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'In the end the facts kick'
Three centuries of economic change
by Michael Newland
During the last three centuries, there have occurred the greatest and
most sustained economic changes in the history of the world.
Much of the world has been transformed in a span of time, which, it
is well to remember, is the flick of an eyelid in historical terms. The
oldest people, whose lives overlapped my generation, could speak of those
they had known, further back, who were born at the end of the 18th century.
Dicken's London was the world they grew up in. The changes, often and in
many ways, have not however always been for the better.
Books and articles which offer an accessible summary of what has happened
in the round are not as abundant as might be expected - perhaps because
of a complex interaction between politics and economics - subjects often
wrongly treated as separate. Those who do not know what went before them
remain children said Cicero. Yet the main facts, and ebb and flow of argument
about events over the last 250 years, may be summarised in comparatively
short order - but at the cost of some inevitable over-simplification. Nationalists
need to have the main points at their fingertips, and that is the purpose
of this whirlwind tour.
Before about 1700, the amount of goods and services which a man could
produce in a year had increased so slowly in two thousand years that one
generation would generally see little difference from the last - their
lives albeit punctuated by irregular catastrophic upsets from climate change,
famine, and disease. Between 1348 and 1350, for example, one third of the
population of Europe perished from the Black Death.
Then, in so far as a precise date can be given, but to fix ideas, a
miracle started to happen around 1750 - firstly in Britain during what
is known as the Industrial Revolution. Historians recognise early signals
of what was to come a century or more before. Industrial output began to
grow by about 1.5 per cent a year. Consider what that means. By the time
a child had grown to adulthood, industrial wealth would have increased
by more than one-half when compared with the time of his birth.
Men wondered at the alchemy of it all, and questioned whether the peculiar
events, unknown in the whole of history, would disappear as fast as they
had appeared. The banker Rothschild said that there were three sure ways
to lose money - women, gambling, and engineers. We take the cost-effectiveness
of machines for granted today. It was by no means so obvious in their infancy,
when even constant attention could not prevent constant breakdown - and
sometimes explosion! Even thirty or forty years ago, cars were surprisingly
unreliable, despite most of the basic technology they contained being a
Of course, there had been major but isolated technical innovations long
before the eighteenth century, the wheel being almost a cartoon example.
What was so different this time was sustained development and innovation
without apparent end.
Two distinct phenomena brought about the miracle - technological invention
and the increasing specialisation of the workforce which went with it.
The heart of the matter was the invention of a new form of power source
to drive machinery, which allowed large-scale production for the first
time - the steam engine. Water, wind, animal, and human muscle power were
insufficient. The harnessing of steam at first appears to explain the Industrial
Revolution, but merely begs other questions - why no one had managed to
invent it centuries before, and why history should have chosen Britain
to be the stage upon which the world would be first transformed. The answer
seems uncertain, but has something to do with the giant world markets which
The vast scale of the new production methods, by historical standards,
allowed the tasks involved in making things to be broken down into stages
in which one man would concentrate on a tiny part of the whole operation,
its acme in the modern car factory pioneered by Henry Ford. This proved
to be vastly more efficient, but also, as we shall see, left him critically
dependent on the workings of the economy as a whole for his livelihood.
The historian Eric Hobsbawm remarked that a Ford would have been viewed
as a madman had he lived two centuries or more before, so different were
In bad times of economic recession, the new specialist could no longer
retreat into making his own work as his forefathers had been able to. In
short, the new workman was dependent, as mostly today, on having a job
supplied by an employer, in which he would perform nothing but his own
narrow skill. It was a staggering change from a world in which a man's
working life might be split into, perhaps, growing food on a small holding,
doing some woodwork, and helping out in a pub. Eighteenth century domestic
servants would often find their time as much employed in the master's trade
as in domestic duties.
By the 19th century, world industrial growth doubled to 3 per cent a
year. In a mere decade, industrial wealth would grow more than a third!
Output multiplied by five in Britain over the century. Of course, not everyone
benefited equally. Vast fortunes were made by the successful. One of the
perennial questions in economics is how to rate the moral merits of changes
which increase wealth as a whole, but leave some worse off - the trade-off
between efficiency and equity. One approach is view life as a lottery -
inequality of outcome is no more unfair than winners and losers at a game
of cards. A century ago this 'fortunes of war' approach held far greater
sway than today.
In the new industrial cities like Manchester, during the first half
of the 19th century, the conditions of life were appalling. Workers were
often little better placed than slaves - subject to instant dismissal from
their employment when work was short, but without even the guarantee of
subsistence which a slave enjoyed by virtue of the cash investment which
had been made in his purchase. My own great-great-grandfather, a brass
founder, died suddenly at 50, in 1857, of one of the fevers which swept
through the cities - in his case at his home in Brick Lane in East London
- now rechristened 'Banglatown' after the Bangladeshi immigrants who have
taken over the area.
During the 1830s., in Britain, the old parish relief system was abolished
which had guaranteed those unable to support themselves an income, and
subsidised low wages - something often known as the 'Speenhamland' system,
after the Berkshire village whose magistrates had responded to local poverty
by introducing new parish-funded benefits in 1795. The destitute would
now be forced to go into the workhouses - the fear and legend of it continued
to haunt older people for nearly the next hundred and fifty years.
What was happening during the 1830s was something about which we hear
a great deal today - the creation of a 'flexible' and mobile national labour
force - the Tebbitesque 'get on your bike' of the 19th. century. Perhaps
only social deference contained the overthrow of the political order between
1830 and 1850.
To what extent do welfare benefits really assist those targeted in the
long run, if incentives to contribute to the society are eroded, or employers
lower wages pound for pound by the amount of state subsidy given to poorer
workers? Will diminution of state support lead to more and better paid
employment, or simply further pauperisation? During the 1830s, the optimists
about reduced support for the poor won the argument - with a good deal
of assistance from taxpayers who simply wished to see their burden diminished.
The same debate is going on today.
Many people, like the Reverend Malthus, thought that a population which
was exploding in numbers would outrun the ability to produce, and that
the level of incomes for most people would tend to remain at the bare subsistence
levels which had been their lot since time immemorial. This was a very
great error, but an understandable one for the time. Technology has proved
itself so far well able to win the game, in its abilities to boost output,
and environmental limits are today the main source of concern - global
warming, for example.
Two hundred years ago, not unnaturally, people related the possibilities
of producing goods to the world of agriculture which was the focus of their
lives. Only so much could be extracted from a piece of land no matter how
much tilling and gathering were intensified, and the extra reward would
be smaller and smaller the more effort one put in. The new world of industrial
production was quite different. The larger the amount produced the bigger
the reward for extra effort - what we now call increasing returns to scale!
The economist Allyn Young, in a most succinct explanation of what industrial
production is all about, said that it is only worth making a hammer if
you have a lot of nails to drive in. A hammer is far faster than a rock
at nail hammering, and output will soar if the scale of production is large
enough to warrant investing time in making one. Once the economy is big
enough, huge factories will make it worthwhile to use superior methods
which in themselves boost wealth.
After the Napoleonic Wars ended in 1815, something as unanticipated
as the Industrial Revolution began to make its appearance, whose causes
are still the subject of controversy. Massive cycles in the welfare of
the economy began to appear. In 1825, the Bank of England was only saved
from a terminal run on its reserves by the chance find of a chest full
of money in its vaults. During the 19th century, the economy would yo-yo
from boom to bust and back about every ten years. People wondered whether
the new type of economy had a fundamental flaw which would lead to total
Marx and his communist contemporaries thought so - expecting the final
denouement within their lifetimes. Marx himself developed an economic theory
which purported to explain how this would occur, and that history was predetermined
to produce such an outcome. Few thinking people, transported to Marx's
lifetime, which ended in 1883, would not have had such an idea at the least
occur to them. Our ancestors were not fools, but they were able only to
reason on the basis of the knowledge available to them.
Marx was wrong about the collapse of capitalism, and his later followers
- what we popularly know as 'Marxists' - were wrong about the virtues of
the communist society which was supposed to follow the great event, but
he was right about much else. Free enterprise industrial society is prone
to massive cycles of unemployment and terrible misery - the 'slow breathing'
Marx also rightly observed that the economic system would try to dictate
social relationships to suit its own interests, describing economics which
did not take account of the social dimension as 'vulgar'. He described
the process as 'commodity fetishism' to emphasise how people's personal
relationships were manipulated by the pressures of their economic circumstance.
'Anti-racism' campaigns are a modern example. Business wants immigrant
labour, and people are to be re-invented accordingly to reject their future
existence. Ironically, the communist system in practice was even more dictatorial
in the social relations it prescribed than capitalism had been in Marx's
Not only were there regular economic cycles of a few years duration
during the 19th century, but far more prolonged swings became evident.
Europe erupted in short-lived revolutionary movements in 1848 - "The spectre
of communism haunts Europe" wrote Marx in the Communist Manifesto. They
collapsed in the period of prosperity between 1850 and 1870, only to be
followed by a depression in the 1870s., but further prosperity around the
turn of the century. During our own century, the Great Depression of the
1930s. dwarfed all previous cycles in its scale. The communists thought
for a while that this was the final event foreseen by Marx.
During the 1920s, a Russian, Nikolai Kondratiev, suggested that the
prolonged swings between boom to bust and back again which had occurred
since the 18th. century at about 60 year intervals were no accident. Perhaps
there were cycles of technological advance which spurred industry into
investment, gradually petering out before a new phase appeared. The suggestion
that capitalist crises might resolve themselves was something of a social
faux-pas in Stalin's Russia, and poor Kondratiev died in the Siberian concentration
The Depression was a watershed for economic thought. Apart from the
Marxists, who were a separate entity, mainstream economic thought believed
that the ups and downs of the economy were very temporary swings around
a condition of full employment and prosperity. Political regimes inevitably
draw on ideas which support their continuance. Theoretical models in which
a market capitalist system is self-righting began to be established by
economists during the 1870s, and were quickly seized on by the establishment.
During the early part of the Depression, suggestions that government
might act to alleviate the slump by spending were met with the objection
that this would be ineffective, merely blocking out private spending pound
for pound - the famous 'Treasury view'. The attractions of the 'self- righting'
theory had been made even greater by another aspect of the theory - that
the rewards given to workers and investors reflected their contributions
to output of goods. The distribution of wealth was a fair one. The complaints
of socialists about exploitation of workers were unjustified.
The Depression seemed to demand new explanations, and, in 1936, a bombshell
hit the world of mainstream economic theory. John Maynard Keynes's book
General Theory of Employment argued that the normal condition of economies
was not full employment and output at all. The problem was that when people
decided to save their money goods and services would not be sold, and workers
would be laid off.
That would not matter if the money were lent to businessmen who invested
it, thus making up the shortfall in demand by purchasing machines and other
goods to build up the productive capacity of their factories. The problem
was that, if the economy slumped, businessmen would lose confidence and
refuse to invest, thus prolonging the misery. When this happened, said
Keynes, it was the job of government to bypass the waves of optimism and
pessimism to which businessmen were addicted, and spend borrowed money
until confidence was restored, and business began to invest again.
The impact of Keynes's ideas provoked a revolution. Once the Second
World War was over, governments throughout the Western World accepted a
responsibility to manage demand, as Keynes had said they must. Never again
would there be a slump like that of the 1930s. Confidence that government
would take responsibility for preventing economic depression was something
of a weapon whose existence, in theory, obviated a need to use it - rather
like the claims often made for nuclear weapons. If business is everlastingly
confident in the future it will provide the investment which prevents recession
in the first place.
The miseries of the workforce, during the 19th century, and then during
the 1930s, had provoked a growing sense of revolt among workers. Both communist
and fascist movements had become increasingly powerful following the end
of the First World War in 1918. Russia had fallen to the communists, and
much of Europe to fascist movements, which also offered direct support
to workers to ease the condition of their lives.
Capitalism suffered a terrible shock during the 1930s. Its downfall
was threatened not just by economic collapse alone, but by political movements
which could either entirely destroy it, or at the least reduce it to a
poodle. Drastic measures were needed to restore its dominance, and what
became known as the welfare state was put up to persuade the workforce
that it might again place its confidence in what free enterprise could
do for it. It had not escaped notice that countries whose economic affairs
were heavily controlled and planned by government seemed to have suffered
less during the 1930s than those which still held to the old values of
non-interference in the economy. In the Soviet case, a willingness to believe
the skilful propaganda offered by Stalin's regime stifled probing into
Stalin's regime in Russia owned and ran the economy in accordance with
communist dogma. One of the great economic controversies of the 1930s became
known as the 'socialist calculation debate'. If, as communism claimed,
capitalist markets were prone to fatal hitches, then might it not be possible
for government to act as free markets would in an imaginary world in which
the bugs were removed? All that was necessary was for government to fix
all prices at those which the market would set in such a world. One of
the snags, as the Austrian economists pointed out, was that free markets
stimulate invention and innovation in a manner which government never can.
Hitler's government made sure that industrialists, while remaining owners
of their enterprises, did mostly what they were told, under the threat
of nationalisation. The industrialist Hugo Junkers found his company taken
over by the government when he refused to build aircraft for the Nazis.
Government schemes deployed labour into public works projects like a new
Clement Attlee's Labour government, which came to power in 1945 in Britain,
drew on both sources in its economic policy in a hybrid scheme for a 'planned
economy', as well as on Keynes's ideas, nationalising some industries like
coal and the railways, on the Soviet model, while continuing to foster
for a while the huge wartime bureaucracy which in part directed the remainder
on the Nazi model. 20 per cent of the economy was placed in public ownership.
As with the Nazi regime, the threat of nationalisation hovered over the
uncooperative. Much of Western government adopted the same approach, something
distinctly politically incorrect to contemplate!
There followed a sustained period of full employment and dazzling growth
from about 1950 to 1970 never seen before even during the best times during
the 19th century. The Cambridge economist Joan Robinson christened it 'The
Golden Age'. Unemployment in Britain averaged about 2 per cent, and during
the 1960s growth reached an all time peak. The low level of unemployment
provided an excuse to begin mass immigration into Britain from former colonial
countries. As attempts were made to nationalise the workforce by force
during the 1830s, so began the current unadmitted policy of internationalising
Management of the economy was seen as a precise technical affair which
became known as 'fine tuning'. People imagined a sort of power station
control room, in the basement of the Treasury, displaying dials showing
every tiny movement in key economic variables like unemployment. A nudge
on this lever or that would correct any imbalance.
People stopped talking about the problems of economic cycles, and turned
to debating how all the new wealth - much of it appropriated by government
in taxation - should be spent. The unemployed could always find work with
the 'employer of last resort' - the government. The vast increases in taxation
alone gave government great leverage over the economy, even after the most
severe governmental controls were relaxed during the 1950s.
Massive government schemes demolished large areas of the cities and
built the huge tower blocks of flats which were thought by architects to
be ideal housing - and which have proved so unsatisfactory as focuses for
a portion of society thought due for extinction - but now reborn with renewed
vigour as the 'underclass'. Only those who lived through the Golden Age
can appreciate the degree to which the future was taken for granted.
The welfare state had the effect not only of assisting the worst off
- the moral driving force, quite unlike that of earlier centuries, was
also that too wide differences in wealth between rich and poor were unacceptable.
The concept of redistributing income, through taxation, replaced a 'fortunes
of war' acceptance of extremes of good and poor luck in a lottery. This
was seen - contentiously - as also contributing to keeping up the level
of demand and employment, since wealth in the hands of those with plenty
was more likely to be left unspent. The famous Hell Fire Caves were dug
out at West Wycombe partly as a make-work scheme for the poor, by a wealthy
knight during the 18th century. The 1950s preferred not to rely on the
whims and largesse of the better off!
Then the unforeseen once again burst out of a Pandora's Box of history,
as it had during the 1930s. Economic collapse returned during the 1970s.
Confidence in society and the social order in general began to decline
to a degree not seen since the Depression, and that process is continuing
today, and intensifying.
The Marxists gloated at what they perceived to be the long-awaited final
crisis - the signs had been there since the late 1960s, with an upsurge
in industrial strife and student protests. What they were observing seems
more accurately to be identified as a fall into the trough of a Kondratiev
Keynesian management of the economy was claimed to have been a failure
- begging the question as to whether the long boom of 1950 to 1970 really
owed much to it. Some economists say that there was a happy coincidence
of special factors. The prolonged prosperity would have happened if Keynes
had never written a word, and that the vastly increased government control
of the economy had stifled enterprise.
During the period up to 1970, there were arguably very good reasons
for prosperity which at the least loosely fit the pattern of similar past
long-running events. Since the Industrial Revolution, there have been five
major innovations in the productive system - water, steam, electricity,
Fordism, and the ongoing micro-electronics revolution.
The extreme specialisation of the factory production line, which bears
Henry Ford's name, began in 1915 with his first assembly line factory.
Two world wars interrupted full exploitation of the method until after
the Second World War, when full Fordisation of workers allowed stupendous
gains in productivity for a while. Post-war rebuilding also stimulated
output. Wages could rise rapidly without profits being affected. Everyone
took a creamy slice of the cake and was reasonably satisfied. The vast
US economy also helped to sustain demand, lending to other countries when
it enjoyed a trade surplus, and accepting imports when it suffered a deficit.
By the end of the 1960s, the scope for gains in output from these sources
became thin on the ground, but workers had become accustomed to a large
annual pay rise. Profits were squeezed from both ends, and in a second
round, once again by the massive oil price hikes after 1974. The massive
increases in the oil price of the 1970s. both squeezed demand as the oil
rich countries accumulated wealth without spending it, and led to a struggle
over wages. Confidence collapsed, inflation and unemployment soared, and
the Keynesian concensus, which had become known as 'cooperative capitalism',
along with it.
What really happened was a problem which Keynes's ideas were never intended
to counter. The amount of wealth available shrunk in the West, both from
the exactions of the oil producing countries in the Middle East, and from
the reduction in growth. There was a 'supply' shock, as distinct from merely
the periodic 'demand' problem which Keynes had addressed.
Waiting in the wings, since the confident 1950s, had been a very different
school of economic explanation than Keynes and his followers offered, or
indeed the Marxists with whom they had disputed since the 1930s.
Enter Milton Friedman and the Chicago monetarist school.
Perhaps economies were self-righting after all. If substantial unemployment
existed, then, as 19th. century economists believed, this was simply because
workers made themselves unemployable by demanding more than they produced.
Lower wages, and a better and more 'flexible' and productive workforce
were the answer, encouraged by unemployment. Inflation was simply the result
of too great a growth in the money supply. Government intervention, which
Keynes had dictated to be the cure, would simply lead to accelerating inflation.
Control the money supply, cut taxes to improve incentives, privatise nationalised
industries, let the economy readjust in a very temporary phase of 'cold
turkey' as the damaging stimulants were removed, stand well back and watch
the results - something of a return to the 'Treasury view' of the 1920s.
The Thatcher government applied the remedy on its election in 1979 -
unemployment soared not beginning to fall again until the mid 1980s. The
money supply proved to be wayward in its wish to be controlled, and was
quietly dropped from the agenda. The Lawson boom of the late 1980s soon
collapsed into a second slump from which we are at present emerging.
Government has lived in terror of inflation for twenty years. Some would
say that this reflected a priority of financial interests. Full employment
has disappeared from the political agenda as supposedly impossible. The
more cynical would say that mass joblessness reflects a shift in the balance
of power between workers and capital, which is pleased to lay out the position
of the workforce in the traditional manner - unhappiness is met with the
retort that there are plenty more who would be happy to take the particular
job. Monetarism certainly offered a spurious legitimisation for the wasting
of much of the workforce. Lord Kaldor ironically described the overall
objective as 'strength through misery'.
The official viewpoint is that further freeing up of markets will ensure
entry to the promised land. Hopes are pinned on a single European currency,
about which the same claims are being put up as those made for the single
European market during the 1980s.
Monetarism, and the shift towards the interests of a capital which at
present does not feel under threat as during the 1930s, cannot, however,
be entirely blamed for mass unemployment since the 1970s.
As the potential for growth in successive major waves of innovation
peters out, part of the workforce is freed for new activities. Even without
the culpable starvation of resources from the traditional industrial base,
the amount of labour employed would have fallen - but to a smaller degree.
The appetite for more consumption of some goods is sated, and new demands
grow - home computers, videos, and fast food, for example. New industries
have grown up which need different skills, like micro-electronics, micro-electronics
based services, and existing industries are being revolutionised by their
products. Making such massive adjustments is always difficult, as was the
transition from the land to factories during the 1830s and after.
The transition from the Fordist style to the micro-electronics style
of production is ongoing, and stressful - Joseph Schumpeter called such
changes 'creative destruction'. Whole swathes of middle management may
be obviated by computers, which can gather and analyse information without
the army of paper shufflers who did the job at the height of the Fordist
system. Computer-controlled robotisation also obviates many of the shop
floor jobs. Problems with far from user-friendly software are the modern
counterpart to Rothschild's fears about the efficacy of engineers during
the early Industrial Revolution.
If society wishes to see a larger pie created, then changes to the methods
of production are unavoidable. That is precisely the explanation for the
modern worker's car and television - in so far as we are to rate such things
above all else. Paraphrasing Marx and the 'workers in chains', Joan Robinson
said that they had nothing to lose but their suburban lifestyles. There
are, however, other ways of making the transitions than the present brutality.
The chief global economist of the merchant bank Lehman Bros, John Llewellyn,
related on television recently how he had been stricken by doubts as a
young man about whether economics was much use in understanding what was
happening. Economists so often made wild errors in their predictions about
what would happen next. Famously, the American economist Irving Fisher
had reassured the US public that there was nothing to worry about on the
eve of the Great Depression! The young man asked the great Swedish economist
Gunnar Myrdal for advice. The short-term may be unpredictable, said Myrdal,
but "in the end the facts kick".
Grasp the workings of the underlying forces in society and events will
unfold as they determine. Generalising from economics to the society as
a whole, nationalists who doubt that the problems they identify will evidence
themselves in radical change in response in the long run may be reassured.
The facts of life will kick out eventually however much the media and the
regime try to pretend otherwise. That is what happened to communism.
What may we learn about the inner workings of the post-Industrial Revolution
economy from our vantage point with the benefit of nearly three hundred
years of hindsight? Capitalism continues to be unstable and cyclical -
a social as well as an economic system - as Marx rightly taught us more
than a century ago, veering between prosperity and depression, but not
to the point of being swept away in the manner which the communists supposed
was a historical inevitability.
Opinion has divided between three distinct schools of thought - waxing
and waning with the successive ups and downs of economic well-being. The
spectrum of opinion lies between the declining numbers of communist extreme-pessimists
who say that capitalism is doomed, and the monetarist optimists who believe
that economies are essentially stable if market forces are left to do their
proper work. In between lies the Keynesian school, which accepts instability
as an inevitable part of the capitalist process, but contends that it may
largely be obviated by government intervention - a 'best of both worlds'
outlook in between communism and unfettered capitalism. Hyman Minsky argued
that the business cycle was endemic to capitalism not necessarily because
of sudden shocks to the system like oil price hikes or wars but because
long periods of economic success bred overconfidence and dubious borrowings
by both business and individuals. Sooner or later some debts would fail
to be paid, bringing down sound organisations in their train and creating
a crisis from which it would take some while to recover.
Before the Industrial Revolution, government saw itself as there to
intervene in the economy in the broadest sense although without the paraphernalia
of state which would have allowed specifics of government action like the
'fine-tuning' of the post-WWII era. A long period of economic liberalism
followed, in which minimal intervention was the dominant viewpoint - the
high point of its supremacy as a near-religion being the 19th century.
Gladstone said that the business of government was saving candle ends -
a far cry from 'tax and spend' in the post-war era. The 1930s broke the
pattern, with a return to belief in intervention dominating from 1945 to
around 1980, and a further intellectual cyclical swing back to non-interference
from 1980 onwards.
Communism's dreams of replacing capitalism with a superior system have
proved themselves to be a disastrous historical detour. Communist economic
systems, often described as 'state capitalism', have economically pauperised
too many countries to remain a convincing contender for the prize of offering
the superior economic system. As the Soviet joke had it: "We pretend to
work, and they pretend to pay us."
The modern contest is between a belief in unfettered free markets, which
suffered an almost total eclipse after the Second World War, re-emerging
during the 1980s, and a renewed interest in economic management, which
is at present pushing up some green shoots. A part of the reason for the
latter is increasing economic globalisation, and the decreased power of
governments committed to it to deal with their own localised problems.
International trade, its effects, unemployment, and the interlocked issue
of a single European currency deserve further articles.
The merits and demerits of different types of economic system make themselves
known in the end. As Myrdal put it: "In the end the facts kick". One fact
has already kicked out beyond dispute - the wonder and miracle of how technology,
during the last three centuries, has transformed the output a man may produce
in his working life.
Empires and ideologies have come and gone. Prolonged economic growth
has been the greatest event in the history of mankind.
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