitalism.

Analysis

John Maynard Keynes observed a world sick with widespread depression which almost ruined trade and brought nations to the brink of bankruptcy. Exports fell, national banks failed, leading countries abandoned the gold standard, foreign debts went unpaid, and workers suffered mass unemployment. The result in Europe was a definite tendency toward dictatorial forms of government, as in Germany, Italy, Austria, and Rumania. The less favored nations, notably Germany, Italy, and Japan, embarked on territorial expansion.

In the United States, against the background of the Roaring Twenties and the legacy of Coolidge prosperity, the air was filled with optimism. Herbert Hoover, president from 1929-33, promised "two chickens in every pot and two cars in every garage." Suddenly, the doomsday of Wall Street prosperity arrived without warning on October 24, 1929. By October 29, 16 million shares had been sold at staggering losses; by November 13th, $30 billion in capital values vanished. By the end of two months, the figure had increased to $40 billion. Just prior to the crash, the total value of stocks had been $87 billion. By March of 1933, it dropped to only $19 billion. This crash triggered the Great Depression for these reasons:

1.Agricultural overexpansion resulted in surpluses.

2.Industry overexpanded with too many factories and machines to meet demand for goods.

3.Labor-saving machines replaced workers and produced more goods.

4.Capital surpluses were created, producing an inequality in income distribution.

5.Overexpansion of credit led to stock market speculation and installment buying.

6.High tariff policies produced a decline in international trade.

7.Political unrest contributed to defaults on foreign debts.

By 1930, in a typical U.S. industrial city, one out of four workers had lost their jobs. In major cities, many workers slept in public parks because they could not afford housing. Residential construction fell off by 95 percent. 1933 saw the turning point, with over 16 million workers unemployed out of a total population of better than 120 million. Stunned like the rest of America, congressional leaders stood helpless, waiting for the new president to take action.

This was the situation when Franklin D. Roosevelt was inaugurated in March 1933. He immediately called a special session, which began emergency legislation under the slogan of "Relief, Recovery, and Reform." Under Roosevelt's leadership the following acts became law: the Emergency Banking Act; Federal Emergency Relief Administration; Civilian Conservation Corps (CCC); National Recovery Administration (NRA); Agricultural Adjustment Act (AAA); Federal Deposit Insurance Corporation (FDIC) — which guaranteed savings deposits in banks; Federal Securities Act, which led to the SEC (Securities and Exchange Commission) to regulate the stock market; Home Owner's Loan Corporation (HOLC); and the Tennessee Valley Authority (TVA), plus a host of other New Deal measures.

Basic to the New Deal philosophy was the concept of "priming the pump" through federal action, which Keynes so ably defended in his major work, The General Theory of Employment, Interest, and Money. The result of the New Deal was that while the measures failed to end the Great Depression, the downward trend of the economy was halted and national confidence bounced back. In a world beset by communism and fascism, FDR saved American capitalism by using the goals and objectives of John Maynard Keynes.

Glossary

The Great Crash The Wall Street Crash of October 1929, when the New York Stock Exchange collapsed after a selling wave in which stock values tumbled in a panic following an all-time high.

The Great Depression Worldwide depression triggered by the Wall Street Crash. The era extended from 1930-39, with the depths reached in 1933.

The New Deal Social and economic reforms carried out by President Franklin D. Roosevelt between 1933 and 1939 to combat the Great Depression.

The Hundred Days The period of remarkable cooperation between President Roosevelt and Congress, beginning with a special session on March 9, 1933, when the basic measures of "Relief, Recovery, and Reform" were enacted into law.

Compulsory Savings A deferred savings plan by which a government finances a war through a required deduction from all wages to pay for war bonds.

Unlike Thomas Malthus and Karl Marx in the previous century, John Maynard Keynes looked forward to better times for capitalism in the twenty-first century. In his Economic Possibilities for Our Grandchildren, he predicted that by the year 2030, the age-old problem of equal distribution of wealth might be solved. Even though Keynes did not foresee the panacea immediately after World War I, in later years he deduced that capitalism would continue its upward climb. Certainly he could not attribute the easing of hard times to the bounties of nature, since the supply of raw materials was quite obviously finite and dwindling. Instead he lauded the ability of factory workers to utilize technology, thereby making each succeeding generation more productive. For example, in the 1960s, American workers turned out over five times the goods per hour in comparison with their forebears a century earlier. In like manner, Keynes envisioned a rosy future for his native England, calculating that by the year 2060, the nation would produce seven and one half times the wealth of the past century.

The canny student of economy, however, cannot accept this cheerful prognostication without further delving, for a complete analysis of modern times requires a thorough study of more than Marx and Keynes. A third spokesman is necessary: the brilliant gadfly Joseph Alois Schumpeter (1883-1950), a spirited, histrionic Viennese aristocrat and Harvard professor, who saw capitalism in the twentieth century in terms of dynamic growth, yet he relegated it to destruction in the long run.

A contemporary of Keynes, Joseph Alois Schumpeter was a native of Austria, born of solid, yet undistinguished stock. Educated amid the upper crust at an exclusive school, he developed elitist airs that followed him throughout his life. From being a brainy enfant terrible who challenged his teacher at the University of Vienna, he moved to England, where he served successfully as a financial adviser to an Egyptian princess. While in her employ, the twenty-seven-year-old Schumpeter published The Theory of Economic Development (1912), an unassuming overview of capitalistic growth. Surprisingly, the book describes a capitalist economy which lacks accumulation of capital. Relying on a circular flow, the model, like a toy train maneuvering around a hearthside track, remains static and predictable, never altering or expanding.

In answer to the age-old stumper of where profits originate, Schumpeter declares that capitalism, grounded in inertia, has no momentum. Workers, he predicted, would, in time, receive full remuneration for their toil while owners will derive value equivalent only to the resources they contributed. Capitalists would obtain nothing except their wages as managers. Thus, in a changeless economy, profit does not exist.

As Schumpeter elaborates, the only explanation for profits occurs when the static economy fails to follow its circular path, a situation which occurs when capitalists introduce innovative technology or organizational changes. Such ephemeral profit disappears after competitors emulate the innovation. In rapid order, innovation becomes the standard operating procedure. Like a huge, insatiable maw, the system swallows up ideas, turning them into the well-digested fuel of everyday productivity. Because the introducers of these changes differ from the norm, Schumpeter awards them the title of entrepreneur, one who is a business trailblazer, or risk-taker.

An additional surmise of Schumpeter's Theory of Economic Development is his explanation of the business cycle. As a swarm of imitators follows the trail blazed by the business pioneer, investment spending leads to a short-lived economic boom. Competition, as always, forces prices down. Ultimately, profits disappear. Ironically, the entrepreneur is not necessarily the receiver of the profit generated by an innovative idea. As a rule, profits tend to go to the business owner, with the entrepreneur forced out of the picture by the dynamics of the new process.

Schumpeter paints an unappealing picture of the life of an entrepreneur — a talented specialist who differs markedly from the military leader or politician. Treated by society as an upstart or social pariah, the entrepreneur resides outside the limelight. Unlike people who are motivated by the urge for riches or title, the entrepreneur prefers instead to found a dynasty. Goaded by the will to conquer, to climb to the top of the heap, this creator resembles a paladin, or "knight errant of the system." For the entrepreneur, the carrot at the end of the stick is not the monetary reward but the challenge itself, the vacuum into which innovation falls.

After the publication of his ingenious work, Schumpeter served as commissioner on the nationalization of industry, an arm of the socialist German government, as well as finance minister of Austria.

Unfortunately, the unstable times did not permit his creative beacon to shine very far. After Schumpeter moved into a position as bank president in Vienna, the collapse of Europe's financial structure led to huge personal debts. During this trying period, Schumpeter's young and charming wife, whom he had groomed for her role as his helpmeet, died in childbirth.

Like the fabled phoenix, Schumpeter rebounded. He built a career as a visiting professor in Japan, Germany, and the United States. At Harvard, he married economist Elizabeth Boody. Renewed, he allowed his creative juices to flow at will.

In his thousand-page, two-volume Business Cycles, Schumpeter attempted to account for the Great Depression. He based his explanation on a description of three distinct types of business cycles:

1.A short cycle.

2.A second span lasting 7-11 years.

3.A fifty-year cycle evolving from blockbuster inventions like the steam engine or automobile.

The Great Depression, which stands out from the norm of economic ups and downs, was the cataclysm that erupted when a series of all three cycles hit bottom simultaneously.

Schumpeter's conclusion produced a major economic contribution: the belief that capitalism, which evolves from the values of the civilization itself, was losing its steam. Even though his prediction emphasizes a moribund state of the economy, the author appends a small hope that there are still three decades in which capitalism will struggle before dying out completely.

A more complete economic vision appears in Schumpeter's Capitalism, Socialism, and Democracy (1942), in which the author mounts an offensive thrust against his arch-enemy, Karl Marx. Departing from his predecessor's obsession with the antagonism between capitalist and worker, Schumpeter fastens onto the bourgeois nature of the capitalist. Crucial to his denouncement of the wearer of the lounging suit is the author's depiction of plausible capitalism, which describes capitalism as an economic success but a sociological failure. The system bogs down in a bureaucratic nightmare of red tape, where entrepreneurial input counts for little. Yet, even though Schumpeter's scenario plays well on the surface, it is riddled by the disease of rationalism, which gobbles up its own reason for being.

Schumpeter, from the vantage point of his cleverly constructed soapbox, appears to defeat Marx at his own game. The whole breastwork of logic carries some measure of significance in that it predicts the bureaucratization of business and government as well as the ebb and ultimate foundering of the middle-class ideal. Still, the fabric of his logic is weakened in fiber. The mood of Western capitalism did indeed follow his predicted trends through the 1960s. However, it has not resigned itself to the benign socialism he envisioned.

The overwhelming weakness of "the world according to Schumpeter" is that the prognosis is more social and political than economic. In guessing which way the tide of history will direct itself, he lends credence to a belief in a noncapitalist elite, who will form the dynamic core of an otherwise inert society. Unlike Marx's paradigm, which centralizes a disgruntled proletariat in the heart of change, Schumpeter's model places a changing cast of creative movers and shakers at the lead position of capitalistic innovation.

Analysis

Like the consummate poker player shoving the whole pot into a grandstand showdown, Schumpeter begs the whole question of economics by reducing it to a single quibble: Is the function of economics analytic or predictive? Do economists merely compartmentalize facts about life as we know it or do they serve as visionaries? In other words, is it better to know where the market has been rather than where it's going? Obviously, Schumpeter himself chose the latter role, opting to lay out a vision of future generations than to muck about with the nuts and bolts of mundane money matters.

The driving force in Schumpeter's world-picture is his accolade to the talented few, the idea people who render service to an otherwise not-very-engaging business machine set in the well-worn ruts of sameness. An even more intriguing possibility is that Schumpeter, imbued with elitist notions from childhood, may have set up this paradigm as a means of self-glorification, seeing himself as the swami of elitism.

Whatever his motivation, he has produced a passionate interest in the captains of industry — not the grasping, dog-eat-dog Vanderbilts, Rockefellers, and Morgans of the previous generation, but the Lee lacoccas and Donald Trumps, the Sam Waltons and Ray Krocs, whose genius expresses itself in the proverbial "better mousetrap."

Certainly, Schumpeter's contribution to economics places an emphasis on the part of the whole, which has, in past overviews, tended to fall between the cracks. Instead of stressing the inevitability of money following money or of workers locked into a predetermined social stratum, he opens a window on the spectrum of creativity. To Schumpeter, economics is less dry, less stultifying when interpreted as an outgrowth of wit, talent, and innovation.

From his perspective, the future of capitalism appears less the function of an inevitable movement toward some predetermined end and more like a shapeless lump of clay in the potter's hand. A truly humanistic approach, Schumpeter's evaluation leaves hope that there's always room at the top for the tinkerer, the visionary, or the risk-taker. In his scheme of things, the world beckons perpetually to a Walt Disney, an Estee Lauder, a Steven Jobs, or a Liz Claiborne, whose brain children never capitulate to mundane limitations.

Glossary

Plausible Capitalism A capitalistic system that perpetually renews itself through growth.

Monopoly Literally, "single seller"; an economic situation in which one firm controls an entire market.

Circular Flow A static system which channels productivity and profits into an endless exchange.

Entrepreneur A risk-taker, or innovator, in the business world.

The concluding chapter addresses the achievement of economists as a whole. How useful have their writings been in interpreting actual events? Has prediction been the economist's aim? Is this undertaking a worthy endeavor? Among the economists described in the book, John Stuart Mill came closest to functioning as an economic prognosticator.

Unlike Mill, most theorists narrowed their perspectives, offering little more than a single option for the future. In comparison to the rest, Thomas Malthus' Essay on Population is the most limited and dogmatic in its prediction of doom from overpopulation. Conversely, Karl Marx, the "Great Predicter," remained cautious about carving his predictions in stone.

The reason that economic prediction remains nebulous and hazy is that economics differs from more scientific studies, such as astronomy or physics. Because society exists in a state of flux, its behavior is less predictable than the motions of the planets or the status of atoms in a molecule. Therefore, economists are willing to forecast only a generalized picture of future trends rather than particular details. These economic generalizations, or laws, exist in a kind of historic vacuum, without recourse to inevitable changes in background situations. Thus, the savvy student of economics expects some ambiguity in predictions and knows to apply common sense to any grand schematic design. In its normal state, prognostication is possible only on two conditions:

1.Behavioral regularities must govern the lives of individuals. These "givens" allow the economist to create "if . . . then" statements, such as Thomas Malthus' surmise that if workers continue to expand their families during boom times, then world population will soon outstrip necessary resources to feed the multitudes. In similar fashion, Karl Marx believed that if capitalists continued oppressing the working classes, their actions would lead to a class war and the inevitable collapse of capitalism.

2.The outcome of the economy will influence society as a whole. Economists as a group share the common belief that how people spend their money affects the "overall shape of things to come." Because money is an integral part of the totality of society, it cannot be overlooked in any analysis of civilization as a whole.

These two conditions clarify how Schumpeter arrived at the conclusion that capitalists would evolve into hidebound bureaucrats. He believed that a change would occur in human nature. Significantly, however, he was the first economist to declare that economics was less crucial to human history than politics or sociology. In summary, it is remarkable that economics, apart from other social sciences, is able to predicate laws of any kind, especially definitive laws which describe how buyers and sellers will react in the marketplace.

In assessing how well the laws of economics describe actual behavior, the student will notice immediately the limitations of time. Economists like Adam Smith were unable to foresee how factory systems would change following revolutionary discoveries, such as the steel-making process, which replaced the lowly pin factory. Likewise, David Ricardo did not envision improvements in nineteenth-century agricultural productivity; nor did John Stuart Mill or Karl Marx clearly predict innovative changes in the political control of economics. In more recent times, even Keynes' and Schumpeter's theories have already suffered major setbacks as events have moved in directions neither man could foresee.

Most significant to the trouncing of economic prediction is the fact that economists as a group have not been able to predict three trends:

1.The growth of technology. Adam Smith was unable to guess that mass production would vastly alter the factory system. Moreover, David Ricardo had no inkling how drastically steam power would alter production. In general, these market seers failed to understand how machines could displace labor. Only Karl Marx surmised that machines might replace workers and even he would be astounded at modern computer-driven machinery, particularly the sophisticated robotics that bolsters the automotive industry.

2.Changes in society's attitudes and behavior. Adam Smith assumed that workers would remain complacent when, in fact, they became more militant. Karl Marx, assuming that human outlook would remain static, failed to see that workers could resolve their differences with capitalists within the confines of a democratic society

.

3.More profound than the other two trends is the fact that regularities of economics are no longer regular. Adolph Lowe, who questions how the random behaviors of individuals in the marketplace manage to provide for the entire community, reveals that people establish economic order because of their singleminded acquisitiveness. However, the will to maximize personal finances is waning as capitalism develops. Human lives are so well furnished that modern capitalism resorts to advertising to convince the public that it needs the new products which factories are turning out. Thus, one of the dependable "givens" of the economic equation is no longer a sure thing.

In short, economic vision has been bounded by turns and twists in the historical path. Each economic theory has reached only so far as the prevailing technology and lifestyle of the times allowed it. These aforementioned alterations in capitalism are therefore producing a less predictable market behavior.

In a demonstrative break with his predecessors, Lowe contends that economics can no longer be governed from within. In order to maintain a balance, the economy requires active interference, such as tax inducements. Thus, the new function of economics is not to predict but to control. The old philosophical system, now completely out of date, must give way to an upgraded version — political economics.

At this point, one quality of economic prognostication seems more pertinent than at any other time — Schumpeter's "preanalytic" grasp, which enables the economist to recognize coming trends, such as Schumpeter's cadre of entrepreneurial elite or Mill's vision of human improvement. Even though these projections derive from the personalities and backgrounds of the economists themselves, they must not be dismissed as whimsical or unimportant. Rather, they merit distinction for being penetrating, courageous, and intellectual acts.

In summary, economics, because it is rooted in human behavior, cannot be reduced to a list of mathematical formulae. Economic exchange functions as a single building block of the total social picture. While economics is a thrilling study of one aspect of what it means to be human, it is still only one view of a complex and ever-changing world picture.

Analysis

The role of economics in society has never seemed more crucial than it does today. There are tens of thousands of practicing economists who influence decisions in banks, corporations, and government. However, the field of vision among today's economists is greatly reduced. Lacking the scope of an Adam Smith, a Thorstein Veblen, or a John Maynard Keynes, these professionals concentrate on smaller spheres of interest, such as Paul Samuelson's work in mathematical economics, for which he won a Nobel prize.

Breaking with earlier traditions, modern economics lauds such figures as Milton Friedman, spokesperson for the free market, and John Kenneth Galbraith, whose philosophy runs counter to Friedman. Whatever the area of interest, economists at present suffer no lack of problems to solve, whether depression or inflation. Under the stimulus of massive change — globalization of the marketplace, third world starvation in an era of affluence, and threats to the industrial order as Japan faces off against the American giant — economists look out on a host of possibilities. What mixed blessing will technology bring? Will the earth survive the pollutants produced by industry? Has ecology gone too far toward destruction to be rescued? Will the depletion of fossil fuels spell the end of the factory system? Is a global depression possible? Will technology extend into outer space?

In none of the above troubling situations will economics bear the final resolution. The citizen of tomorrow will find the role of politics encroaching more heavily on economic growth. Never again will the market chug along on its own steam, as it appeared to do in Adam Smith's day. Consequently, the day of the worldly philosophers appears to have ended. Yet, their role in teaching humanity how to assess a major cog of civilization has brought about a worthwhile reaction — a better understanding of itself.

Glossary

Behavioral Regularities Predictable aspects of the marketplace, such as competition and demand.

Preanalytic Creative; predicting change.