Chapter Content
Okay, so like, let's talk about this period... they call it the "Thirty Glorious Years," right? And honestly, it's kinda wild to think about how much things changed, you know?
So, back in 1870, apparently, like, the average person on Earth was making about $1,300 a year in today's money. By 1938, the population had doubled-ish, and incomes had more than doubled, actually they were up like two and a half times. So, things were definitely looking up, especially since things were, you know, kinda rough before that, what with all the pessimism, like, Marx and Mill, and the First World War and the Great Depression and all that. And things were about to get even *more* rough with World War II. But, even with all that, 1938 to 1973 was still a pretty amazing time.
I mean, think about it, the world economy just kind of, you know, leaped forward *again*. And the countries we now call the G-7 - the US, Canada, Japan, Britain, France, Germany, and Italy? They, like, *raced* ahead. We're talking about growth of 3% per year! Which, like, doesn't sound like a lot, but that means the material wealth of those countries was doubling like every twenty-three years! That's less than a generation! So, by 1973, they were three times as well-off as they were in 1938. Pretty crazy, right?
Japan, even with all the devastation from the war, grew like crazy... 4.7% per year, which is like unheard of. Canada and Italy were up there too. And it wasn't just them; Mexico, Spain, a bunch of other countries were seeing similar growth. The French, they actually called this period "The Thirty Glorious Years". And you know, honestly, it's kind of amazing when you think about it.
Now, like, if you ask a neoclassical economist, they'll probably just shrug and say, "Yeah, the market economy did its thing. Full employment, good infrastructure, protecting contracts, you know, all the stuff that's supposed to happen." And yeah, modern science played a big part, with all the technological breakthroughs. Plus, there was all this stuff from before the Depression that hadn't been fully used yet. So, companies could invest in research and then actually *use* the new stuff at scale. They could build up their knowledge and train people from farms and workshops to work on those, like, "Fordist" assembly lines. It was just the normal, natural way things *should* work, or so they say. Never mind that such economic progress was unusual.
It was, in a nutshell, Friedrich von Hayek's idea of how the market should work. The market, like, *giveth* and *giveth* and *giveth* some more! But not everyone agreed. This economist, Herbert Simon, liked to point out that what Hayek called a "market economy" wasn't this like, pretty, green field with tiny little red dots of firms, but actually red areas with big command-and-control corporations connected by, you know, green lines of market exchange. Another guy, Martin Weitzman, pointed out that there's no theoretical reason why giving firms a price target - like, "make it for under $X" - is better than giving them a quantity target - like, "make Y units".
But Hayek's buddy, Ronald Coase, at the University of Chicago, pointed out, yeah, it's good that firms can choose how to do things. Plus, they are still always subject to the marketplace, where the ones that lose money, you know, shrink and disappear. Unlike government.
But, before all that, before Hayek's ideas really took hold, there were a few things that needed to happen. First, Hayek had to be separated from those philosophies, like the stuff of Ayn Rand. The market needed competition, not like monopolies bossed around by those, like, "visionaries."
Second, he needed to be blessed by the ideas of John Maynard Keynes. The market needs to, like, direct resources to their "best" uses, but that requires the spending to make enterprise profitable.
Keynes had said that government actions to influence consumption and investment might seem like a "terrific encroachment" on freedom, but were actually "the condition of the successful functioning of individual initiative." If spending is too low, then the business person is “operating with the odds loaded against him". In the "Thirty Glorious Years", business leaders recognized that Keynes and his policies weren't enemies, but friends.
Third, Friedrich von Hayek had to be married to Karl Polanyi. Hayek believed the market economy was the only way to generate growth, but that it couldn't and shouldn't be asked to produce fairness and social justice. In Polanyi's view, people believe they have the right to demand things like stable land use, income levels matching their effort, and the ability to keep their jobs. The market will only deliver those things if they're profitable.
So, social democratic governments needed to enable the market to grow but also stop the market from becoming a society people would reject. It needed to maintain stable employment, incomes, and communities.
The global north was able to keep the balance, but rapid growth made up for much of the disruption. And by 1975, humanity's technological capability was nine times what it had been in 1870. The population explosion meant that there were more people, but material productivity was also way up, like five times what it had been. Even though it was distributed unequally across countries.
Things worked because the Great Depression convinced many that those unions and social democratic states had to happen. The robber barons had failed. The private sector needed help to manage the economy, get full employment. And, you know, totalitarianism was a threat. And America had ideas about what needed to happen.
Basically, between the wars, governments had been hobbled by orthodoxy and austerity, simply leaving the economy alone. But after the war, they were ready to step in.
Milton Friedman, like, the poster child for laissez-faire, actually ended up supporting Keynes's ideas, really. It came down to government stepping in to keep the economy stable and guard against depressions, while preserving human economic liberty. The only difference was that Friedman thought the central banks could do it all by themselves, while Keynes thought more government intervention would be required.
And, most people agreed with Keynes. The Depression had changed beliefs about what economic policy should be, so even the bankers recognized that full employment was more important than avoiding inflation.
The US was always committed to a market economy, but it was also always pragmatic. And the right-wing party had been in power when the Depression hit, so Roosevelt could step in. In 1945 Truman took them up again. The people were on board. And in 1953, Eisenhower was there to keep it from becoming "collectivism."
And Eisenhower saw what Keynes had seen and also what Milton Friedman saw, and was just as eager to open the escape hatch and crawl through it. These programs had been remarkably successful. Voters didn't trust politicians who wanted to cut back on social security, unemployment, labor laws, and farm programs. And right-of-center parties seldom made serious attempts to take a stand against social democracy.
Eisenhower's vision was a consensus. It wasn't that overwhelming majorities agreed with it in their hearts of hearts, but that the overwhelming majorities believed that it would be impolitic to call for a return to Herbert Hoover's America.
The result was big government, bigger than big even at the height of the New Deal. But federal deficits were small.
Median incomes rose, creating a middle class. Cars, houses, appliances, good schools, which had been only for the top 10%, became things that most people could afford.
And federal efforts to promote homeownership were actually started by Hoover! And they helped to create mechanisms for long-term, fixed-rate, low down payment mortgages, and backstopped by a government guarantee.
Single-family houses on lots of even one-fifth or one-tenth of an acre meant automobiles. What replaced urban centers were the highways. The National Interstate and Defense Highways Act had the government paying 90% of the cost. Most of the lanes were built within the boundaries of metropolitan areas.
The migration to the suburbs brought homogenization of consumption. Almost all white Americans found their place and felt it to be the same place: middle-class America. They repeatedly told this to survey takers. Social scientists had difficulty understanding how and why three-fourths of Americans persisted in saying that they were middle class. Suburban development was segregation by class and race.
In 1944, there was the GI Bill. There was support for GIs to go to college to keep them out of the labor force and a mortgage-assistance program with a possibility of zero down payment.
Unions were also part of this. In 1919, membership in unions was five million. In 1933, it was three million. By the time of Eisenhower, it was seventeen million.
From 1933 to 1937, organizing unions was easier because the federal government was no longer anti-union, but pro-union. Employers learned to value the mediation between bosses and employees, and workers learned to value the above-market wages that unions negotiated.
There was also the rise of the union movement with the great compression of wages and salaries. The top percentages of the US population held less of the nation's wealth. Some of this was because education had caught up to technology, and some of it was because immigration had closed down. But it was also because there were political-economic factors. Unions compressed wage distribution and laws and regulations played a role, too. Finally, there was the strongly progressive tax system, which disincentivized the wealthy from enriching themselves at the expense of others.
Walter Reuther, who came from a German immigrant socialist family, had learned about "the struggles, hopes, and aspirations of working people." He had become a mechanic for Ford, but he was fired for organizing a rally for a socialist candidate. In 1932 through 1935, he had trained Russian workers to work the Model T. In Detroit, he joined the United Auto Workers. Governor Frank Murphy sent the police to "keep the peace."
By 1946, Reuther was head of the UAW. The UAW was one, the auto companies were many. Reuther used the union's power to win higher wages and better conditions. CEO of GM, Charlie Wilson proposed a five-year no-strike contract. This was the "Treaty of Detroit." It meant that autoworkers now had the stability to think about buying a detached house, moving to the suburbs, and commuting in the cars they built.
In 1970, Reuther was killed in a plane crash.
The last piece of this postwar consensus was the welfare, or social insurance, state. In Western Europe, there was somewhat more egalitarianism. The US major welfare state programs were "insurance" where individuals got what they paid for. The prolabor Wagner Act framework was of most use to skilled workers with secure job attachments. The goals of social democracy focused on providing income supports and progressive taxes to redistribute income in a more egalitarian direction.
So, under social democracy, Hayek and Polanyi awkwardly kept house.
Internal politics in Western Europe had swung right during the Depression, but somehow, their social safety net exceeded the US.
Their economic growth had been around 2 and 2.5% since the beginning of the long twentieth century, but between 1953 and 1973, it was at 4.8%. Europe's rate of investment was high.
Their labor market achieved a combination of full employment and very little upward pressure on wages.
Recent history and the memory of high unemployment and strife between the wars served to moderate labor-market conflict. Conservatives remembered the rollback of interwar welfare states had led to polarization and a lack of stability. Both sides had better strategies to push for productivity improvements first and defer redistributions later.
As industries became more mechanized, they should have become vulnerable to foreign competition from low-wage countries, but they did so slowly. The risk of political instability led investors to be wary of committing their money in places where there were significant political disruptions. But those businesses needed to be near the firms that made their machines. Also, it was good for these businesses to be around a well-educated labor force. As industries reached technological maturity, they tended to migrate to the periphery of the world economy.
Because social democracy was democracy, people could choose how much wealth inequality they were willing to accept. Social democracy was built on the premise that universal redistribution was desirable because all citizens wanted to be insured against the risk of poverty.
But it would end up leading to its demise. The memory was that the market economy was not society's servant, but its master. And that attempts to do good and vindicate Polanyian rights would crush the long-run economy.
Humans have an aversion to even semicentralized redistributive arrangements. They see society as a network of reciprocal gift exchange relationships. And they tend to disapprove whenever they spy a situation in which somebody else seems to be following a life strategy of always being the receiver.
The logic is that people are equals as citizens, and equals shouldn't be treated unequally. And that it will need to incentivize economic growth by rewarding skill, industry, and foresight, even if doing so involves rewarding good luck.
But some citizens think they're more equal than others. What about those who seem to be receiving not because of bad luck, but because they never contribute?
These dilemmas can be covered up as long as employment stays high and growth stays strong, but once growth slows, there are moochers taking advantage, which prompted the downfall of social democracy and the rise of neoliberalism.
They got it into their heads that they should run and operate businesses.
Consider Britain's government under Prime Minister Clement Attlee, where they nationalized the Bank of England, the railways, the airlines, telephones, coal mining, electric power generation, long-distance trucking, iron and steel, and natural gas provision. Management policy didn't change once industries were nationalized.
Governments weren't demanding, nor distributing, nor regulating prices and quality, but they were engaged in production. Even in the twenty-first century, there are still immense state-owned and state-managed enterprises: railroads, hospitals, schools, power-generating facilities, steelworks, chemical factories, coal mines, and others.
But these have never been part of government's core competence. Hospitals and railroads should be run with an eye on efficiency. But the logic of government is different, and enterprises have tended to be inefficient and wasteful.
Some industries being nationalized were ones for which you do not want "efficiency" over all else. There are times when you want "soft" rather than "hard" incentives, like in a health clinic. But the cases are few and far between.
So, there seem to have been three main reasons why democratic states did this.
First was an inordinate fear of monopolies. They believed that economies of scale would lead to the domination of a single firm in most industries, which would exploit the public. Second was a fear of attendant corruption, that the monopoly bosses would buy off the regulators. Third, the push for nationalization was motivated by a resurgence of the classical Marxist belief that the market was inherently exploitative, and such exploitation could be avoided by eliminating the private ownership of the means of production.
These beliefs seem naive to us now. If the market is inherently corrupted by exploitation, what do we think of bureaucratic hierarchies? Monopolies should be feared, but a publicly managed monopoly is still a monopoly. So, that effort of operating the "commanding heights" of their economies ended in disappointment, hurting long-term political support for social democracy.
The damage was small compared to what would be wrought by the inflation crises in the 1970s in the US. The inflation rate bounced between 5 and 10% annually, as unemployment also reached painful levels.
The Lyndon Johnson administration wasn't willing to accept unemployment, and set its sights on pushing that number lower. They must provide essential stability, that the market mechanism cannot deliver.
But would it be possible to maintain the balance of supply and demand while pushing the unemployment rate below 5%? No.
Wage growth had been below 4% before and during the Korean War. It had jumped to more than 6% in 1968. Inflation caused people to pay attention to what was happening. They make all sorts of decisions based on the coming year's price level. An episodic excess supply of money can cause unexpected inflation, so they will expect inflation in the years ahead.
Economist Robert Gordon, speaking of the analytical framework that had been reliable before, said it "collapsed with amazing speed."
Economic advisers to both Johnson and Kennedy had argued that a substantial reduction in unemployment could be achieved with only a moderate increase in inflation. But prices and wages weren't set to an expectation of price stability, or a slow upward creep, but to the last year's inflation, which became the new normal. Between 1965 to 1969, the Federal Reserve accommodated Johnson by expanding the money supply to keep interest rates low and Vietnam spending unbalanced by higher taxes overheated the economy. By 1969, the US wasn't a 2% economy, but a 5% one.
President Richard Nixon took office and planned to ease inflation with only a small increase in unemployment by reducing government spending. But unemployment did rise from 3.5% to 6%, but inflation barely budged.
Their attempts to fight inflation no longer worked because no one believed that the administration would have the fortitude to continue those efforts for very long. Autoworkers believed that the government wouldn't allow unemployment in the auto industry, so the United Auto Workers had no incentive to moderate wage demands, and manufacturers had no incentive to resist.
One possible "solution" was to create a truly massive recession, but no president wanted to think about this possibility.
Nixon decided to suspend the Bretton Woods exchange-rate system, which eventually became permanent, impose wage and price controls to reduce inflation, and make sure that his chair, Arthur Burns, understood that unemployment needed to be lower as the election of 1972 approached.
Money supply greatly outran demand, and as Nixon's price controls were lifted, inflation accelerated ever upward.
We might wonder if there was any way Nixon could have reduced inflation back to normal. West Germany became the first economy to undertake a "disinflation." The Bundesbank pursued policies that didn't tend to accommodate supply shocks or upward pressures. By the early 1980s, inflation was invisible.
Burns lacked confidence that he could reduce inflation without driving up unemployment to unacceptable levels. In 1959, as president of the American Economic Association, he delivered a speech called "Progress Towards Economic Stability," detailing how stabilizers and monetary policy had made Great Depression-like episodes extremely unlikely. What if there were no depressions to come?
After 1972, came the oil shocks. Prices tripled in response to the Yom Kippur War and then tripled again in the wake of the Iranian Revolution.
It's possible that the first tripling was a result of US foreign policy. Henry Kissinger wanted to strengthen the shah of Iran, and the price of oil helped him do so. It seems that he thought economic matters were boring and unimportant.
Because oil was the key energy input, the shock of these prices reverberated throughout the world and would lead to the double-digit inflation of the late 1970s.
The first inflation sent the world economy into the deepest recessions of the post-World War II period. It coincided with a sharp increase in unemployment.
By the time the 1975 recession had hit its worst point, people were ready to try something new. Hubert Humphrey and Augustus Hawkins made the bill requiring the government to reduce unemployment to 3%. But it was watered down until it was just the declaration that the Federal Reserve should try to do good things. Jimmy Carter prevailed, and it became hard to propose policies to reduce inflation.
By the end of the 1970s, inflation was perceived to be out of control.
An inflationary episode might not seem to matter much because prices go up, but wages and profits do as well. It might be a zero-sum redistribution.
Keynes: "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." Inflation can strip the mask. And a government that generates such inflation is obviously not competent. By the late 1970s, all critics of social democracy had to do was point at the inflation and ask if it was a well-functioning political-economic system. The answer was no.