Capitalism and Freedom, Take Two

Earlier this week, a friend (in fact a much beloved seminary professor) shared Caleb Crain’s piece in the New Yorker, “Is Capitalism a Threat to Democracy” (May 14, 2018) with me.

It is very pleasing to see Karl Polanyi back in the game. (Was he ever not in the game?) I hope that you will read it.

I really only have two, small, reactions to the piece. The first reaction is substantive. It always surprises me, perhaps it shouldn’t, when writers fail to note the obvious. If Lord Keynes was right and if a large volume of capital distributed at the bottom of the income hierarchy gives rise to a multiplier equal to the value of the consumer goods purchased by these consumers, then the $4.2T (in 2018 dollars) spent by the treasury defeating nationalism and fascism deserve much of the credit, not simply for lifting us out of the Depression, but also sustaining us through the 1950s and 1960s. To this we can add the millions, not billions or trillions, of the Marshall plan, which, by increasing the purchasing power of Europeans and Japanese, gave their own boost to the US economy. When Japan and Germany returned to full industrial capacity, some time around 1968, competition from world markets began to put a pinch on the returns US investors enjoyed from their  domestic assets.

This is important because it belies Milton Friedman’s claim that it was American know-how, ingenuity, and private investment that made the 1950s and 1960s hummm. No. It was Uncle Sam (and, in the long run, taxpayers themselves). But it is also important because, unlike Europe, which threw its Marshall funds into transportation, health, and education, the US actually believed the story it was telling itself and the world. And, as a consequence, it felt no need to invest in health, education, and welfare “beyond the margin” dictated by the market. That is, it believed that the free market was the cause for its wealth, and not the $4.2T or the destruction of its two major world competitors, Germany and Japan.

This fits with the two very different narratives about the causes for war that Europeans and U.S. policy-makers told themselves. Europeans were more inclined to embrace Polanyi’s explanation and his “double-movement.” When pressed into a corner, political actors push back. The push-back often appears as political extremism. U.S. policy-makers, by contrast, were inclined to credit fascism and nationalism to cultural and intellectual backwardness. Fascism was a throw-back to the pre-industrial era. This U.S. narrative made it possible for the U.S. to bundle economic growth and technological progress together with liberty. Since they did not grasp the economic mechanisms that had given rise to their economic expansion, U.S. policy-makers also failed to grasp why, in the late 1960s, markets began to display evidence of global competition and declining rates of profit.

My second, minor, reaction is therefore that the U.S. was at no time closer to socialism than it was at the end of the 1930s, but that from that point forward it veered hard away from this alternative. This was already clear from the anti-labor legislation (cast as anti-Communist legislation) forced through Congress in the late 1940s and throughout the 1950s. Free enterprise (or so it was argued) did not need assistance from Uncle Sam. The economy was doing great. Don’t let Big Labor ruin it all. And, so, in 1947, Congress passed the most sweeping anti-union legislation since the turn of the century, the Taft-Hartley Act (29 U.S.C. § 141-197), which effectively deprived organized labor the benefit of their numbers. The social welfare state therefore unfolded very differently in the U.S. than in Europe. In the U.S. social welfare was explicitly aimed at the elderly, the poor, children, unemployed, sick, and largely at underserved minorities. In Europe, by contrast, the social franchise was sold as an entitlement to all.

When toward the end of the 1960s international competition began to put the squeeze on, Europeans tightened their collective belts while, in the U.S., policy-makers found it relatively easy to chip away at entitlements targeting specific groups: underserved minorities, children, the poor, the homeless. Just as Europeans spread efficiencies broadly, so they also spread the cost of declining productivity broadly. Not so the U.S., where those least able to shoulder the cuts were targeted as the underlying cause for economic decline. In no case, however, did U.S. policy makers play with socialism. Since fascism arose not as a response to social and economic hardship, but out of intellectual and cultural regression, economic growth and free markets — not social engineering — seemed the natural and necessary antidote to fascism.

Crain is right. Democrats played a central role in dismantling the social welfare state. But it is a role that came naturally to them, since, with their republican allies from across the aisle, they knew that it had been free markets that had made America great again.

But this had never been true. Rather was it the $4.2T allocated by Congress beginning in 1938 that played this role. Which is why, I believe, it is absolutely essential that we place this tremendous sum of money at the center of our explanations.

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