Chicago and Economics

“The building of Chicago is the quintessential American story. Chicago’s early history is the history of the early American West, a place that was opened up, like the rest of the West, by cities, not by pioneering farmers, as the historian Frederick Jackson Turner has argued. The settling of the frontier was one of the most ambitious city-building efforts in history (but that’s an argument for another day). And no city in the West –  in the world, in fact – grew faster than Chicago.

By the time of the Civil War, Chicago was the master metropolis of the mid-continent, a gateway city connecting new farms and towns of the West with the expanding industrial economy of the East. Nature had blessed Chicago, but cities are not ordained by geography. They’re existential, products of human initiative.

The source of Chicago’s early success was its visionary capitalists, money makers as well as city builders. Most of them were young men of modest means from New York and New England. Most were men like William Butler Ogden, the town’s first mayor and master builder, and Gurdon Saltonstall Hubbard, who turned in his [tribal] buckskins for a frock coat and tie and became one of the town’s richest men.

They were gamblers who risked everything they had on Chicago, investing in swampland in the hope the canal would turn a mud hole into a metropolis. Their economic prospects were tied to the town’s economic prospects. Having invested heavily in Chicago real estate, every improvement they made, be it a road or a building, added to the town’s wealth and their own.

It was the working out of Adam Smith’s notion that self-interest promotes the public interest. In chasing wealth, they built a great city. Chicago was the creation of what John Maynard Keynes called those “beasts of capitalism”: risk-taking and innovation. And it embodied better than any other place the brutal and inventive vitality of 19th Century America. Poet Carl Sandberg described Chicago best:

“Hog Butcher for the World, Tool Maker, Stacker of Wheat, Player with Railroads and the Nation’s Freight Handler; Stormy, husky, brawling, City of the Big Shoulders:” 

You can underscore that word “brawling.” When city lots went up for sale to help pay for the canal, speculators poured into the town, and this created pressure to remove the peaceful Potawatomi [tribe]. The Potawatomi claimed most of the land around Chicago, but this land had become too valuable, it was argued, to be left in the possession of “savages.” It was an, essentially, bloodless conquest of a people who couldn’t hold onto their land against more people with more power.

So the [tribes] were displaced, in a land swindle masquerading as a treaty negotiation. And with them went the French-Canadian forest traders, walking silently with wives and half-breed children to government reservations further west. This is how Chicago was turned, at the very moment of its birth, from a pre-capitalist, French and [tribal] trading post, to a capitalist, Anglo-American town.

The symbol of this cultural transformation was the Grid. When Chicago was designated as a future canal town, it was laid out by state surveyors in a grid, or checkerboard pattern. The grid turned land into real estate, a commodity to be bought and sold. Land went to the highest bidder, and to remove land from the market for public use, such as parks or public squares, was considered a waste of a profit-generating resource. So early Chicago had no public squares and only one small park. When the city was built up, people were forced to go to cemeteries and use them as picnic grounds.

Chicago’s founders envisioned a great future for their adopted town. There was only one problem. Chicago was built on speculation – it had no money. Enter William Butler Ogden: Problem solved. Ogden, a New York state legislator, was sent to Chicago by New York capitalists who had bought land there on speculation. He hated the place at first, but saw its potential and set himself up as a conduit for New York money that began streaming into Chicago.

Ogden and his business associates then set about building a town and connecting it to the rest of the country. They built plank roads to grain farms out on the prairie, established lake trade with the East via the Erie Canal, and tapped New York capital to complete the building of the Illinois and Michigan Canal.

And they built an urban infrastructure of banks and businesses, roads and bridges, packing plants and grain elevators, libraries and schools. These prairie capitalists were ceaseless innovators. In 1848, the year the Illinois and Michigan Canal was opened, Ogden was already investing money in a transportation technology that would replace the Canal. It was the railroad.

In 1847, Chicago didn’t have a single mile of railroad. Ten years later, it was the rail center of America, and Ogden was a Railroad King of the West. By the opening of the Civil War, more railroads met at Chicago than at any other spot on earth. St. Louis, Chicago’s chief urban rival, had built a thriving commerce with New Orleans, using steam-powered riverboats. But by the time of the Civil War, Chicago had displaced St. Louis, which remained tied to the river, as the region’s major trade center. The railroad tied the lower Midwest to the Northeast, and insured that this section didn’t split off and become part of the Confederacy in 1861, when the lower Mississippi became a Rebel River.

Chicago rose to regional prominence by becoming not a manufacturing center at first, but a trade center, a giant Exchange Engine. Here’s how the system worked for two commodities: lumber and wheat.

Chicago sat between two different ecosystems, the timber-rich lands of upper Wisconsin and Michigan, and the treeless prairie. It was built on Lake Michigan, a water corridor that connected them. Ogden and other Chicago capitalists purchased entire forests in the North and sent lumber by lake boats down to Chicago, where it was processed, and then sent out by canal and rail to prairie farmers.

Chicago’s lumber mills made cottages, schoolhouses, stores, taverns, and churches. Out on the prairie, it wasn’t uncommon for entire groups of homesteaders to gather together at a desolate railroad depot to await the arrival from Chicago of their entire ready-made town – some assembly required. And where did they purchase the plans and the lumber? From the Sears & Roebuck catalogue.

The wheat trade was a more symbiotic relationship, and the land wasn’t the loser. Reapers made at Cyrus McCormick’s steam-driven Chicago factory allowed farmers to cut the wheat that Chicago shipped to the rest of the world. Farmers made money; Chicago merchants made money; and the key to it all was the railroad.

(Although McCormick is credited as the “inventor” of the mechanical reaper, he based his work on that of many others, including Roman, Scottish and American men, more than two decades of work by his father, and the aid of Jo Anderson, a slave held by his family. Cyrus McCormick filed patents for the invention, and his achievements were chiefly in the development of a company, marketing and sales force to market his reaper and other products.)

At the other end of the line, railroads, at that time, were prohibited from entering the congested heart of Manhattan Island. But in freewheeling Chicago, where money-making was unimpeded by government restraints, the railroads steamed right into the center of town, creating tremendous smoke and noise and killing or mangling two persons a day at unprotected crossings. As one foreign visitor said: “It’s cheaper to kill people than to elevate the railroads, and human life in Chicago is nothing compared with money.” A commercial powerhouse, it was one of the ugliest cities in America, and the unhealthiest, as well.

In the 1850s, cholera, a water-borne disease, hit the city with devastating force, killing in one year almost six percent of its population. In that decade, Chicago had the highest death rate of any American city. The problem was that Chicagoans were drinking [and cooking with] their own sewage.

Both garbage and raw sewage were dumped into the Chicago River, along with the blood and remains of animals slaughtered at the city’s meat packing plants. On some days, the river was blood red. This river water, in turn, flowed into Lake Michigan, the source of the city’s water supply. Even small fish got into the water supply, and would come shooting out of spigots in sinks. “When you turned on the hot water,” as one Chicagoan joked, “you got chowder.”

There was no joking, though, about cholera, which struck people with terrible suddenness and killed them in a day. Finally, public fear and outrage forced the city to act, to save itself. Ogden and other city officials hired a Boston engineer, Ellis Chesbrough, to build a modern water supply and sewage system.

Intake tunnels were driven far out into Lake Michigan. And the Chicago River was reversed by a process of dredging and pumping. Now it carried Chicago’s waste away from the city, into the Illinois and Michigan Canal, past complaining but less powerful canal towns.

Chesbrough also lifted Chicago out of the mud and swampy soil that were breeding places for cholera. He raised up the entire downtown by as much as 10 feet, jacking up entire rows of buildings, with the people right in them, and placing dredged soil from the river bottom under them. The raising of the city and the reversal of the river were two of the most stupendous engineering projects of the age [long forgotten], and they gave Chicago a reputation as a city that could accomplish almost anything.

Raw, wildly growing Chicago illustrated, better than any other place, America’s well-placed faith in technology and unfettered capitalism, forces that were conquering the frontier and raising America to greatness. The Chicago story is however, a cautionary tale.

Self-interest doesn’t always lead in the benign direction Adam Smith hoped it would. These same forces of capitalism and technology would shape the country even more emphatically after the Civil War, making America – and Chicago – great capitalist opportunity centers; but also scenes of economic excess, injustice, and unrest.”

As we have seen, with industrialization and the capitalists came a new world order for the common man. No longer would he be confined to a subsistence living, selling his wares or his goods at market to eke out a life for himself and his family as generations had done since man first put down roots and began farming and trading around towns and cities.

Now, he could sell his labor to a willing capitalist who, along with raw materials and the new machines of the industrial age, could produce goods on a massive scale for profit – the excess of revenues over costs – and thereby create new wealth – and then do it again – more jobs, more profit, more new wealth created along with the excesses, injustices, lawlessness and other cautions that spawned the next great social movement.

In the aftermath of the Civil War came the progressives, fresh from their perceived victory over slave interests (although, as we have seen, the victory actually belonged to the Union soldier, who died by the hundreds of thousands for that cause) to take up a new cause – the plight of the working man under the thumb of the capitalists – the new slavers – in the American industrial revolution. Unfortunately for the working class of all races and ethnicities, the progressives could only see, and detest, the wealthy, not the jobs they created.

Nevertheless, the progressives found new “soldiers” – mostly displaced white industrial working men who believed that they were being unfairly displaced by the new freedmen who were flooding north from the agriculturally destitute South to take new factory jobs, and by newly arrived immigrants mostly from Eastern Europe, Poland, Italy and Ireland, who had sold everything they had, packed everything they needed into cardboard suitcases, bought one-way tickets and boarded tramp steamers headed for America – just for the opportunity to work for whatever was payed.

The blacks and the immigrants would take any job at any pay and the displaced workers, who couldn’t provide for themselves and their families for what these new arrivals would sell their labor, were justifiably angry. To the progressives, the new “rebel” army consisted of the niggers, the micks, the pollacks, the wops and their “ilk”.

So, into the fray came the newly “displaced” progressives. Here were the makings for a new “army” – this one not organized into specialized military units but into labor union locals – and they meant to go to war with the capitalists – the “captains of industry” and their mercenaries – on the side of the “working man”. It would be bloody.

The progressives took much of their passion from the Abolitionist movement, animated by religious fervor with women and politics playing prominent roles. Unfortunately, their cause did not have a moral center as the issue of slavery provided in abundance. This would be a war between two armies of working men, exercising their freedom to sell their labor. This time, rather than being the champions of freedom, the progressives fought to deny freedom to the “other” working men.

Were factory working conditions oppressive, unhealthy and dangerous? Yes, they were. But, these were conditions that the workers had decided to overlook for the wages they could earn, thus providing tacit approval for the employers. It was a choice made by both worker and employer and involved ethical issues – not moral ones – hardly grounds for bloodshed.

However, the progressive’s “war” was not fought over the displacement of workers anyway. They would take the jobs despite the working conditions. It was fought over the working conditions themselves and was meant to bring down the capitalists by pricing them out of business – or, at least, substantially reducing their wealth. Of course, if there are no capitalists, there are no jobs either and, if there is less wealth to invest, there are fewer jobs created – so who wins there? Only the progressives – with a ready-made “army” of the permanently unemployed.

With their fierce support for the labor unions, the progressives were front and center in the labor wars that marked the period from the mid-1870s until the present day – arguably the most violent labor movement in world history. Progressives are still fomenting violence in the streets – as the “Occupy” movement has recently shown.

Now, continuing the discussion of the theory of capitalism. “After World War II, economist Milton Friedman, a proponent of the Chicago School of Economics, took many of the basic principles set forth by Adam Smith and the classical economists, updated them and gave them a new twist. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he argues that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits … (through) open and free competition without deception or fraud.” This is similar to Smith’s argument that self-interest in turn benefits the whole of society. Work like this helped lay the foundations for the coming marketization (or privatization) of state enterprises and the supply-side economics of America’s Ronald Reagan and Britain’s Margaret Thatcher.

The Chacago School of Economicsis best known for its free market advocacy and monatarist ideas. According to Friedman and other monetarists, modern market economies are inherently stable if left to themselves and depressions result only from government intervention. Friedman, for example, argued that the Great Depression was a result of a contraction of the money supply, controlled by the Federal Reserve, and not by the lack of investment as John Maynard Keynes had argued in the 1930’s.

Ben Bernanke, former Chairman of the Federal Reserve, is among the economists today generally accepting Friedman’s analysis of the causes of the Great Depression, tacitly agreeing that all of the government spending from 1933-1939 by the Franklin Roosevelt administration in his “New Deal” was ineffective in ending the economic crisis. Only the industrial requirements of World War II extricated Roosevelt from his dilemma.

Neoclassical economists, who by 1998 constituted a majority of academic economists, subscribe to a [common sense] subjective theory of value, according to which the value derived from consumption of a good, rather than being objective and static, varies widely from person to person and for the same person at different times. Adherence to a subjective theory of value compels neoclassical thinkers to reject the labor theory of value upheld by Adam Smith and other classical liberal thinkers, which was grounded upon a conception of objective value.

Neoclassical models typically adopt the assumptions of Marginalism, according to which economic value results from marginal utility and marginal cost (the marginal concepts) – how does an additional unit of something benefit both the producer and the consumer. Marginalist theory implies that capitalists earn profits not by exploiting workers, but by forgoing current consumption [plowing profits back into the company], taking risks, and organizing production.

In his book The Road to Serfdom, Freidrich Hayak asserts that the economic freedom of capitalism is a requisite of political freedom. He argues that the market mechanism is the only way of deciding what to produce and how to distribute the items without using coercion. Milton Friedman and Ronald Reagan also promoted this view.

Friedman claimed that centralized economic operations are always accompanied by political repression. In his view, transactions in a market economy are voluntary, and that the wide diversity that voluntary activity permits are a fundamental threat to repressive political leaders and greatly diminish their power to coerce – which, despite the discussion above, is still the PLDC’s primary tactic for governing.

Even my “Auntie Ayn” made positive moral defenses of laissez-faire capitalism, most notably in her seminal 1957 novel, and in her 1966 collection of essays, Capitalism: The Unknown Ideal. She often argued that capitalism should be supported on moral grounds, not just on the basis of practical benefits. She has significantly influenced conservative and libertarian supporters of capitalism ever since, especially in the years since the Obama administration took office.

Some labor historians and scholars, in true progressive/liberal/tribal tradition, have sought to demonize capitalism with racial language and have [absurdly] argued that unfree labor – by slaves, indentured servants, prisoners or other coerced persons – is compatible with capitalist relations. Tom Brass argued that unfree labor is acceptable to capitalism. Historian Greg Grandin argues that capitalism has its origins in slavery: “…when historians talk about the Atlantic market revolution, they are talking about capitalism. And when they are talking about capitalism, they are talking about slavery.” Wow! No, I’m not. 

In his book, The Half Has Never Been Told, historian Edward E. Baptist, of the Ivy League’s Cornell University, claims that slavery was an integral component in the violent development of American and global capitalism. According to Immanuel Wallerstein, institutional racism has been “one of the most significant pillars” of the capitalist system and serves as “the ideological justification for the hierarchical nature of the work-force and its highly unequal distributions of reward.”

It seems to me that, in a capitalist system, in which a worker labors under a unique contract – mutually and freely entered into – to pay him/her a certain amount of money for a certain amount of labor, he/she receive whatever “reward” they are owed in their contract-guaranteed paycheck. Whatever amount that is, it is the agreed-upon amount based on their unique contract.

“Many aspects of capitalism have come under attack from the anti-globalization movement, which is primarily opposed to corporate capitalism. Environmentalists have argued that capitalism requires continual economic growth, and that it will inevitably deplete the finite natural resources of Earth. Such critics argue that while this neoliberalism or contemporary capitalism has indeed increased global trade, it has also destroyed traditional ways of life, exacerbated inequality and increased global poverty – with more living today in abject poverty than before neoliberalism [another argument against overpopulation].

Some scholars blame the financial crisis of 2007-2008 on the neoliberal capitalist model. Following the banking crisis of 2007, economist Alan Greenspan told the United States Congress on October 23, 2008, “The whole intellectual edifice collapsed. I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders. … I was shocked.” 

So why, all of a sudden, did the laws of supply and demand, profit and loss, risk and reward, respect and shame – in the absolute absence of slavery – fail so miserably? Let’s see.

I contend – and not without mounds of evidence – that this corporate behavior was merely an outgrowth of a culture of non-accountability, a broad disrespect for traditional values and the moral and ethical environment in the society as a whole, which was manifest in the reelection of Barrack Obama in 2012 (that will be discussed in depth later) by the exercise of an unenlightened selfish-interest by 66 million American voters.

The Founders would be shocked.

Next time: The economic wisdom of the Pilgrims.


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