- Historic Sites
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
People nowadays interchange gifts and favors out of friendship,” says a character speaking from the vantage point of the year 2000 in Edward Bellamy’s 1888 novel, Looking Backward, “but buying and selling is considered absolutely inconsistent with the mutual benevolence and disinterestedness which should prevail between citizens and the sense of community interest which supports our social system.” Writing a century ago, Bellamy foresaw that by 2000 there would be no money and no wages. Employed or not, everybody would receive the same income in the form of an annual credit card (so called) loaded with more purchasing power than people actually would use in the average year. Work would begin at age twenty-one, on the conclusion of education, and end at a mustering-out day when the citizen reached the age of forty-five.
In the twenty-first century of the novel, a benevolent state determines the occupations of the more talented citizens according to their aptitudes; others simply apply for the jobs they think they would like and are put to work. When there are more applicants than needed for a certain job, the hours of work in that employment are lengthened; when there are not enough applicants, the hours are shortened, to balance supply and demand without differences in pay. People who are inefficient at their work are pitied rather than censured, so long as they try. When there is a glut of one product, people wander over to create another, and so forth. The whole society is very, very rich, thanks to the elimination of “misdirected industry.”
Bellamy’s socialist Utopia was immensely popular and was taken very seriously from his day through the early twentieth century. By 1935, when Columbia University asked the philosopher John Dewey, the historian Charles Beard, and Edward Weeks, the editor of the Atlantic Monthly, to list the most influential books published in the preceding fifty years, all chose Karl Marx’s Capital as the most influential and Bellamy’s Looking Backward as the second most influential. Three years after the publication of Bellamy’s book, Pope Leo XIII issued his encyclical Rerum novarum, which essentially revised the medieval Catholic notion of the just price and the just wage and asserted the responsibility of modern governments to prevent gouging and exploitation.
These ideals of economic justice to a degree inspired both Mussolini’s corporate state and Franklin Roosevelt’s National Recovery Administration, with its elaborate codes of minimum prices and minimum wages and maximum interest rates. In 1935 the Supreme Court declared the NRA unconstitutional, and it was never revived even after the Court had come to accept most of the rest of the New Deal. Still, this urge to put the marketplace under government control does survive. Rerum novarum and its reinforcement forty years later in Pius XI’s Quadragesima anno became the twin charters of the Association of Catholic Trade Unionists in the United States and Dorothy Day’s Catholic Worker. Their echoes were to be heard again recently in the condemnation of “unjust” capitalism by the National Conference of Catholic Bishops, in a much less original (and much more American) document than its supporters or its opponents seemed to believe.
As far back as Thomas Malthus, who hypothesized in 1798 that the arithmetical increase in agricultural production could not feed the geometrical increase in population, up to Stanley Jevons’s insistence in 1865 that modern society was about to collapse as the veins of Britain’s coal were exhausted, economics has been a dismal science producing unwanted answers to avoidable questions. “Getting and spending,” Wordsworth wrote, “we lay waste our powers.” But the height of feeling that market capitalism was indefensible came in the last quarter of the nineteenth century, a time of deflation that squeezed farmer, manufacturer, and laborer alike. The beneficiary of the squeeze, in real terms, was the lender, whose capital yielded declining nominal income (Marx’s unfortunate “iron law”) but constantly increased in value as measured by purchasing power. Unrestrained, the workings of the “free market” seemed certain to produce, as Marx said it would and Bellamy said it already had and the Pope said it must not, “immiserization” of the masses.
In 1894, in the middle of the desperate decade that future generations would idiotically describe as the “Gay Nineties,” William Dean Howells, America’s premier man of letters, returned to the attack on capitalism with his vision of a Utopia called Altruria. Once upon a time in Altruria, Howells wrote, there had been an “Accumulation [which] treated the proletariat like a deadly enemy...left their families to starve...sought every chance to reduce wages.” These evils had been remedied in a single blow, at the ballot box. “All transportation was taken into the hands of the political government...which showed itself immaculately pure, compared with the Accumulation. The common ownership of mines necessarily followed, with an allotment of lands to anyone who wished to live by tilling the land, but not a foot of the land was remitted to private hands for purposes of selfish pleasure or the exclusion of any other from the landscape.” Once the production of “fraudulent wares” had been eliminated, “one hour sufficed where twelve hours were needed before, and the operatives were released to the happy labor of the fields, where no one with us toils killingly, from dawn till dusk, but does only as much work as is needed to keep the body in health.” By cutting off and presumably somehow moving away “a peninsula which kept the equatorial current from making it to our shores,” the new socialist government even changed the climate of the southeast coast from one of “antarctic rigor” to one like that of “your Mediterranean countries.”
The year of Howells’s publication was also the year of the Commonweal of Christ—Coxey’s Army—which marched to Washington, seeking a redress of its grievances, which were poverty and unemployment, only to be arrested for trespassing on the Capitol grounds. And 1894 was also the year when William Jennings Bryan brought the fears and hopes of the suffering poor to conventional American political life. Having failed in his effort to be chosen as a U.S. senator by the Nebraska legislature (for those were the days before the popular election of senators), Bryan spent 1895 and much of 1896 traveling around the country—just as the candidates for the Presidency do today—lecturing for good fees at the chautauquas, pressing the flesh, and doubtless noting, at least in passing, the despair of the impoverished. In 1896 he yelled from the podium at the Democratic National Convention that he would not permit the nation’s money interests to crucify mankind upon a cross of gold, and presently he was running against William McKinley in the first of what would be three losing campaigns for the Presidency. Bryan was no socialist. He was not, in truth, much of anything—“silver tongue in a big mouth,” John Dos Passos wrote savagely—but he saw the financial and commodities markets as deflationary devices by which poor people were squeezed so that the rich could wax even fatter.
The capitalists of the turn of the century were, ironically, by no means enamored of economic organization that left prices to be set in a market. They did not want government control, but they still wanted control—by themselves. The twenty years after Bellamy’s book were the age of the great trusts, combining railroads and steel mills and petroleum producers to put a stop to “destructive competition.” Approving words about the idea of a free market were most likely to come from outside the economic context—for example, from liberal theoreticians like Supreme Court Justice Oliver Wendell Holmes, Jr., who thought “competition of the market” was the best procedure for determining even the fate of “fighting faiths.” For businessmen and most people, however, the world was divided into price setters and price takers. Free markets made people price takers (they were stuck with whatever someone thought the traffic could bear), and if possible, everyone wanted to be a price setter. That was safer and more comfortable as well as more profitable, especially in a time of falling prices. Farmers today will give chapter and verse. What the visionary intellectual and philosopher kings found best of all, of course, was the idea of a world where all this haggling would stop. “Socialists,” Bernard Shaw explained, “propose to secure goods for everyone at cost price by nationalizing the industries which produce them.”
Eugene Debs, leader of the first American railway union organized as an industrywide union rather than as a craft union, cut his eyeteeth on politics in the Bryan campaign and two years later announced himself a convert to socialism. He ran for President five times, receiving almost a million votes in 1920 (when his campaigning was greatly restricted because he was in jail).
But American labor chose to follow the lead of Samuel Gompers, who distrusted all economic philosophizing, accepted as his one political principle the law of rewarding friends and punishing enemies, and asked only that capitalism provide the members of his unions with “more.” In the 1920s they—indeed, virtually all Americans except farmers, who could not hang onto the gains from the glory days of the First World War—did get their “more.” In Europe, where the recovery from the war was painful and incomplete, “social democracy” became the legitimate alternative to the ruling parties and sometimes the government itself; but in the United States the Utopian visions of Bellamy and Howells became a rather esoteric part of the American literature program (itself a rather esoteric subsection of English literature until the late 1950s) rather than an element in social thought. As for Marx, Lenin, and their followers, for most Americans they were simply aliens with beards, bushy or pointy as the case may be.
The Great Depression, the worst of deflations, bewildered everyone, leaving only certainty that the future would be vastly different from the past: “Comes the revolution,” the gag line ran in a foreign accent, “you’ll eat strawberries and cream and you’ll like it.” Then came the Second World War, with its necessary sentimentality about GI Joe and his Russian counterpart and the better world they would build together when they returned home in peace. That world, of course, would be free of the dog-eat-dog exploitation of man by man. “The present generation,” wrote the University of Chicago sociologist Edward Shils in 1950, “has seen the growth of socialism to the point where, in large areas of Western civilization, it has come to be taken for granted as a natural course of development, for which we are destined, for better or for worse.”
Nevertheless, capitalism survived and came to a new and luxuriant flowering in the last quarter of the twentieth century. In part it was saved by the long secular trend of inflation and by the “money illusion” described a quarter of a millennium ago by the Scottish economist and philosopher David Hume, which left people feeling richer and able to buy more and thus willing to leave their fate in the hands of market forces. But like most political movements, the restoration of capitalist ideology was nurtured mainly by the failure of the alternatives.
Over the course of the last two generations, many peoples at many times tried to organize “centrally planned” or “command” economies, as they came to be called (bypassing value-charged words like socialist and communist or indeed state capitalist), and the results were never as desired. Wartime, of course, was especially productive of government orders to manufacture this rather than that industrial item, in officially specified quantities at officially established prices. The more stringently this was done, however, the less impressive historians have found the results. The Strategic Bombing Survey conducted after World War II indicated that Hitler’s Germany, which had built matériel of war with slave labor and had allocated resources through a supposedly omnipotent party/bureaucracy, had in fact dedicated a lesser fraction of its production to the war effort than had the United States, where most goods and services continued to be purchased through the market.
This had not, incidentally, been the original American plan. In the first frenzy of rule and regulation after the outbreak of the war, there had been a great deal of requisitioning and demanding at prices either fixed at that time or to be determined later. Like many of his colleagues, the political scientist Norton Long came out of academia a great believer in the primacy of policy over economics and went to work in 1942 for the Office of Price Administration. Some years later, graciously helping an opponent build an argument, Long remembered the problem of finding enough fractional-horsepower motors to rotate the gun turrets on tanks. The Office of Defense Mobilization had made detailed studies of the facilities at the various manufacturers that could be committed to this vital purpose, and the orders had gone out, with a quota for each factory. Each month the shortage of fractional-horsepower motors got worse until finally, Long recalled, somebody said, “Let’s double the price”—and soon there were all the motors the military could want.
In the United States, throughout the war, we rationed meat, we rationed gasoline, we rationed nylon stockings (the nylon was needed for parachutes), we dedicated the automobile factories to military vehicles and aircraft, we controlled the allocation of building materials. Newspapers were not permitted to increase their consumption of newsprint. We had price control and rent control, and large employers could give their workers raises only with the consent of the National War Labor Board. Taxes rose to a confiscatory 92 percent on the marginal dollar of the income of the wealthiest part of the community. The war was popular: Americans mostly hated the Nazis and the Japanese. War spending and its finance by expansion of the money supply lifted the country from a depression that by 1939 had seemed terrifyingly permanent. Yet as time passed, there were black markets in almost everything and great popular dissatisfaction.
After the war state-directed economies were everywhere: some were built on presumably Marxist principles in Eastern Europe and China (where the expenses of the governments that controlled production and distribution were theoretically to be met by the profits of state-owned enterprise), some were organized according to the peculiar principles of Peronism, a political doctrine named after the Argentine dictator Juan Perón by which military-based governments resident in cancerously growing cities could reward their supporters and pay the losses of nationalized industry by confiscatory taxation of the export earnings of the farmers.
This second approach to the organization of economic society was widely adopted in newly liberated Africa, most notably on the Gold Coast, which became Ghana, one of the richest and climatically one of the most salubrious of the developing countries, and which was set on the path to its present misery by its first national leader, Kwame Nkrumah. The government of Ghana still insists on buying its cocoa farmers’ product at very low government-fixed prices for resale abroad at the much higher market price, with the result that the paths through the forest between Ghana and the Ivory Coast are festooned with the rotting corpses of cocoa smugglers caught and hanged by the Ghanaian Army, and the Ivory Coast’s share of world cocoa exports, once less than half of Ghana’s, is now the largest in Africa. A few years ago I spent an afternoon with Kojo Debrah, then the Ghanaian ambassador to both Australia and Malaysia. It was important for him, he said, to report back to Accra on what was happening in Malaysia. That country had won its independence in the same year as his and had then been much poorer, but in the 1980s, after a quarter of a century of more or less capitalistic development, it had a per capita income approaching three times that of Ghana.
Free markets seemed certain to produce the “immiserization” of the masses.
It was not only that the Ivory Coast with its freeholders did so much better than Ghana with its collectivized farms, or that Panama for all its corruption did better than Cuba, or that South Korea and Taiwan generated far higher living standards than North Korea and China. The Eastern bloc countries in Europe recovered from the war much less rapidly than the West. Part of the reason, no doubt, was the difference between American generosity in the Marshall Plan and Soviet rapacity in reparations demands under Stalin (America could afford generosity and Russia couldn’t), but by the latter 1950s the world had perceived that West Germany was so much more prosperous than East Germany because market capitalism was a far more efficient system than state command for the generation of wealth. One must honor the memory of the East German freedom fighters of 1953, who threw rocks at the tanks on Stalin Allee, but East German demands for liberty were less important than the West German standard of living in Khrushchev’s decision in 1961 to build the Berlin Wall. As those who lived inside them knew, moreover, these socialist states were desperately corrupt societies, where the goods and services people earned from their labors depended very much less on what they produced or what they “needed” than on whom they knew.
The insight most visibly validated by the years after World War II was that of the French revolutionary syndicalist Georges Sorel in the years before World War I. “When politicians intervene,” he wrote in his book Reflections on Violence, “there is, almost necessarily, a noticeable lowering of ethical standards, because they do nothing for nothing and only act on condition that the devoured association becomes one of their customers.” Sorel was writing of what he called “political-criminal associations.” Sixty-odd years later the foreign minister of Singapore coined the term kleptocracy, rule by thieves, to describe the governments of certain—alas, many—Third World countries.
There are doctrinaires who prefer general poverty under the rule of rightminded or at least indigenous leaders like Castro or Mobutu to prosperity created by the greedy and often foreigninfluenced buccaneers of the marketplace. Ian Buruma, cultural editor of the Far Eastern Economic Review, wrote recently of what he saw as a sinister conspiracy in capitalist Japan: “The sharp rise in living standards that began with the economic boom of the 1960s was part of a deliberate political strategy to undermine political activism.” But ordinary people—and, in fairness, most “political activists” too—have a preference for progress rather than poverty, especially, of course, in the United States.
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.
There is no doubt that decision making in a market, as opposed to decision making by plan, offers one continuing and eventually overwhelming advantage: People find out when they are wrong, in ways that cannot be gainsaid. Greed is the cleanest of the vices, because it is the most simply rebuked by reality. The bureaucrat can cover his rear, the leader can send dissidents to the psychiatric ward, the lecher can look for another girl on another street, the Oblomov can roll over and go back to sleep—but the merchant loses his stake and is, in the old English phrase, wound up. The incentive structure is in every way rational and useful. As Norton Long discovered, when you order the electrical-equipment makers to make fractional-horsepower motors, you get what they make; when you raise the price, you draw newcomers into the business of making fractional-horsepower motors. The price information created in a market offers business people recurring chances to become winners. Its unique and indispensable value, however, is in changing the behavior of losers. For what really kills enterprise—and ultimately societies—is the inability to learn from mistakes and to cut losses.
Winston Churchill in a famous aside once said that democracy was the worst system of government except for all the others, and the spread of a similar attitude toward the market as a form of economic organization has given the word capitalism a more positive aura than it has ever enjoyed. For generations the defense of capitalism rested upon the notion that the system threw up its own ameliorations: labor unions and social security, wages and hours legislation, pensions, medical benefits, workers’ compensation, and the like. The economist Joseph Schumpeter, looking at the world from Harvard with clear, sardonic vision, doubted that these kindnesses were in fact a benefit; eventually, he thought, they would overload the system with political demands for freebies. And indeed, several of the better advertised “welfare states” of the pre-war period, notably Uruguay and New Zealand, have fallen into serious decline in recent years, probably to be joined in the near future by Denmark and the Netherlands, which are in process of exhausting their credit and natural gas reserves, respectively, to provide unnecessarily generous support for the unproductive.
The new defense for capitalism—in the United States, in Britain, and especially in France, where intellectual fashion has swung 180 degrees—is a libertarian attack on planning, a return to Adam Smith’s eighteenth-century “invisible hand,” which assures that a community of people all asserting their own self-interest will achieve the optimum result for the group. No one who looks around the world can seriously doubt the recent assertion in The Economist “not just that the market economies have achieved, over a period, higher living standards, but also that they run much more smoothly....Markets are much better than bureaucrats at finding out what people want, and then providing it.”
The attack has, inevitably, gone to excess. There can be no capitalism (or any other economic society) without what Milton Katz of the Harvard Law School has called a “legal order.” Someone has to establish uniform weights and measures, the measuring instrument of money, and courts for the enforcement of contracts. For such services the government is entitled to be paid, and there are many reasons the price should be more than just taxes. The function of law, McGeorge Bundy told a convocation of law professors while he was still dean of the faculty of arts and sciences at Harvard, is “to prevent the natural unfairness of human society from becoming intolerable.” The excellence of the markets at delivering information that allows producers to find and satisfy the desires of consumers does not mean that the decisions of the market must be allowed to determine how grandly the winners win and how desperately the losers lose. Consumer sovereignty is not worth much to the polity in a poor country where the top 2 percent of the income distribution has all the votes.
In a period when capitalism rides high, moreover, the most active players begin to believe that the game exists for its own sake. “All nations with a capitalist mode of production,” Marx wrote in 1864, “are seized periodically by a feverish attempt to make money without the mediation of the process of production.” Like the 1920s, the 1980s have seen feeding frenzies in the stock markets (and now in the commodities markets too), and quite apart from all the other unlovely thoughts this spectacle inspires, the activity is wasteful. Market capitalism has repeatedly demonstrated itself as more efficient than the known alternatives, but the business cycles it creates cause misallocation of resources and losses in production as well as human pain. Like the South, the enemies of capitalism will rise again.
But never, one suspects, with quite the same self-confidence or joie de vivre. The French philosopher Bertrand de Jouvenel remembered a day soon after the end of World War II when he was part of a delegation waiting to welcome Georges Bidault, then the French foreign minister, back from a trip to Moscow. As the train slowed down in the station, a railroad worker ran alongside the minister’s carriage, calling up to the window, “Monsieur le Ministre! Monsieur le Ministre! Is it true they have a workers’ paradise in the Soviet Union?” By the 1970s no Frenchman was so ignorant or so Communist that he still believed the Soviet Union was any kind of paradise. And very few socialists or “progressives” in the United States still believe that the sort of society Edward Bellamy envisaged for the era we are now entering can be created by real people in real time. The defects of capitalism turn out to be in large part defects of humanity. The willingness to seek partial rather than wholesale remedies for these defects, to accept the tenets and institutions of capitalism in ways that the early twentieth century could not have imagined may mean that the world, like its people—even the American people—has grown up.