Lecture 2: The Rise of Big Business 2: The Costs of Rapid Industrialization

I. Last time, we looked at the path of the Industrial Revolution in the US. 

A. We noted that the prerequisites to rapid industrialization were:  

1. technological innovations such as the invention of the steam engine and the development of various technologies designed to use the new source of power, and in the production of steel (Bessemer Process—1850s);

2. innovation in manufacturing techniques and organization (the factory system and mass production);

3. the creation of a national communications network (trans continental telegraph completed in 1861),

4. the creation of a national transportation network (transcontinental RR completed in 1869), and

5. the creation of a legal basis for the modern corporation (14th Amendment). 

B. Based on these developments, industry in the US grew very rapidly in the US following the Civil War. 

C. Industrial development in the US took the shape of increasing concentration of wealth in fewer and fewer hands. Through Vertical and Horizontal Integration, the most aggressive industry leaders were able to amass great fortunes while gaining domination over a particular industry.   

1. A few powerful men gained significant control over key industries—Andrew Carnegie consolidated the Steel Industry; John D. Rockefeller dominated the Oil Industry with the creation of Standard Oil, William A. Clark came to dominate Copper Mining, and so on. The trend also reached to the banking industry, where J.P. Morgan came to dominate investment banking and became the richest man in the world. He also bought out Carnegie’s steel empire merging it with his own to create one of the world’s first billion dollar companies and creating a virtual monopoly on steel. 

 2. The increasing concentration of wealth was made possible further by governmental policies prevalent at the time—in particular, “laissez-faire capitalism.” 

a. Laissez faire was a set of governmental policies that were based on the teaching of Adam Smith, the father of modern capitalism. Smith argued that the selfish pursuit of self-interest, if allowed to flourish without government interference, would result to the best possible social outcome. The selfish pursuit of self interest would automatically lead to increasing quality and decreasing costs, so the benefits to society would be maximized (people would have more money to spend on “quality of life” improvements if maximum efficiency in manufacturing could be achieved. 

 b. The US government accepted Smith’s advice and did virtually nothing to control business during the post-Civil War days. The things government did do, such as put the US on the Gold Standard (to put the US financial system on level with world standards) helped corporations but harmed other elements of the economy—especially agriculture. 

 c. Thus, as large corporations grew and prospered, farmers and workers suffered—working long hours in dangerous jobs and making barely enough money to survive. This was standard policy throughout the early years if industrial revolutions throughout the world. This style of development imposed serious costs on American society. 

II. The Costs of Rapid Industrialization 

A.  The Rise of American Cities

1. With the concentration of wealth and development of the mass-production system, employment opportunities were also concentrated.

2. An ongoing crisis in the Agricultural sector (declining prices) caused many rural Americans to move to the cities.

3. Blacks trying to escape a life of poverty and subjugation in the South also moved to Northern cities in large numbers.

4. In addition, there were some 15 million immigrants (most from southern and eastern Europe) after 1880.

 a. Unlike earlier immigrants, most of whom went west to become farmers, the new groups stayed in the cities and generally, settled in neighborhoods with people from the same regions in Europe or Asia.

  b. This gave rise to the development of Chinatowns, Little Italies, Jewish communities, etc.

B.  The exploding population in many cities resulted in many problems—lack of adequate water supplies, inadequate sewage facilities, no regular garbage pick up, lack of social services, development of ghettos.

1. In addition, most of these people worked for starvation wages in factories that went unregulated by the government—they were very dangerous and many people died (Sweatshops).

2. Further, the new immigrants’ slowness, inability, or lack of desire to assimilate into American mainstream society (earlier immigrants had been mainly from Northern Europe—Protestant—new immigrants were mostly Catholics and Jews. produced a negative reaction by Americans—NATIVISM.

a. Nativism swept the cities, provoking harassment of new immigrants, prejudice against various religious and ethnic groups; belief that they were taking jobs from Americans and were too willing to work for low wages

b. It found its way to the national level too—The Chinese Exclusion Act (1882) prevented further immigration of Chinese; further, in 1885 Congress forbad American companies from brining even skilled workers in under contract.

3.  Government was unable to manage the problems of the cities; so much of this work was done by political “machines.”

 a. The Gilded Age was the era of “Machine Politics”—political groups formed “machines”—organizations—which supplied services to groups of people in exchange for political support—in exchange for votes, political machines gave people coal in winter, food during recessions, paid for funerals and gave gifts on weddings and births, and provided jobs

 b. Machine Politics was very corrupt, but the political organizations provided essential basic services that allowed people to live. 

III. Social Darwinism: The Ideology of the Early Industrial Period 

A. Despite the hardships suffered as a result of rapid industrialization, there was no groundswell of political revolution until the 1890s. This was largely because along with industrial development there emerged an ideology which seemed to explain the circumstance many found themselves facing. It was called Social Darwinism. 

B. The concentration of wealth into the hands of a small number of people seemed un-American to many. Many people continued to hold on to the Jeffersonian ideal of an egalitarian society, and the rapid industrialization after the Civil war was seen as a threat to that ideal. 

C. Some thinkers came to the defense of this development, however, and for a brief time Social Darwinism helped to justify the disparity of wealth that emerged between rich and poor.

1. US economic policy was based on the philosophy of Adam Smith, who believed that the individual pursuit of self-interest would result, ultimately, in the best possible outcome for society.

a. Free competition would create the greatest efficiencies in production and would result in the best quality products at the lowest cost. 

2. The US government thus followed a policy of laissez faire (with some exceptions—various policies to help business) 

3. Businesses also followed the British philosophy that you needed to keep workers hungry in order to have a stable workforce—should pay workers only what they need to survive so they need you on an ongoing basis. 

4. As people came to fear the concentration of wealth, a new philosophy was developed to explain and justify it—Social Darwinism.

a. Darwin had published Origin of the Species in 1859 which introduced the theory of natural selection:

i. survival was a continuous competition

ii. evolution made improvements in species over time, or they died out

iii. superior traits help species to survive

b. These ideas were first applied to human societies by Herbert Spencer.

i. In every human activity we are in competition with others

ii. The “unfit” lose while the “fit” win.

iii. The best naturally rise to the top.

iv. In capitalism, wealth is the best measure of “fitness.”

v. Government would harm society if it changed “nature” and allowed the “unfit” to escape their fate. 

c. They were popularized in America by William Graham Sumner, who added that not only was it a terrible idea to give aid to the poor (because it allowed the weak to survive) but also that tariff protection for business hurt competition, and hence society.

5. The harsh logic of Social Darwinism was used to justify the concentration of wealth in the hands of a few, and remains a viable ideology today—many feel that giving food aid to Africa is a mistake as it simply encourages people to have more children. 

D. The harsh implications of Social Darwinism were softened somewhat by the development of The Gospel of Wealth (1889)

1. Influenced by a growing group of religious leaders who called upon the wealthy to use their riches to improve society, Andrew Carnegie came to believe that “surplus wealth” held by the rich should be used for the betterment of society.

a. Carnegie became the first great American philanthropist, creating a trust fund that has since built thousands of schools, libraries, museums, and so on.

b. Many of the rich ignored his ideas, but others followed—most notably John D. Rockefeller.

E. There was a reaction against Social Darwinism throughout its period of influence as well—Reform Darwinism.

1. Reform Darwinists based their ideas on the fact that other biologists after Darwin (such as Kropotkin in Russia) had discovered that in nature, cooperation is also a tool used for survival—its not just competition.

a. Reform Darwinists believed that cooperation was the more recent evolutionary development, and thus was a superior adaptation.

b. The implication for society was that human will could successfully intervene in mitigating the negative social outcomes caused by competition.

i. Thus, Reform Darwinists advocated the active intervention of government to regulate business activities and provide basic social services and assistance to the poor. 

F. A second reaction to Social Darwinism was Socialism, which rose to considerable popularity in the US in the 1880s and 1890s. 


[i] Horizontal integration is the purchase of companies at a certain stage of production in an attempt to gain market share—and ideally, total control—over that stage. For example, if Hyundai Motors were to buy Kia, and then Daewoo, and all the other Korean automobile manufacturers, that would be horizontal integration. Vertical integration, on the other hand, is when a company tries to gain control over all of the things that go into the production and sale of a product. For example, John D. Rockefeller’s Standard Oil gained a remarkable deal of control over the oil industry because he bought oil exploration and drilling companies, built and owned the pipelines that delivered the oil to the oil refineries, owned the oil refineries that produced oil for heating homes and powering automobiles, and set up oil delivery companies to deliver oil to homes and industry as well as gasoline stations to sell oil to drivers. This is an example of vertical integration. Generally, vertical integration creates greater efficiency and can lead to reduced costs, while horizontal integration leads to inefficiency and gives one company the power to set prices. Still, in some cases vertical integration is also very bad because the increased efficiency of one firm might allow it to set prices so low that other firms can’t compete. If they go out of business, a monopoly with the same power of a horizontally integrated firm is the result. Indeed, this is what happened with Standard Oil, which became so powerful that the US government was eventually forced to break it up into 7 companies to re-introduce competition into the oil industry.)