Deck 4: The Historical Foundation of American Economic Institutions and Ideas

Question 1

What were the key features of the mercantilist system? Explain how it was effectively overhelmed by the rise of market-based economies.

Answer 1

The key features of the mercantilist system included a focus on accumulating wealth through a favorable balance of trade, government intervention in the economy through tariffs and subsidies, and the establishment of colonies to provide raw materials and serve as markets for finished goods. Mercantilism also emphasized the accumulation of gold and silver as a measure of a nation's wealth.

However, the rise of market-based economies effectively overwhelmed the mercantilist system in several ways. First, the Industrial Revolution led to the development of new technologies and increased productivity, which allowed for the mass production of goods and the expansion of trade. This shift towards market-based economies allowed for greater specialization and efficiency in production, leading to increased wealth and economic growth.

Additionally, the rise of free trade and the dismantling of trade barriers allowed for greater competition and access to a wider range of goods and services. This shift towards market-based economies also led to the development of financial markets and the establishment of central banks, which provided greater access to capital and facilitated investment and economic growth.

Furthermore, the shift towards market-based economies also led to the development of new economic theories, such as classical economics and later, neoclassical economics, which emphasized the importance of free markets and individual decision-making. These theories challenged the interventionist policies of mercantilism and advocated for a more laissez-faire approach to economic policy.

Overall, the rise of market-based economies effectively overwhelmed the mercantilist system by promoting greater economic efficiency, competition, and innovation, and by challenging the interventionist policies of mercantilism in favor of free markets and individual decision-making.

Question 2

"The factory system arose from a flurry of inventions." Explain.

Answer 2

The factory system, which became the foundation of the Industrial Revolution, emerged from a series of technological advancements and inventions that occurred during the 18th and 19th centuries. Prior to the factory system, goods were typically produced using hand tools or basic machines in small workshops or at home—a system known as the cottage industry.

The flurry of inventions that gave rise to the factory system can be attributed to several key developments:

1. **Textile Inventions**: The textile industry was one of the first to be transformed by these inventions. The spinning jenny, water frame, and spinning mule were all developed in the second half of the 18th century. These machines allowed for the mass production of yarn and cloth, which was previously a labor-intensive process.

2. **Steam Power**: The development of the steam engine by James Watt and others was a pivotal moment. Steam power could drive machinery and allowed factories to be located away from water sources, which were the primary source of power before steam.

3. **Power Loom**: Invented by Edmund Cartwright in 1785, the power loom mechanized the process of weaving cloth, which further increased production capacity and efficiency.

4. **Iron Making**: The introduction of new methods for producing iron and steel, such as the puddling process and the Bessemer process, provided the materials necessary for constructing machines and building factory infrastructure.

5. **Transportation**: The invention of the locomotive and the expansion of the railway network facilitated the movement of raw materials to factories and finished goods to markets, further integrating and expanding the industrial economy.

6. **Interchangeable Parts and Assembly Line**: The concept of interchangeable parts, coupled with the development of the assembly line, allowed for the efficient mass production of goods with consistent quality and facilitated the repair and maintenance of products.

The convergence of these inventions and innovations led to the establishment of the factory system, which is characterized by:

- **Centralization of Production**: Factories brought workers, raw materials, and machinery under one roof, which allowed for greater control and coordination of the production process.

- **Specialization of Labor**: The factory system divided production into simple, repetitive tasks that could be performed by unskilled or semi-skilled workers, rather than craftsmen with years of training.

- **Economies of Scale**: The mass production of goods led to significant reductions in cost per unit, making products more affordable and accessible to a broader market.

- **Increased Productivity**: The use of machinery and specialization of labor resulted in a dramatic increase in productivity and output.

- **Urbanization**: The growth of factories led to the migration of people from rural areas to cities in search of work, contributing to the urbanization of society.

In summary, the factory system arose from a flurry of inventions that revolutionized the way goods were produced, leading to the Industrial Revolution, which changed the economic and social fabric of society. These technological advancements made production faster, cheaper, and more efficient, laying the groundwork for the modern industrial economy.

Question 3

Trace the path of organized labor from its early days to the 1930s.

Answer 3

Organized labor in the United States has a long and complex history, beginning in the early 19th century and continuing to evolve through the 1930s. In the early days, workers began to form trade unions to advocate for better working conditions, higher wages, and shorter hours. These early unions often faced significant opposition from employers and the government, and many strikes and labor protests were met with violence and repression.

One of the first major milestones in the path of organized labor was the formation of the National Labor Union in 1866, which sought to unite workers across different industries and trades. This was followed by the creation of the Knights of Labor in 1869, which also aimed to bring together workers from various backgrounds and promote labor rights.

The American Federation of Labor (AFL), founded in 1886, became one of the most influential labor organizations of the late 19th and early 20th centuries. Led by Samuel Gompers, the AFL focused on skilled workers and used tactics such as collective bargaining and strikes to achieve its goals.

The early 20th century saw a surge in labor activism, with major strikes and labor disputes occurring across the country. The 1911 Triangle Shirtwaist Factory fire in New York City, which resulted in the deaths of 146 garment workers, galvanized public support for improved workplace safety and labor rights.

The 1930s marked a turning point for organized labor with the passage of the National Labor Relations Act in 1935, also known as the Wagner Act. This legislation guaranteed workers the right to organize and bargain collectively, and established the National Labor Relations Board to oversee labor disputes. This period also saw the rise of industrial unions such as the Congress of Industrial Organizations (CIO), which successfully organized workers in key industries such as steel, automobiles, and mining.

Overall, the path of organized labor from its early days to the 1930s was marked by significant challenges and achievements, as workers fought for their rights and improved working conditions in the face of opposition from employers and the government. The period culminated in the establishment of key labor laws and the growth of powerful labor organizations that continue to shape the American labor movement today.

Question 4

Explain how periodic economic "panics" influenced the development of governmental policies.

Question 5

Why is the Progressive Era associated with the development of a "mixed economy?"

Question 6

What events led to the development of the "New Economics" of John Maynard Keynes?

Question 7

What was distinctive about the "stagflation" of the 1970s? How did it change economic thinking?

Question 8

Supply-side economic theory rose to prominence in the 1980s. How did this differ from the previously dominant view of the functioning of the macroeconomy?

Question 9

Business cycles were thought to have become less frequent and less severe until recently. What happened to reverse this view and why?

Question 10

The early beginnings of organized labor were fraught with strife and resistance from business and government.

Question 11

Government has played little role in the American economy almost from the beginning of the establishment of the United States.

Question 12

The Civil War had absolutely no positive impact on American economic development since it caused such widespread devastation to the economy and society.

Question 13

"Progressivism" is a term used to describe the greater role assumed by
government in the 1700s.

Question 14

Urbanization during and after the 1920s spurred the development of consumer goods industries.

Question 15

The theoretical focus of the New Economics was on macroeconomics, whereas before Keynes, the focus had been on microeconomics.

Question 16

Since the end of the 1950s, the role of multinational businesses has steadily eroded as measured by these firms' output and sales.

Question 17

The centerpiece efforts of Lyndon Johnson's Great Society programs were
efforts aimed at using government programs to offset stubborn social problems such as poverty and unemployment.

Question 18

Stagflation was a term adopted by economists in the 1970s to describe a
national condition of lagging economic growth, high rates of unemployment, and high rates of inflation.

Question 19

President Ronald Reagan defended his tax-cutting policies by citing the economic arguments advanced supply-side economics.

Question 20

The fiscal policies actually practiced during the Reagan years were similar to the anti-depressionary theories set forth by Keynes four decades earlier.

Question 21

Although the federal deficit grew to incredible proportions during the
Reagan years, America enjoyed a position of power in international affairs, enjoying a period of consistent trade surpluses.

Question 22

An example of a structural shift in the American economy over the past
forty years is the relative decline in manufacturing and the rise of service industries.

Question 23

De-industrialization is a term used to describe the shift away from an industrial economy like that of the 1950s and 1960s.

Question 24

The concept of "private interest" presumes that certain governmental economic activities are essential to assure provision of goods and certain protections to the whole society that would not be provided by a pure market economy.

Question 25

Durable goods have long useful lives, ordinarily three years or more.

Question 26

The New Economics is most closely associated with what period in American economic history?

A) The Great Depression (1932-1940)
B) The Reagan Boom (1982-1988)
C) The rise of big business (1870-1900)
D) The Kennedy-Johnson Years (1960-1968)
E) The Progressive Era (1900-1920)

Question 27

The economic policy practice by the British toward their American colonies was called:

A) mercantilism
B) progressivism
C) laissez faire
D) economics of scale
E) de-industrialization

Question 28

Which of the following is an accurate commentary on America's
Economic growth record?

A) Overall GDP/capita growth has 2 ½ times faster in the United States compared to most of the industrial nations since 1870
B) Only Japan has shown an impressive economic growth rate over the past 30 years
C) America's growth record was quite commendable up until the 1970s but since then has not been remarkable compared to the rest of the world
D) All of the above
E) None of the above

Question 29

As an immediate cure to the depressed economic conditions of the 1930s, J.M. Keynes urged:

A) starting a space program
B) an increase in government spending
C) a reduction in business investments
D) an increase in imports
E) a return to higher rates of personal savings

Question 30

Which of the following were important 19th century pro-business activities undertaken by the federal government?

A) Tariffs
B) Subsidies and bounties for raw material development
C) Enforcement of prohibitions on trade unions
D) All of the above
E) None of the above

Question 31

Which of the following were likely causes of the stock market crash in 1929?

A) Buying stocks on margin
B) The sudden disappearance of buyers of stocks
C) The realization that stocks were overpriced relative to their earnings
D) The absence of effective securities trading regulations
E) all of the above

Question 32

Which of the following initiatives was part of the Great Society program?

A) Civil rights legislation
B) Enlargement of social security benefits
C) Medicare and Medicaid
D) Government aid to higher education
E) All of the above

Question 33

The first American president to consciously follow the macroeconomic policy path suggested by Keynes was:

A) Franklin Roosevelt
B) Dwight Eisenhower
C) John Kennedy
D) Lyndon Johnson
E) Ronald Reagan

Question 34

The supply-side economics of the Reagan years emphasized:

A) a tax cut to stimulate saving, investment, and entrepreneurial risk taking.
B) an increase in government regulation of business
C) never running deficits
D) an increase in business taxes

Question 35

The recession of 2007-09 was notable because:

A) it immediately followed a large bubble in housing prices
B) it was the longest contraction since the Great Depression
C) it pointed out fundamental weaknesses in the economy
D) all of the above
E) none of the above

Question 36

The information technology boom and supply-chain management revolution of the 1990s that seemed to defy the usual economic tradeoffs and inevitability of cyclical downturns became know as the:

A) New Economy
B) the "dumbest generation"
C) the housing bubble
D) TARP
E) the "Clinton Coaster"

Question 37

Discretionary spending refers to:

A) expenditures on necessities
B) all consumption spending
C) spending that the government tells you do
D) purchases of goods and services that are not necessities