Introduction

This lesson focuses on a group of nineteenth-century industrial entrepreneurs described in many history books as Robber Barons. It calls upon you to analyze the activities of these entrepreneurs in order to draw conclusions about the innovations and business practices for which they are known. To carry out this analysis, you will examine techniques of mass production, division of labor and vertical and horizontal integration, noting their effects on industrial output and other outcomes. You will also read a case study on John D. Rockefeller and discuss the characterization of him as a Robber Baron.

The nineteenth-century industrialists often described as Robber Barons include Andrew Carnegie of Carnegie Steel, John D. Rockefeller of Standard Oil, and Cornelius Vanderbilt, a railroad magnate. (The term Robber Baron was first used in a history book published by Matthew Josephson in 1934.) Accumulating great wealth through entrepreneurial activity and innovation, these men became recognized leaders in industry and business circles, known particularly for business consolidations on a large scale and for focusing sharply on innovative management practices.

Their achievements yielded benefits and costs. The benefits flowed from a new emphasis on improving efficiency in the workplace. Innovators achieved this emphasis by replacing decentralized methods of production with mass production, developing specialized production techniques and cutting production costs through vertical and horizontal integration. The costs, also flowing from an emphasis on efficiency, included certain harmful effects of monopoly practices and conditions affecting workers.

Learning Objectives

● Evaluate the entrepreneurial careers of prominent industrial and financial leaders in the United States late in the nineteenth century.

● Analyze business consolidation and techniques of mass production, identifying effects on costs, competition and restraints on trade.

● Analyze business consolidation and techniques of mass production. The purpose of this lesson is to examine the role played by leading industrialists of the late nineteenth century, including Andrew Carnegie and John D. Rockefeller. Some historians refer to these individuals as Robber Barons. The term Robber Barons connotes a derogatory judgment, implying that the individuals in question gained their success through special privilege or unethical business practices. Others regard the same individuals as industrial entrepreneurs — people who took risks in order to produce goods and services for consumers. In your opinion before the lesson which description is accurate? Were these men Robber Barons or industrial entrepreneurs focused on pleasing their customers?

What do you think might be some of the characteristics of an entrepreneur?

TRAITS OF ENTREPRENEURS Economically speaking, an entrepreneur is a productive resource — a special sort of human resource. Entrepreneurs have several characteristics: • They organize resources and manage them in innovative ways to increase output or produce new goods and services — or both. • They look for new ways to produce goods and services. • They are willing to take risks. Seeking success, they risk failure. • They are willing to face stiff competition. • They are willing to take advantage of legal ways to limit the competition they face — by using patents and copyrights, for example. • They take steps to earn as much profit as possible.

Why are property rights important to Entrepreneurs?

ENTREPRENEURSHIP DURING THE LATE NINETEENTH CENTURY

Entrepreneurial Activity (Causes)

Definition Effects

Mass production Involves the production of large quantities of similar goods using large-scale operations, especially mass production in factories employing many workers. Examples include breakthroughs in producing steel, clothing, shoes, cans and so forth.

• More output can be achieved at a lower cost. Supply increases. • The number of people employed increases because the demand for labor rises.

Division of labor and specialization

Laborers (productive resources) can usually produce more goods and services per hour if their work tasks are divided among different workers. This is the division of labor. The division of labor allows laborers to work repetitively on the same tasks to specialize in the production process. As time passes and laborers become skilled at specific tasks, output rises and labor costs fall.

• Improves efficiency: output per labor hour rises. Supply increases.

Vertical integration Vertical integration occurs when firms manufacturing goods or providing resources along with the same production chain merge. Gustavus Swift in meatpacking and Andrew Carnegie in steel are among those who used vertical integration.

• Production costs fall. Supply increases. • Vertically integrated firms may restrict output and increase prices. Supply decreases.

Horizontal integration Horizontal integration occurs when business competitors in the same industry merge; it occurs when a company in one sector of an industry acquires or gains control over other companies in that sector. For example, a production company may expand by

• Production costs fall if economies of scale are realized. Supply increases. • Horizontally integrated firms may restrict output and increase prices.

purchasing other production firms. John D. Rockefeller is the best example of an industrialist who used horizontal mergers.

Supply decreases.

When output increases, prices will fall (if nothing else changes). And when production increases, the demand for labor will rise, along with income and consumption.

P = Price S = Supply Q = Quantity D - Demand

Why do producers increase their output when price increases?

Why is the demand curve downward sloping?

Identify the equilibrium point in the graph the point at which every buyer finds a seller and every seller finds a buyer at one price called the equilibrium price.

JOHN D. ROCKEFELLER: NO ONE LOVES A COMPETITOR John D. Rockefeller was an entrepreneur who sensed an opportunity waiting to be grasped. To grasp it, he set about bringing organization and efficiency to the emerging U.S. petroleum industry. He did this by figuring out how to cut costs. Cutting costs allowed him to reap personal benefits and pass some of the savings along to consumers. The rewards for his many innovations were great. He became a very wealthy man. Seeking Less Expensive Lighting The U.S. petroleum industry became increasingly important during the nineteenth century because it provided substitutes for whale and coal oil then used for lighting. Edwin Drake had discovered that petroleum could be pumped successfully from oil wells. Consumer interest in whale oil, already declining, continued to drop as the desirability of less expensive kerosene, produced from petroleum, increased. By the 1880s, kerosene had replaced whale and coal oil as consumers’ fuel of choice. But the petroleum industry in the 1860s was filled with uncertainty. Prices varied wildly as businesses experimented with ways of drilling, refining and transporting oil. Much confusion existed about which technologies would be best. Reducing Costs Rockefeller entered the uncertain environment of the oil business in Cleveland in 1862. He quickly recognized that many cost-savings could be achieved. Soon he bought out the partners of his firm and made changes in production that would reshape the industry. Perhaps Rockefeller’s greatest innovations were in the area of transportation. It was there that he managed to get ahead and stay ahead of his competition. Oil in those days was hauled in barrels. Loading and unloading barrels of oil took time and was therefore expensive. Rockefeller substituted railroad tank cars for barrels to carry oil. Because of his potential to be a high-volume customer, he was able to pressure (or negotiate with) the railroads in order to get favorable prices (rebates) for shipping his oil. These pricing agreements had the effect of reducing his costs and allowing him to sell at prices lower than those of his competitors. Rockefeller and his associates established Standard Oil Company in 1870. Within a decade, Standard Oil owned major refineries in Cleveland, New Jersey, Pittsburgh and Philadelphia. In 1882, Rockefeller organized the Standard Oil Trust. Standard Oil developed a

pipeline system, purchased new oil fields and created new ways to market its products. Rockefeller then controlled most refining and distribution of oil in the United States, and he also controlled much of the world’s oil trade. Because of the innovations Rockefeller employed, Standard Oil’s transportation costs dropped like a stone. Prices to consumers followed the same path. The price of petroleum dropped from 36 cents a gallon in 1863 to 8 cents a gallon in 1885. The Criticisms of Rockefeller Newspapers at the time portrayed Rockefeller as a cutthroat competitor, and many historians have stated the same criticism. Rockefeller was accused of using ruthless tactics to drive out his competition. Was he a ruthless competitor? Let’s examine the logic of the case. If the point is that he was in front of his competitors in finding ways to cut costs and lower prices — if that’s being a ruthless competitor — then the answer is a clear yes. Rockefeller and his associates did benefit from undercutting their competitors, but consumers benefited, too. By about 1890, most Americans could afford kerosene lighting. Some business people claimed at the time that Rockefeller competed unfairly. They accused Rockefeller of “dumping” oil or selling it below his costs in order to drive them out of business. Does this charge make sense? Standard Oil owed much of its success to reducing costs. Rockefeller could not have sold oil below his costs for very long. If he had, he would have been forced out of business. Rather, through the use of tank cars and pipelines, he developed ways to reduce his costs sharply. This allowed him to sell oil at prices below those of his competitors. Who benefited from lower costs and prices? Standard Oil and consumers of kerosene and other oil products. Who was hurt from lower costs and prices? Producers unable to compete and consumers who otherwise might have experienced still lower prices from greater competition in the oil industry. Another charge is that Rockefeller forced other firms to join him. Rockefeller is described as shamelessly selling at lower prices in order to force reluctant firms to join his emerging monopoly. Rockefeller’s competitors had little choice, according to this view. This charge overlooks the fact that most of the firms Rockefeller acquired approached him and asked to be acquired. We can speculate about the conditions leading up to these appeals. However, it is clear that Rockefeller’s competitors realized that they could not compete successfully with him. His costs were lower. They wanted to avoid going broke. They hoped that in combination with Rockefeller they could stay in business and eventually gain wealth. The owners of these firms concluded that it was to their advantage to join the competition while their businesses were still attractive. Breaking It Up The Standard Oil Trust that Rockefeller established was found to be illegal under the Sherman Antitrust Act of 1890. The Sherman Anti-Trust Act prohibited businesses from acting in combination to restrict competition. Standard Oil continued to operate as a holding company called Standard Oil of New Jersey until 1911, when the U.S. Supreme Court ordered the firm dissolved. Giving It Away While Rockefeller has often been attacked for his business tactics, he is often praised for his generous and far-sighted philanthropy. He gave away $550 million during his lifetime. The legacy of his giving might be familiar to you. He formed the Rockefeller Foundation and Rockefeller University. He helped found the University of Chicago in 1890. He was responsible for the renovation of Williamsburg, Virginia. He funded the restoration of Versailles in France. He acquired the land that eventually became Grand Teton National Park in Wyoming. These are just a few of the endeavors that he supported.

What innovations did Rockefeller introduce in the U.S. oil industry?

Why is Rockefeller regarded by some as a cutthroat competitor?

Do you think the criticism is justified?

Rockefeller was praised for his philanthropy. Was this his most important economic contribution?

During the nineteenth century, two types of business consolidation emerged. Horizontal mergers occurred when one firm consolidated with other firms producing similar products. For example: If one manufacturer of lawnmowers merged with another manufacturer of lawnmowers, that would be an instance of a horizontal merger. By contrast, vertical mergers occurred when one firm consolidated with other firms producing goods or providing services along the same production chain. For example: If a manufacturer of lawnmowers merged with a manufacturer of small engines used in lawnmowers, that would be an instance of a vertical merger. In the type of Merger area either put Horizontal or Vertical depending on what type of merger it was.

Entrepreneur Main Company Types of Firms Consolidated to Permit Production at a Larger Scale at a Lower Cost

Type of Merger

Andrew Carnegie (1835-1919)

Carnegie Steel Company

Other steel companies

John D. Rockefeller (1839-1937)

Standard Oil Company Assumed ownership of 39 other oil companies

Cornelius (1794–1877) and William Vanderbilt (1821-85)

Railroads: Staten Island Railroad and New York & Harlem Railroad

Cornelius purchased ferry and steamship companies.

Wrap Up Questions

● What are some of the characteristics of an entrepreneur?

● What is the primary effect of entrepreneurial activities on supply and market price?

● How did John D. Rockefeller’s business practices benefit consumers?

● Why do you think so many competitors were willing to combine with him rather than compete against him?

● Why did many people accuse Rockefeller of being a cutthroat competitor?

Keynes vs. Hayek: The Rise of the Chicago School of Economics

Students will be able to:

● Compare different schools of economic thought on the role of government in an economy. Warm-up Questions - Answer these how you think the government might respond?

What should happen if there is high unemployment and businesses are struggling to make payroll?

What can the government do?

What can struggling businesses do to help themselves?

What can laid-off workers do to help themselves?

Following World War II, one major economic question dealt with the appropriate role for government in the economy – a debate dominated by the ideas of John Maynard Keynes and Friedrich von Hayek. Both of these influential economists had distinct ideas about economic freedom, ideas that were very clearly in opposition to each other.

John Maynard Keynes, an English economist, developed theories that called for a large role for government in the economy. “The government would borrow money to spend on such things as public works; and that deficit spending, in turn, would create jobs and increase purchasing power. Striving to balance the government's budget during a slump would make things worse, not better. Keynes's analysis laid the basis for the field of macroeconomics, which treats the economy as a whole and focuses on the government’s use of fiscal policy –spending, deficits, and tax. These tools could be used to manage aggregate demand and thus ensure full employment. As a corollary, the government would cut back it’s spending during times of recovery and expansion.” – Daniel Yergin and Joseph Stanislaw (in The Commanding Heights: The Battle for the World Economy)

Austrian economist Friedrich von Hayek argued for limiting the role of government. He maintained that government was to restrict itself to doing what it does best – protect rights, evenhandedly enforce laws and contracts, and provide a few public goods. To Hayek, less government intervention meant more economic freedom across households and businesses. He believed that when people are free to choose, the economy runs more efficiently because they can best identify solutions to problems, quickly respond to changes, and learn by doing. “The problem was that under central planning, there was no economic calculation – no way to make a rational decision to put this resource here or buy that good there because there was no price system to weigh the alternatives.” – Daniel Yergin and Joseph Stanislaw (in The Commanding Heights: The Battle for the World Economy)

Present a Keynesian perspective on the topic and Hayek’s perspective on the problem. In other words, how would each group recommend fixing the problem

Education

One major social problem is clearly the deterioration of our educational system. Next to the military, education is the largest socialist industry in the United States. Total government spending on schooling—I call it schooling rather than education because not all schooling is education and vice versa—comes close to total government spending on defense, if, with the so-called peace dividend, it is not already greater. The amount spent per pupil in the past thirty years has tripled in real terms after allowing for inflation. Although input has tripled, output has been going down. Schools have been deteriorating. That problem is unquestionably produced by the government.

Keynesian perspective

Hayek’s perspective

Homelessness

What produced the current wave of homelessness around the country, which is a disgrace and a scandal? Much of it was produced by government action. Rent control has contributed, though it has been even more damaging in other ways, as has the governmental decision to empty mental facilities and turn people out on the streets and urban renewal and public housing programs, which together have destroyed far more housing units than they have built and let many public housing units become breeding grounds for crime and viciousness.

Keynesian perspective

Hayek’s perspective

The Chicago School 1 Excerpt from Commanding Heights by Daniel Yergin and Joseph Stanislaw, 1998 ed., pp. 145-149. Copyright © 1998 by Daniel A. Yergin and Joseph Stanislaw. Reprinted by permission of Simon & Schuster, Inc., N.Y. All rights reserved. Among those attending that first Mont Pelerin meeting [in 1947] was a young economist from the University of Chicago who was making his first trip to Europe—Milton Friedman. Mont Pelerin certainly helped Friedman become part of an international network—and at the same time contributed to the dissemination of Friedman's increasingly influential work. Indeed, the fundamental shift in the global attitude toward markets might never have happened, at least in the form it did, had it not been for several decades' worth of highly unfashionable academic "scribbling" by Friedman and his colleagues at the University of Chicago. The Chicago School, as it became known, provided a substantial part of the foundation for the intellectual reformulation, both in the United States and around the world. Like many great university

departments in the United States, Chicago's economics faculty came together in the 1930s and 1940s as an amalgam of distinguished American academics, rising young stars, and eminent Europeans, some of them refugees from fascism. It was a diverse group. The leader was Frank Knight, a free-market economist. But there was also Paul Douglas, a firebrand New Deal liberal, who eventually departed for a career in politics and ended up a U.S. senator. Another member was a Polish refugee, Oskar Lange, who, ironically enough, while at Chicago did much to develop a model for market socialism. Lange was expected to become a major figure in the department but instead left Chicago at the end of World War II to join the new Communist-dominated government in Poland and became its ambassador to the new United Nations. By the end of the 1950s, people were already talking about a distinctive Chicago School, which, in opposition to the new Keynesianism, emphasized laissez-faire—free markets—and argued against government intervention. What made Chicago special? The economics faculty was committed to famously rigorous and well-defined standards of teaching in the Ph.D. program. People flunked. The department focused on workshops, which brought faculty and students together on a regular basis to thrash out and argue over issues. Members of the department cohered around a particular worldview and set of ideas, which they explored and The Chicago School 2 advanced single-mindedly and which was basic to the training of new Ph.D.s. George Shultz, later secretary of the Treasury and secretary of state, noticed the difference as soon as he joined the Chicago faculty after 15 years at MIT. "It was more a university than anywhere else," he said. "People from all over the university interacted together as colleagues." "Chicago always had a strong tradition of a belief in the power of markets," said Gary Becker, who went to Chicago as a graduate student in 1951 and won the Nobel Prize in 1992. "Chicago's contribution was to show the power of markets and people's choices, not only in public policy but also in economic science. The department also had very strong leadership. There was a lot of self-confidence that we had the right answers and the rest of the profession was wrong. We saw economic analysis as a powerful way to understand behavior, providing a lot of insight not only into the economy itself, but also how society organized. I think that at most places economics was taught as a game; it was not clear that teachers elsewhere thought economics was a powerful tool. Chicago did." The Chicago economists believed, in practice, in a very small number of theorems about the way decision makers allocated resources and the ways these allocations led to prices. They trusted in markets and the effectiveness of competition. Left to their own devices, markets produced the best outcomes. Prices were the best allocators of resources. Any intervention to change what markets, left alone, would achieve was likely to be counterproductive. For the Chicago economists, the conclusions for government policy were clear: Wherever possible, private activity should take over from public activity. The less government did, the better. Intervention in the money supply distorted the markets; better instead to have a steady, predictable growth in the money supply. This was the very opposite of the Keynesian idea that government could smooth out economic fluctuations. This aspect of the Chicago approach, and its later variants, became known as monetarism. Through most of the 1950s, the Chicago School remained obscure and unfashionable, at least as far as the public was concerned. It seemed to contradict the conventional wisdom in almost every respect. But by the end of the decade, all that was changing, partly driven by Milton Friedman, who was not only a powerfully capable economist but also charismatic, optimistic, and unfazed, whether by the spotlight or by the enormous amount of criticism that would be heaped upon him. The Chicago School 3 While in high school Friedman had fallen in love with mathematics, inspired by a teacher who was so passionate about geometry that he concluded the proof of the Pythagorean theorem by quoting John Keats's "Ode on a Grecian Urn"—"Beauty is truth, truth beauty." Attending Rutgers on a state scholarship, Friedman was eager to find a profession in which he could use mathematics, and he aspired to become an insurance actuary. That ambition was terminated when he failed some of his actuarial courses. But by then he was already interested in economics, again inspired by outstanding teachers, including Arthur Burns, who went on to become chairman of the Federal Reserve Board. Economics was an almost-inevitable career choice for Friedman: "I graduated from college in 1932, when the United States was at the bottom of the deepest depression in its history before or since," he later wrote. "Becoming an economist seemed more relevant to the burning issues of the day than becoming an applied mathematician or an actuary." He enrolled as a graduate student in economics at the University of Chicago and did his doctoral work there, interspersed with research at Columbia. It was upon becoming a professor at Chicago in 1946 that Friedman truly began to go his own way. He emerged from among the Chicago faculty as an iconoclastic and controversial thinker and

leader of what was, by the late 1950s, an all-out assault on virtually every aspect of Keynesian economics. He was a formidable debater. Colleagues joked that people preferred to debate him when he wasn't there. As a teacher, he was demanding and relentless. "Everything you could say, he could say better," recalled one student. His students also developed enormous loyalty to him. There was a great sense of camaraderie. They were part of a small band, fighting for the truth. According to the Chicago approach, intervention almost always did more harm than good. In a famous early article, "Roofs or Ceilings? The Current Housing Problem," Friedman and his coauthor, George Stigler, rigorously demonstrated that however good its intentions, rent control had the perverse effect of reducing available housing by removing the incentives for landlords and builders to bring new housing to the market. Overall, Friedman would argue, taxation and government spending were appropriate only for the most limited set of "public goods," such as national defense. Everything else was best left alone. The members of the Chicago School rejected the concept of market failure and the tenets of Keynesianism. They were also much more concerned about the extension of government The Chicago School 4 power than about the dangers of monopoly, the latter having been one of the main motivators of regulation in the United States. They regarded the problem of private monopoly as much overstated, partly because of technological change. "Private unregulated monopoly," wrote Friedman, was the lesser of the evils "when compared to government regulation and ownership." While Friedman attacked the sacred cows of macroeconomics, his colleagues challenged other aspects of the dominant thought. George Stigler conducted a quiet but no less devastating critique of government intervention through regulation. Gary Becker applied economic analysis to an array of social issues, beginning with discrimination. "I believe that people make rational decisions and that they try to look ahead to the consequences of their decisions," explained Becker. "They are affected by incentives. You can take markets, rationality, and incentives and illuminate issues involving race, education, and the family." Becker's most famous work was a path-breaking analysis of "human capital" Although now more than fashionable as a subject, it was hardly studied at all before Becker took it up. "Human capital," he said, "deals with expenditures on people—for education, training, health—that in a broad sense raise productivity." He agonized, however, about using "Human Capital" as the title. "I was concerned that it would set too many people off. It was unacceptable to many people to link 'human' and 'capital.' Now people are happy to use it." Chicago's 1995 Nobel Prize winner, Robert Lucas, led a new line of research, starting in the 1970s, around the issue of "rational expectations." That work argues that government decisions are not likely to have the anticipated results, owing to the responses of decision makers in the economy. Market knowledge outwits government knowledge. The Chicago School was derided for being dogmatic, rigid, and reductionist. Friedman was happy to counterattack. He enjoyed the pulpit. He believed his ideas could transform the world—and, arguably, they did. He saw a direct, explicit, and unabashed connection between capitalism and democracy. Free markets produced the best results, and economic freedom rested, in turn, on political liberty. He propounded his ideas not only in a constant flow of journal articles but also in more popular form. His 1962 classic, Capitalism and Freedom, was aimed at economists and the general public alike. In 1964, he was economics advisor to the conservative Republican presidential candidate Barry Goldwater. He had become so much a The Chicago School 5 celebrity upon receiving the 1976 Nobel Prize that he found himself, he said, interviewed "on everything from a cure for the common cold to the market value of a letter signed by John F. Kennedy." He conveyed his ideas in a mass-market best-seller, Free to Choose, which became a public television series. In the 1980s, [Friedman] could recall with some satisfaction that in the 1950s the ideas he and his colleagues were propounding were those of "a small, beleaguered minority regarded as eccentrics by our fellow intellectuals." By the 1980s, those very same ideas were "at least respectable in the intellectual community and very likely almost conventional among the broader public." Still a decade later, in the middle 1990s, MIT economist Paul Krugman would write that Friedman's "long campaign against the ideas of Keynesian economics" had made him into "the world's best-known economist." So much for Keynes. The Chicago School was hardly alone, and by the early 1980s, "Chicago" itself had become more dispersed. Friedman retired from teaching and, along with others, shifted his base to the Hoover Institution at Stanford, which afforded direct connection to Ronald Reagan and his advisors. But by then it became clear that the Chicago School had carried out a devastatingly successful "neoclassical counterattack" in economics and in its applications. Macroeconomics management did not work, while tinkering with the money supply only increased uncertainty and discouraged investment. And the Chicago

School also showed that regulation would inevitably drift away from the ideal of promoting an impersonal public good. Instead, it would be captured by special interests. On top of everything else, government had failed to prove itself as a forecaster. Faith in "big government" fell under the attack. The work of Chicago—and, more indirectly, Hayek's contribution—proved crucial to a general shift in the center of gravity of economic thinking and to a reevaluation of the appropriate balance of government and marketplace. Fiscal management was no longer seen as an effective tool; fine-tuning was beyond the knowledge and skill of the tuners. Higher inflation did not assure lower unemployment, but it did mean more uncertainty. Smaller government was better; it was all too easy for big government to crowd out private activity. In contradiction to the received wisdom of Keynesianism, reducing deficits, rather than increasing them, could stimulate economic activity. Keynes, it turned out, was not a man for all seasons. The Chicago School 6 Professors at Chicago felt for many years that other major universities—such as Harvard, Yale, MIT, and Berkeley—did not take Chicago seriously and would not hire its students. Schools like UCLA and the University of Rochester were much more sympathetic. The University of Virginia became a center for free-market thinking, around the figure of James Buchanan. Buchanan and the "public choice" theory applied economic assumptions of self-interested behavior to the actions of politicians, bureaucrats, and voters. A groundswell of Nobel Prizes, beginning with Hayek and Friedman in the mid-1970s, chronicled Chicago's ascendancy. Altogether, since 1974, eight professors from Chicago and another 11 associated at some time with Chicago have won Nobel Prizes in economics. "The shift toward Chicago was clear to me after 1975," said Gary Becker. "It was a result of what was going on in the economics profession and what was going on in the world. They came together." As Friedman himself saw it, the acceptance of Chicago's ideas resulted first from the stagflation and economic impasse of the 1970s—and then from the fall of the Berlin Wall. "People are not influential in arguing for different courses in the economy," he said. "The role of people is to keep ideas alive until a-crisis occurs. It wasn't my talking that caused people to embrace these ideas, just as the rooster doesn't make the sun rise. Collectivism was an impossible way to run an economy. What has brought about the change is reality, fact—and what Marx called the inevitable forces of history."

Directions: Evaluate each statement and answer as best you can. 1. According to Gary Becker, what was the Chicago School of Economics’ contribution to economic science?

2. How was the Chicago School in direct conflict with the Keynesian school of economic thought?

3. According to the Chicago School economists, what should the government’s role in the economy be?

Read the following statements and decide if they are Keynesian School of Economics or Chicago School of Economics and put it in the box by the theory.

View on Economic Theory School of Economics

Recessions are the product of deficient aggregate demand. The source does not matter. The government should step in and boost demand through activist policy.

Recessions are a necessary evil, reflecting the mistakes of individuals made in the past. The government should not intervene. Let prices and wages influence decisions and restore full employment levels of production.

Increases in government spending can successfully boost spending and investment without causing problems.

For reasons unknown, the gains from trade between individuals are sluggish. The government should step in to help through expansionary fiscal policy.

Let people adjust to recessionary conditions. Changes in prices, wages, and interest rates will bring about conditions under which full employment will be restored and new growth will emerge.

The money supply should grow around two percent to support a healthy economy. It should not expand and contract with recessions and inflationary periods, respectively.

Government policy causes people to make decisions that lead to problems that cause recessions.

An increase in taxes or a decrease in government spending will effectively relieve inflationary pressures throughout the economy.

Identify cartoons, jokes, and quotations about economics in order to deepen concepts and

make real-world connections.

Understanding Persuasive Techniques

1. Recognize exaggeration.

2. Understand symbolism.

3. Understand labeling.

Looking at the Picture

1. Identify the visual elements.

2. Identify the main focus of the cartoon.

3. Take note of distortion or exaggeration.

4. Look for allusions to contemporary events or trends.

Looking at the Text

1. Brainstorm how the words enhance the pictures.

Identifying the Issue

1. Identify the issue that the cartoon is referencing.

2. Determine the audience.

Analyzing the Message

1. Think about how readers might respond to the cartoon.

2. Determine the overall message.

3. Evaluate the effectiveness of the cartoon.

Payday loan statistics: easy cash or bad bargain?

When bills, car payments, and other nagging expenses pile up and the checking account is running low, it’s tempting to look for an easy way out, some quick green to lighten the financial burden a bit. A payday loan is a common form of fast money that the cash-strapped often turn to. With no credit check required and money in-hand quickly, payday loans seem like an easy solution to dealing with mounting expenses. Sure enough, 12 million Americans a year use payday loans to fill the gaps in cash flow, but are they worth the high interest? We’ve compiled some useful information and statistics to better educate you on the ins-and-outs of payday loans — and why they should be avoided if possible.

What is a payday loan? ● Unlike loans used to cover large expenses like a mortgage loan or a student loans, a payday

loan is a small loan based on the borrower’s pay–a loan amount usually around $500 and rarely over $1000–intended to tide the borrower over during financial emergencies until they can pay the loan back along with interest within 1-2 weeks using their next paycheck. The fee attached to an average payday loan is $55 dollars to be paid back within two weeks, and the typical loan requires a lump-sum repayment of $430, i.e, paying in installments is not permitted with this type of loan.

● Despite the fact that payday loans are advertised as being helpful for unexpected

circumstances or emergencies, research shows that 70% of borrowers use them for regular, recurring expenses like rent, utilities, and car payments.

● Taking out a payday loan typically requires employment and income verification, as well as

valid identification, although a credit check is not necessary. Attempting to search for the best deal on a payday loan is mostly futile, as the market is not price competitive, with lenders generally charging the maximum amount possible under state law.

● Laws vary from state-to-state on the maximum fee allowed for a payday loan, although $15

dollars for every $100 borrowed is a common fee. This calculates into a whopping 400% annual percentage rate (APR), which dwarfs the APR on most types of loans and credit. For example, credit cards typically have an APR of 12%-30%. While some say that APR is not a good way of assessing a short-term loan like a payday loan, not everyone is able to pay back the loan within the customary two-week period, as we’ll see later. That interest can add up fast.

Who takes out payday loans… and why

● According to a Pew Charitable Trusts survey, 5.5% of adults in the United States have taken out a payday loan in the past 5 years, with the average borrower earning around $30,000 per year.

● While people from all demographics use payday loans, most borrowing is done by younger

folks without a college degree. The survey revealed that a majority of borrowers are women and white, however other factors can be a better indicator of a person’s likelihood of using payday loans.

● For example, those that are separated or divorced (rather than single, or married) have 103%

of using a payday loan in the past, while African Americans have a 105% higher likelihood of using them. Furthermore, those that rent their homes are more likely to use payday loans compared to those that own their homes.

● In essence, payday loan users are often people in desperate situations with little recourse. In

fact, 58% experience difficulty meeting their basic monthly expenses. As stated before, payday loans are commonly advertised as the last resort in the case of emergency, but borrowers more often use them to pay rent, utilities, car payments, or to put food on the table. What’s worse is that once people begin to use payday loans, they become trapped in a cycle of borrowing that it becomes difficult to emerge from.

The risks of payday loans Payday loans are meant to be a one-time solution in an emergency situation, and if no other options are on the table, it might serve its purpose and provide the borrower relief at a manageable cost. However, in reality, it doesn’t work out that way.

● Alarmingly, 80% of payday loans are either rolled over into another pay period or followed by another payday loan within two weeks. The average lump-sum payment swallows up 36% of the already cash-strapped average borrower’s total paycheck. Due to the high costs of the loans relative to a borrower’s income, the borrower gets locked up in a desperate cycle of debt, taking out more payday loans just to pay back earlier loans.

● A report by the Consumer Financial Protection Bureau (CFPB) uncovered that 15% of new

payday loans begin a loan sequence 10 loans long, or longer, and that half of all outstanding payday loans are part of a sequence at least 10 loans long.

● The data on monthly payday loan borrowers are revealing: they are much more likely to stay in

debt for 11 months or longer compared to the rest of the populace. They are also more likely to be recipients of government benefits.

● In light of the economic status of the most common payday loan borrowers, it may be that they

have few other options available, but getting caught in a loan sequence actually does much more harm in the long run, with interest consuming a large percentage of the borrower’s

income. Consider this: those taking out 11 or more loans are responsible for 75% of payday loans. The payday lending industry is one of the more predatory financial services by nature.

Where are people getting payday loans? In the United States, payday loans are available in 36 states. While such loans aren’t necessarily banned outright in the states they aren’t available, many states either rate cap APR (remember: the APR of payday loans is around 400%) or have other laws rendering the payday lending industry unprofitable. For example, 16 states currently don’t allow payday loans with rates over 36%. Nevertheless, these are the states that prohibit payday loans:

● Arkansas ● Arizona ● Connecticut ● Georgia ● Maryland ● Massachusetts ● New Jersey ● Pennsylvania ● North Carolina ● Vermont ● West Virginia

An interesting case is how Colorado has recently dealt with payday loans by replacing the standard two-week payday loan with new rules and a six-month installment model with far lower interest rates. In response to the new regulations, half of the payday loan stores closed, although the ones that remained open are now twice as busy. Furthermore, Colorado capped their payday loan rates at 36%. Nowadays in Colorado, payday loan borrowers pay just 4% of their next paycheck in interest, rather than a percentage in the high-thirties as is typical of the standard payday loan arrangement in other states. Furthermore, 75% of borrowers pay back their loans early, saving more than $40 million dollars annually. The revamped payday loan market model in Colorado is a promising development and should point the way for how other states regulate the payday loan market in the future.

Payday loan alternatives While a bad credit score may be a limiting factor for those seeking an alternative to using

high-interest payday loans to cover expenses, it never hurts to see what one qualifies for.

A personal line of credit, which is a loan that works like a credit card in that the borrower is approved for a certain amount, yet only pays interest on the amount actually used, is a favorable alternative to payday loans. Plenty of banks, credit unions, and other financial institutions offer personal lines of credit, and the interest rates are much lower than payday loans, so it’s definitely something to check out if unexpected expenses come your way.

Credit card cash advances are another option. Though they carry high-interest rates, borrowers aren’t required to pay back the borrowed sum in a short two-week time frame as with payday loans, so they are a preferable alternative if one can utilize them.

Summary

● While payday loans might seem like a quick fix when one is in need of some emergency cash, we’ve seen the heavy back-end burden can be overwhelming for most payday borrowers.

● The numbers don’t lie: users of payday lending often get caught in loan borrowing sequences spanning ten loans or more.

● Unless one has no other recourse, potential borrowers are strongly advised to seek alternatives to taking out payday loans.

● Few types of loans have more unfavorable terms than these types of loans, which is why they are so easy to take out.

● Payday lenders take in 9 billion in loan fees each year, i.e., borrowers’ hard-earned money. Questions

What are Pay Day Loans?

Who takes out Pay Day Loans?

Why do people take out Pay Day Loans?

What is the danger of Pay Day Loans?

What are the other choices instead of Pay Day loans?