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How Capitalism Survived The Twentieth Century
One hundred years ago many thoughtful people predicted the decline and disappearance of capitalism. What happened to make their prophecy wrong?
November 1987 | Volume 38, Issue 7
But in the years right after World War II, the choice did not present itself that way. Like Bellamy, most Europeans and even some Americans thought socialism would be more rather than less efficient in the production of what people wanted. Oskar Lange, while a professor of economics at the University of Chicago (later he returned to his native Poland to be foreign minister for the Communist government), demonstrated to his own and some others’ satisfaction that a “socialist market” would yield more productive allocation of resources than the usual capitalist market. Yale’s Henry Wallich, one of the most perceptive American economists and a Republican to boot (later a governor of the Federal Reserve Board), wrote a book, The Cost of Freedom: A New Look at Capitalism , which assumed that the allocation of resources in a competitive marketplace might be marginally less efficient than in a state run by philosopher kings, but that the political benefits more than made up for such losses. Britain nationalized its coal and steel producers, electricity generators and gas suppliers, telecommunications, the Bank of England, and the railroad network; France, sometimes for reasons of punishing collaborators rather than for political theory, took over the nation’s largest automobile manufacturer and oil company and the three largest commercial banks (it had always owned the railroads and the telephone utility); Italy perpetuated and strengthened Mussolini’s multifarious government holding company that wound up proprietor of perhaps 20 percent of the nation’s manufacturing enterprise.
In addition, France developed a supercadre of theoreticians in the Commissariat Générale du Plan, which nudged the economy in ways the government liked the look of, and the Japanese advertised the “administrative guidance” given that country’s manufacturers by the Ministry of International Trade and Industry, working mostly through privately owned but tightly controlled banks in a country where investment was overwhelmingly financed by bank loans rather than through capital markets. The Russian physicist Andrei Sakharov, who got arrested for it, argued that there would be a “convergence” between these mixed economies of the West and a liberalizing Soviet Union, with both sides enjoying the best of each.
Even in the United States the idea of “planning” dominated the 1960s. Projections were made to determine the petroleum and electric power, road networks, airports, steel capacity, even agricultural output the nation would need at the end of the century, and no big business worthy of respect by financial analysts was without its five-year plan, annually updated and extended. Once planning is accepted as the preeminent activity, of course, government (which by definition has access to better overall information than any private actor) becomes not only a major player but, in a sense, a role model. Staff rather than line jobs become the road the holders of business degrees will travel to the tippy-top in the big companies. “Type A” executives, who react to instant stimuli, are downgraded in favor of “Type B” leaders, who even when surrounded by alligators will retain their understanding that the corporate objective is to drain the swamp.
The defects of capitalism turn out to be in large part the defects of humanity.
Then, in 1973, the alligators in the form of the Organization of Petroleum Exporting Countries (OPEC) ate the planners. The price of oil soared, and giant corporations that had rested their elaborate analyses on economizing capital or labor or land found that profitability went to those who could adjust quickly to the need to economize energy. The United States fell into an inflationary whirlpool that by the end of the 1970s threatened to swallow its political as well as its economic institutions. Popular media acquired a new interest in the example of the Weimar Republic, where hyperinflation prepared the way for the Third Reich. The learned began to cite Lenin’s noted aphorism (which, in fact, Lenin never said) that the way to destroy capitalism is to debase the currency. As the Western economies slowed their growth and unemployment increased, it became apparent that new jobs and new wealth were generated far more by entrepreneurs, by small capitalists with the flexibility to adjust to changing prices, than by the great planned giants, governmental or corporate.