Theories of Economic Obsolescence, Revisited

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This paper reviews some early technological theories of competitiveness and (what often is left out of account) the obverse side of the coin: economic obsolescence. The implications of technological change, industrial head starts and the causes of economic backwardness were analyzed above all by American economists in the mid-19th century who no longer are well remembered today: Calvin Colton, Henry Carey and E. Peshine Smith. These writers were associated with Whig (and, after 1853, Republican) politicians in shaping the industrial policies that transformed the United States from a raw-materials producing (“Southern”) economy into the world’s major industrial power as a “Northern” economy.

Members of the American School typically are dismissed (if they are discussed at all) as protectionists. A more accurate name for them would be technology theorists, futurists or prototypical systems analysts. Their Theory of Productive Powers focused on industrial and agricultural technology, especially the substitution of capital for labor and land. A quarter-century ago (Hudson 1972a and 1975) I collected examples of their theorizing. More recently (Hudson 1992, especially chapters 7 to 9) I placed them in the context of the evolution of international trade theory. But inasmuch as mainstream theory continues to ignore their remarkable contributions, it is not out of place to present a summary of their work to the European audience today. The present paper therefore contrasts their technological assumptions with the narrower assumptions adopted by subsequent laissez faire orthodoxy. I conclude by suggesting some features needed to formulate a modern theory of the financial and social preconditions international competitiveness vs. backwardness.

Twentieth-century trade theory has diverted economists down the path of hypothetical “what if” reasoning unabashedly at odds with economic reality. Year after year, Nobel Economics Prizes have been given for mathematical demonstrations that under certain highly restrictive assumptions, economies tend to settle at stable and equitable equilibria. Under these assumptions, international wage and profit rates tend to converge.

There is reason to suspect that the selection of unrealistic assumptions underlying this economic orthodoxy is not innocent. It is axiomatic to historians of economic thought that when a speculative theory is chosen in preference to a more realistic one, some industry’s or nation’s self-interest is acting as an Invisible Hand turning economic doctrine into a public relations ploy to promote specific desired policies. The effect is to divert analysis away from economic reality.

Today’s economics discipline has become a “science of assumptions” whose badge of scientific reasoning is internal consistency of these (arbitrary) assumptions. If trade theory bears much of the blame, this is largely because of the role played by the tariff debate during the formative period of classical economics, and the mobilization of economic theory to promote status quo dependency patterns today.

The Factor-Price Equalization Theorem, for instance, diverts attention away from examining the reasons why, in practice, wages and profits do not converge (much less, equalize) in the international economy. What is remarkable to the historian of economic thought is that over a century ago, international trade theory recognized an everyday fact of life that proves fatal to the Factor-Price Equalization Theorem: Capital competes with other inputs (labor and land) as well as with other capital. This means that the market for goods is not shaped mainly by low-wage labor competing against high-wage labor, as the vulgar protectionists argue. (More sophisticated protectionists progressed beyond this assumption a century and a half ago.) High-productivity, power-driven capital competes with manual labor and also, to a lesser degree, skilled high-wage labor.

When Japanese auto makers captured a large part of the American automotive market from the 1960s onward, for instance, it was Japanese capital that undersold American labor as Japan’s scientific mechanization of production — and the yen’s rising international value — raised the remuneration of its workers above that of their U.S. counterparts. Likewise, when American grain undersells that of Argentina and other countries, it is not simply because of the higher natural fertility of U.S. soil. Rather, American agriculture has become more highly mechanized and capital-intensive than that of any other nation. Agricultural capital has been substituted for land and farm labor. Meanwhile, foreign aid-lending provides easy grain-credits to foreign countries, while World Bank lending (reinforced by chronic currency depreciation) diverts their agricultural investment toward the production of plantation export crops. Guatemala, Cuba, Chile, Nicaragua, Brazil and other countries undertaking serious land reform find themselves the objects of political and economic Cold War destabilization.

What does the Factor Price Equalization and other free-trade orthodoxy have to say about these phenomena actively shaping trade patterns? Very little, I’m afraid.

The world’s major nations — England throughout the Industrial Revolution, and the United States, Germany and Japan prior to the 1940s — developed dynamic industrial policies not based on free-trade orthodoxy and its “equilibrium economics.” But as these nations have achieved industrial leads, they have adopted international economic orthodoxy, at least as an ideology to export to their increasingly dependent customer countries. International dependency and unequal gains from trade thus find their counterpart in asymmetrical economic policies and early theorizing.

The American School of political economists reflected their nation’s position as a “less developed country.” They did not want to develop in the “normal” way, as a “hewer of wood and drawer of water” providing raw materials to help England remain workshop of the world. Viewing this as mal-development, they wanted to create something more than “economic growth” — a new kind of economic civilization based on the productive powers of capital, above all energy-driven, mechanized production. It was recognized that this high-productivity capital required skilled high-wage labor as operators and managers.

The economics of interfactoral competition: How capital undersells labor

An economic novice might imagine that only since World War II has the role of capital productivity in displacing labor become a subject on the economic horizon. Was it more natural a few centuries ago to reason that an economy’s labor competed with the labor of other countries, not with capital?

Actually, the theory of how capital produces labor-power (and indeed, horse-power) equivalents has a long history. James Steuart (1767:I, 159) noted that machines provided work effort without needing food. To be sure, he added, new labor was needed to make this machinery, so the result would not tend to be unemployment. Josiah Tucker (1931:241f.) had made the same point in 1757, and William Petty had said much the same thing in 1691. Adam Smith believed that capital and labor simply would grow together rather than capital displacing labor, but Lauderdale (1804:298f.), in his critique of the Wealth of Nations, noted that the nation need not fear that rising wages would stifle business upswings, for employers could substitute capital equipment. (The literature is reviewed in Hudson 1992:170ff.)

Writers in both Britain and the United States tracked machine power in terms of its labor-equivalents, but it was the Americans who emphasized that capital was being substituted for labor at different rates internationally. British power looms supplanted not only domestic labor, but that of India and the United States as well. If one country possessed machinery that doubled the output of its workers, Alexander Hamilton wrote in his 1790 Report on the Subject of Manufactures (in Taussig 1893:17, 35), its labor-cost of producing given articles would be halved, giving it a corresponding international advantage. Henry Clay picked up this idea in 1824, multiplying Hamilton’s example a hundredfold: “One man at home did the work of two hundred, less or more” (cited in Colton 1846:159f.).

American economists also perceived another fact that British economists overlooked: The machinery that displaced mainly the most poorly paid manual labor needed skilled high-wage labor to operate it, as well as to design and build it. “It is not by reducing wages that America is making her conquests,” U.S. Labor Secretary Jacob Schoenhof (1884:19) concluded, “but by her superior organization, greater efficiency of labor consequent upon the higher standard of living ruling in the country. . . . High-priced labor countries are everywhere beating ‘pauper-labor’ countries.”

Steam-powered production not only increased labor productivity, it threatened to render unskilled and low-wage labor redundant, not only at home but in less industrialized countries. Instead of these poorer countries “rich” in low-wage labor developing a comparative advantage in “labor-intensive” manufactures, there was no such thing as inherently labor-intensive manufactures — or land-intensive agriculture, for that matter. In every sector, labor was being replaced by capital. This was the universal dynamic of industrial progress. Countries that failed to mechanize their production thus were in danger of finding their labor forces becoming industrially obsolete. Low wages were a curse, not an advantage.

The diplomat-lawyer-journalist Erasmus Peshine Smith viewed economic development in terms of energy per worker. A close associate of William Henry Seward and, in his economic theorizing, a follower of Henry Carey, his Manual of Political Economy (1853) became one of the most famous American economic books of the period, being translated into French, Italian and German, while Smith himself went to Japan as advisor to the Mikado following the Meiji restoration.

Smith’s basic premise was that mechanization lowered the cost of work-effort applied in the production process (as measured in joules or, by logical extension, horsepower or kilowatt-hours). The economic imperative of technological progress was to raise labor from the role of providing merely brute force to that of applying skills. Smith proceeded to develop a refined theory of what subsequently would be called human capital.

Following Ricardo, the English economists had viewed capital merely as an adjunct to their value theory: The value of capital in production reflected the labor embodied in its manufacture. But as Carey had pointed out, the value of commodities reflected their reproduction costs. These costs tended to fall steadily with the progress of technology. It followed that comparative advantage among nations was to be gauged mainly by the productive powers of the capital with which labor operated.

Smith accordingly formulated what might be called an energy-productivity theory of value in which capital played a more important role than in English economics. Rejecting the “pauper labor” argument that industrial tariffs were needed to keep out the products of low-wage countries, he described the American system of political economy as resting “upon the belief, that in order to make labor cheap, the laborer must be well-fed, well-clothed, well-lodged, well instructed, not only in the details of his handicraft, but in all general knowledge that can in any way be made subsidiary to it. All these cost money to the employer and repay it with interest” (1852:42). What appeared to be highly paid labor on a per diem basis thus turned out to be inexpensive on a unit-cost basis.

Employment of labor required a complementary investment in capital, noted Smith (1853:107): “As we rise to labour in connection with more complicated machinery, the value of general intelligence becomes distinctly apparent.” Indeed, Schoenhof observed a generation later (1892:27): “In almost every employment of an industrial nature a very great amount of training is requisite to make it effective or to make it serviceable at all. Only in times of a very great demand and scarcity of labor would any one employ crude labor in factories where skill is required.” The minimum necessary educational level rose over time, as labor required an increasingly intensive training and education as a precondition for employment — not only within the national economy, but internationally as well. It followed that nations that promoted popular education would be in the best position to ride the wave of technological progress and undersell other nations. This incidentally seemed to favor democracies over autocracies (a principle long noted by British writers as well.)

If there is no such thing as inherently labor-intensive commodities (given the tendency of machinery to displace labor), then “factor endowment” theories miss the point in viewing countries as having a “natural advantage” in either labor- or capital-intensive products. Trade does not necessarily provide a demand for each nation’s particular “mix” of labor and capital. Countries may be left behind if their unskilled labor becomes too poor and technologically obsolete to work with high-productivity capital.

In focusing on steam-powered production as the mainspring in economic development, Peshine Smith exemplified the dictum of Friedrich List (1885:170) that political economy should not aim simply at increasing “the values of exchange in the nation, but of increasing the amount of its productive powers.” But he went further. List had remained in the German Romantic tradition in not explaining just how to quantify productive powers economically. It is a reflection of how far Smith’s generation” of American protectionists progressed beyond List that in reviewing the first American translation of List’s National System in 1856, Smith complained (in Greeley’s New York Tribune, April 12, 1856) that the book was too historical and empirical. In terms of actual economic theory, “all he has done is to substitute the ‘Theory of Productive Force’ for that of Values.” To be sure, Smith granted, “He shows that the European Economists overlook the truth that ‘the power of creating wealth is vastly more important than wealth itself. . . . Their system ignores what may be called virtual or latent wealth, and treats nations as if they were actually exerting the whole productive power of which they are capable; and the only question was how their forces should be directed. The moment this idea is introduced, their theory explodes.”

The Obsolescence Function applies in agriculture as well as industry. The upshot has been that the industrial nations have become supreme not only in manufactured products but also in foodstuffs! While North American and European agriculture have enhanced soil fertility by the application of fertilizers, pesticides and herbicides, and freed labor by mechanizing production, the socially backward “Southern” economies have been unable to compete. Over the past century the world has seen raw-materials monocultures from Latin America to Africa deteriorate into food-deficit economies.

Most European economists rejected the technological analysis of economic development. Reviewing the Manual in France, Courcelle-Seneuil (1853) complained that Smith’s approach was too “specifically American” for him to understand. “In order to found his theory on purely physical laws, Peshine Smith has simply left the realm of economic science.” The Manual’s emphasis on the effect of international trade on soil productivity (in viewing ecological depletion as a byproduct of single-crop monocultures) entailed propositions “in truth, more agricultural than economic.”

This did not say much for the relevance of economic science to problems relating to industrial and agricultural technology. Ricardo’s theory that each nation gained from specializing in “what it was good at producing” turns out, upon examination, to be static and itself obsolete when applied to real-world development. Today’s trade theory remains in the Ricardian tradition by not recognizing the technological imperatives analyzed a century and half ago by the American School. And beyond the the phenomenon of economic obsolescence looms the broader problem that “Southern” food-deficit, debtor countries tend to be sick or corrupt societies as well as merely being “capital poor” economies.

Fitting technology and obsolescence into trade theory (and indeed, into economics proper)

By failing to trace the effect of trade on national productive powers, free trade theorizing (and indeed, neoclassical economics in general) remains merely a theory of market-clearing price equilibrium achieved through the forces of supply and demand, not a dynamic analysis of how economies evolved in terms of their long-term trends and social structures. It would be more than a century before modern economists would rediscover the principle of falling production costs as capital is substituted for labor, and the corollary that economies (or specific companies within given industries) may achieve such great progress as to render pre-existing technologies commercially obsolete, along with out-dated machinery and relatively untrained labor. For “low-paid laborers cannot afford to acquire the training or education necessary to raise their status in production at the rate required by twentieth-century technology” (Hudson 1972a:125f.). These phenomena are fatal both to the Factor-Price Equalization Theorem and to its twin Factor Endowments theory of comparative advantage.

Instead of asking what conditions might lead wages and profits to equalize in the world economy, economics could gain greater respectability as a discipline by asking why the world’s economies are polarizing rather than converging. But a methodological trap lurks for economists who imagine the badge of scientific method to be the ability to mathematize problems. A single determinate mathematical solution only emerges in a world of diminishing returns. Increasing returns would not produce an equilibrium tendency, and certainly would not lead to factor-price equalization, but rather to a polarizing world in which lead-nations extend their advantages over economically and socially obsolete countries.

Such countries are not so much “less developed” as mal-developed. Latin American and African agriculture is blocked by inequitable land tenure patterns, rendering these continents dependent on the “industrial” economies for their basic food needs, and hence subject to their coercive diplomacy (Hudson 1972b and 1978). Obsolescence, international dependency and “anti-communism” thus go together, especially where landownership and land-use patterns are concerned.

This real-world fact of diplomatic coercion, above all in reinforcing agricultural backwardness, shows the need to extend “technological economics” into the diplomatic sphere so as to recognize the IMF and World Bank financial pressures now being witnessed most notoriously in Russia. These loan programs promote capital-intensive export sectors whose proceeds are taken by the large multinationals, side by side with capital-starved low-wage domestic subsistence sectors.

The financial context for capital-intensive technology

In addition to not analyzing competitive advantage in terms of capital productivity, today’s economic theory neglects the analysis of how capital is “costed.” By this term financial analysts refer not merely the purchase price of a machine amortized over its productive lifetime on a unit-cost basis, but its financial costs reflecting the interest rate charged, the debt maturity, and the “mix” between debt and equity financing. This involves the analysis of credit, and of debt on the other side of the balance sheet.

The important point is that in today’s world, technology is not only a product of engineering; it exists in a financial context. As technological paths become more capital-intensive, the decision to employ a given technology turns largely on how it is financially costed. Direct investment in machinery and factories must be financed either internally (with retained earnings), or externally by a combination of bonds, equity stock issues and bank debt. Interest rates on such debt vary from country to country, as do price/earnings ratios for stocks (and hence, the cost of equity capital).

Modern economies accordingly must be analyzed not just in terms of their “factors of production,” but also in terms of their growth (indeed, overgrowth) of financial and other rentier claims on income and wealth. Yet today’s “value-free” economics mistakes the FIRE-sector overhead for wealth itself. All labor and other remunerated economic activity is counted as productive, regardless of its economic consequences.

Yet in examining the competitiveness of specific industries (e.g., electronics, autos and other manufacturing), the key variable often turns out to be the “costing of capital.” Countries are financially uncompetitive when their banking systems provide credit at so high a price that producers must factor in higher interest rates, higher debt/equity ratios, lower price/earnings ratios and shorter debt maturities than their foreign competitors. Obviously, the imposition of austerity programs tightening domestic credit works to block new capital-intensive investment.

Such financial considerations are central to any corporate planner, but have not found their way into academic economics. There is no perception of countries becoming so financially overgrown — that is, so deeply in debt — that most of their income must go to pay debt service. This prevents them from competing with low-debt and low-rent economies. Even if the same physical technology is available to all countries, financial considerations may render any given technology less remunerative in one economy than in others.

Economists avoid having to cope with such problems by dismissing them as “external economies,” that is, considerations lying outside of (“external to”) the narrow scope of factors recognized by most policy-making theory.

The fact that new technology requires an R&D lead time means that profits cannot simply be paid out to investors as dividends. They must be reinvested in research to develop yet new products or to cut costs on existing output. But the spread of corporate raiding in the 1980s led companies to make quick payouts rather than invest in long-term development. Such payouts were needed either to support stock prices against potential raiders or (in the case of companies that already were raided) to pay off the high-interest (“junk”) bond-holders.

Post-classical economics has dropped the study of land as a distinct factor of production, telescoping it into “capital in general.” This obviates the study of land tenure as a cause of backwardness and agricultural obsolescence. To be sure, the mechanization of farming is largely responsible for America’s remarkable growth in agricultural productivity. But land also has a pure site value. Fortunes are made by reclassifying rural land as suburban development land. And to the extent that savings are recycled to create a real estate bubble (as distinct from a stock market bubble), rents may be raised.

Fiscal, financial and related rentier charges do not reflect factor prices as such. They are claims on income or wealth that do not reflect actual inputs. If they have been neglected by most economic theorists, the reason seems largely to reflect self-interest by the FIRE sector in not making its behavior a subject of economic analysis (or political or any other kind of attention, for that matter). It is part of the virtual invisibility screen that has been erected around the FIRE sector and its rentier income overhead.

The role of capital transfers in factor-price polarization and the choice of technologies

An implicit corollary of the Factor-Price Equalization Theorem is the Purchasing Parity theory of exchange rates. This theory (perhaps a “rule of thumb” might be more accurate) states that currency values tend to reflect the cost of a similar market basket of commodities among countries. The logic is that if such prices vary (at least under free trade conditions), trade will occur for imports or exports to equalize prices in a unified world economy.

But as any traveller knows, international prices tend to vary widely, especially where third world debtor economies are concerned. And any balance of payments analyst knows why: Most foreign transactions (like most transactions within domestic economies) are not for goods and services, but for capital investments and their reciprocal debt service or earnings remittances. These capital account items (and I include debt service as being functionally a part of the capital account of assets and liabilities) overshadow commodity trade. Stated another way, currency values have become primarily a function of capital transfers. In balance of payments terms, the capital account drives the current account.

To be sure, international prices are plugged into certain common denominators. Raw materials have a common world price, as do physical capital goods. Capital and management also have more or less common world prices. These prices typically are set in U.S. dollars, and hence are not influenced by currency depreciation.

When currencies are devalued, the major price influenced is that of domestic labor. In addition, foreign debt-service becomes more expensive as calculated in the local currency. Devaluation diverts purchasing power away from the domestic sector to the foreign sector. The case of Latin America is instructive in this regard. Debt service — along with domestic capital flight — exerts chronic downward pressure on the entire region’s currency values.

Austerity programs deny the credit needed to apply capital-intensive technologies. The policy of “stabilizing public budgets” by taxing domestic income, while depreciating the currency, favors crude labor-intensive technologies rather than more capital intensive ones.

Such programs also reflect U.S. support of domestic oligarchies against domestic populations. For employers well know that whatever wage increases may be won by labor unions affect domestic wage levels only. These wage levels can be chronically devalued. Running up a foreign debt thus serves the interests of domestic employers, especially those in the export sectors.


If the purpose of economic theory is to explain existing and future production and trade patterns, it is necessary to take into account not only the physical engineering aspects of technology, but the broad array of financial, fiscal and institutional factors that determine the economy-wide costs of such technologies. All these factors contribute to making third world countries and the formerly socialist economies “hewers of wood and drawers of water,” as the American technology theorists put it in the 19th century.

A “total” economic theory is needed — not merely a theory of market-clearing prices, but an overall development theory. As long as such theories are marginalized into special sub-disciplines of academia, the discipline will remain sidetracked into a non-developmental, asocial and apolitical theory. In fact, the discipline seems to have reverted to its original context as “moral philosophy,” that is, as religion. Like most religions, it accepts its tenets as god-given, not to be questioned. As Groucho Marx put it in one of his movies, “Who are you going to believe — me, or your eyes?”

Policy implications

The policy implication of American theories of technology’s economic characteristics is that countries that did not achieve and maintain technological leadership would suffer from economic obsolescence. To prevent this fate from befalling the United States — and to increase industrial and agricultural productivity — technology theorists urged protective tariffs, so as to support industrial prices, and hence, profit levels. This demand for tariff barriers has led these theorists to become known (and dismissed) as protectionists.

Their expectation was that the higher sales prices achieved behind protective tariffs would generate income that would be reinvested in new investment and economic modernization. The key perception was that capital would be substituted for labor at steadily following costs as mass production was mechanized. But by the end of the 19th century, protectionism had become the mother of monopoly, and the trusts began to be broken up as it became clear that higher profits were not being translated into new direct investment in machinery, but used for financial speculation or other unproductive purposes.8

Some protectionists claimed that high tariffs would support domestic employment, and hence protect high U.S. wage levels from foreign “pauper labor.” This was controverted by free traders who drew on the technology theories that had been developed by the most sophisticated protectionists. By the time of Jacob Schoenhof (appointed under Grover Cleveland’s Democratic administration), it had become clear that America’s high-wage labor was so much more productive than its foreign counterparts as to substantially undersell low-wage labor. Thanks to the high productivity of well fed, well housed, well clothed and — most important of all — well educated labor, protective tariffs were deemed unnecessary. America had firmly secured its head start.

To be sure, this free trade position served in its own way as an argument for strong government activism to subsidize education, especially higher education. Land grant colleges and state universities were established to provide a more pragmatic curriculum — one more amenable to the protectionists’ economic theories — than was available at the older, more prestigious universities that had been established mainly as training grounds for the clergy. Business schools began to be established, such as the Wharton School at the University of Pennsylvania.

In the late 1870s and 1880s, “economics” emerged as a distinct academic discipline, replacing “political economy” (mainly British free trade theory), much as the latter had replaced the “moral philosophy” courses taught in the senior college year early in the 19th century. A generation of American economic students went to Germany to study at the hands of the historical school. They returned to America to take up academic positions advocating social reform and government activism.

Whereas British free-trade political economy was technologically pessimistic (based as it was on Ricardo’s theory of diminishing returns in agriculture), the American technology theorists were technological optimists (the term has been popularized by Gide and Rist). They anticipated a steady increase in agricultural productivity via the industrialization of agriculture through the intensive application of fertilizer and the mechanization of farm production (and also more efficient transport of farm produce). Indeed, one important upshot of the technological theories promoted by Henry Carey, Peshine Smith and others was the establishment of the Department of Agriculture under the Republicans, who gained nearly uninterrupted control of the presidency from 1860 through World War I (with the exception of Cleveland’s administration). Agricultural extension services, seed experimentation and rural education (followed in time by rural electrification) sought to promote the most efficient farming methods, and to discourage the soil-depleting plantation monoculture that had become a characteristic of southern states under free trade.

Although America has reduced its industrial tariffs as it has achieved lead-nation status, it remains today one of the world’s most highly protectionist agricultural economies — and also has the highest farm productivity. Instead of falling soil fertility leading to widening land rents as forecast by Ricardian theory, the American anti-Ricardians (a more accurately descriptive term than “protectionists”) foresaw that economies with high agricultural, industrial and labor productivity would achieve a “Schumpeterian”-type rent of innovators enjoying cost advantages over producers slow to modernize their production.

Since the 1930s the United States has become the world’s most highly protectionist nation with regard to its agricultural sector. However wasteful its quotas and subsidies appear at first glance, agricultural productivity has far surpassed industrial productivity growth, making food exports the mainstay of America’s balance of payments. U.S. diplomacy has thwarted land reform in less developed countries, while insisting on “market share” agreements guaranteeing American access to foreign food markets. The upshot has been to create international food dependency on U.S. farms. Agribusiness has turned out to be a major “lead industry.”

But in manufacturing, as noted above, Americans recognized by the turn of the 20th century that monopoly gains had become extortionate. Rather than being reinvested in industrial modernization, these gains (“industrial quasi-rents”) merely added to the economy’s cost structure. From the Sherman Anti-Trust Act of 1890 through the regulatory legislation of the 1930s, Americans put in place a system of checks and balances that did not find a counterpart in any other economy.

This was in large part because a much broader range of American economic activity was in private hands than was the case in foreign countries. Public utilities, railroads, air lines and bus lines, broadcasting and other communications, fuels and mining were privatized from the outset in the United States, while they remained in the public sector in most European and third world countries.

Also important to finance the new technology of heavy industry was the banking system. In addition calling for protective tariffs and internal improvements (canals and other public infrastructure), the “American system” of political economy called for a national bank. But the country nonetheless maintained a “small banking” tradition, and had tens of thousands of banks rather than the large nation-wide banks found in nearly every other country. In France, by contrast, the Periere brothers (in St. Simonian tradition) proposed a type of banking that was quite different from the British-style merchant banking supplemented by mortgage banking. Their Credit Mobilier provided a model for Germany, which carried investment banking to an even higher degree. Socialists and nationalists advocated long-term investment banking, so as to mobilize national savings to fund industrial investment. In continental Europe (as subsequently in Japan), banks were much more closely involved in the investment decisions of their customers than in England and the United States, and typically were major stockholders in companies to which they lent heavily.

American industrial economists also advocated this kind of banking. The National Banking Commission was convened after the Panic of 1907, and was strongly influenced by Germany’s Reichsbank and its other large industrial banks. But the loss of the White House by the Republicans in the 1912 election (when Teddy Roosevelt split the party’s vote by running as an independent) led to a Democratic Party victory behind Woodrow Wilson. Under his presidency the Federal Reserve Act created a more decentralized banking system along English lines. And the stock market crash of 1929 and the onset of the Great Depression led to the Glass-Steagall Act of 1933, which separated commercial and mortgage banking activities from investment banking.

Since World War II, the United States has urged this decentralized banking philosophy on other countries, while excluding foreign ownership of America’s banks (except for foreign branch offices). This exclusion of foreigners also applied to major radio and TV media, and informally to other industries deemed to be of national strategic interest. Thus, since 1971 the OPEC countries, Japan, Germany and other economies running balance-of-payments surpluses were only permitted to invest their excess dollars in relatively innocuous forms — U.S. Treasury bills and bonds, minority stock ownership and real estate trophies.

Today, many of these policy manifestations of earlier technology theory are being dismantled. Nations throughout the world are abandoning protectionism (save for the United States, most notoriously in the agricultural sphere). Investment is being opened up to foreigners (again, with the notable exception of the United States). Austerity plans dictated by the International Monetary Fund has replaced national industrial banking. Public enterprise is being sold off to private buyers, ranging from power and water utilities to transport systems, broadcasting systems and national arts programs. Public education likewise is being scaled back, especially in the United States. And as government budgets are being slashed in country after country, taxes are being cut accordingly.

Economic theory itself is being stripped of all dimensions potentially that do not endorse laissez faire to a degree that earlier generations would have found extreme. Government services are being privatized. World banking likewise is being standardized along Anglo-American lines as merchant and mortgage banking, rather than the continental European focus on long-term investment banking.

The operative philosophy today is that private banking and credit, privatized public utilities and natural monopolies, and private education can create more wealth under a free trade regime (albeit one that grandfathers U.S. protectionism) is more productive than public enterprise in promoting technological and economic progress. But this philosophy has not yet proved its case. There is as yet no indication that higher profits will automatically be reinvested in new direct investment, R&D and technological modernization. In many ways, the world seems to be living in the short term — the sphere addressed by marginalist laissez faire economics — rather than in the longer term in which the technological environment is transformed — the sphere that the early technology theorists addressed. And the short-term perspective is likely to breed technological obsolescence. But obsolescence is a relative term — relative to the pace of productivity gains in the lead nations. If all economies are being deindustrialized equally, then the result is simply economic exhaustion and inertia.

Today, the transformation of economics into monetarism and price theories of market-clearing equilibrium are plunging most of the world into a short run in which the future is opaque and technology is dismissed as an “externality” to academic orthodoxy.


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