The Mystery of the Post-War Boom – or why has economic growth been falling for over half a century?

According to a recent study, economic growth among the industrialised countries of the world has been declining for around sixty years.

“… contrary to what is widely believed,” the report from Geopolitical Economy Research Group (GERG) at the University of Manitoba in Canada states, “this [post-war economic growth of the industrialised North] has fallen continuously, with only brief and limited interruptions, since at least the early 1960s.” The trend includes all major Northern economies “without exception” and shows no sign of ending.

The study includes the usual suspects – the US, Germany, the UK, Japan and France – as well Australia (which isn’t in the Northern hemisphere admittedly) and 10 other countries.

Today’s “meagre” growth rates of 3 per cent are treated as evidence of economic success, but fifty years ago – when rates of 6 per cent or more were common – such an economic performance would have been greeted with “alarm and despondency”, the report’s author, economist Alan Freeman points out.

The erroneous widespread belief the report aims to counter is that either economic growth started falling after 1973 (i.e. a decade later than the reality) or – as in common on the Right – that the nadir of the strike-ridden 1970s was banished by the successful attempts of Thatcher, Reagan and others to revitalise Western economies.

And although the report doesn’t speculate as to why economic growth has fallen so drastically it does affirm the original cause – “an historical event, the Second World War, which brought in its wake one of the greatest and most prolonged economic expansions since the Industrial Revolution”.

The post-war enigma

As can be seen below, there are various explanations for the post Second World War boom, an economic expansion which few sentient people deny occurred. The US economy more than doubled in size between 1948 and 1973, while the UK, West Germany and Italy grew fourfold in the same period and the Japanese economy swelled tenfold.

However, the boom is treated very differently on the Left and the Right. For the mainstream Left, it was the consequence of a peculiarly benign set of economic policies, or in the words of the late economist Andrew Glyn, “a unique economic regime”. The so-called Golden Age of capitalism was built on collective bargaining with strong trade unions resulting in wage growth and rising effective demand, restrictions on finance which funnelled investment away from speculation and into physical assets (resulting in rising productivity) and an international economic architecture (the Bretton Woods system) that fixed exchange rates, stopped currency speculation and ensured global economic stability.

For the Right – or those elements on the Right willing to deal with the facts – the post-war boom had nothing to do with correct policies or regulations. Indeed those policies – for example high corporate and personal levels of taxation – may have ‘worked’ in spite of themselves and were exposed as impediments to growth in the stagnation years of the 1970s.

Rather the post-war boom was the result of an inherent, and frequently unnamed, economic vitality that gradually evaporated as the second half of the 20^th century wore on. This perspective can be seen in reactions to the inconvenient fact that, although Margaret Thatcher radically changed British society in innumerable ways, she left the rate of economic growth virtually untouched. Or in scepticism towards the advocates of a Basic income.

However, the debate about the post-war boom usually takes as it as read that it concerns capitalist economies only – GERG’s 16 country list solely comprises industrialised capitalist economies. But, there are, in fact, good reasons for including the communist Eastern bloc and the former Soviet Union. Although reliable economic statistics for the Soviet years are hard to come by, the broad outlines are widely accepted – the Soviet Union enjoyed strong economic growth for two decades after World War Two but this growth petered out in the mid-1960s.

Such was the economic optimism, Soviet leader Nikita Khrushchev boasted in 1961 about leaving the United States far behind in industrial and agricultural output – and was taken seriously. This boasting was based on the fact that output had shot up, towns and cities had been rebuilt, life expectancy had doubled and many infectious diseases conquered. And the ‘socialist’ system was responsible.

Unfortunately, from the mid-1960s all this went into reverse. Health spending was cut, mortality started rising (by the end of the 1980s the USSR had the worst mortality rates of any industrialised country anywhere in the world) and deaths from heart disease, cancer and respiratory diseases started increasing. Indeed, in 1976, a French demographer, Emmanuel Todd, predicted the collapse of the Soviet Union on the basis of rising infant mortality. The Soviet state stopped collecting these figures in 1974.

So this should not be mistaken for a paean of regret about the unfairly maligned ‘socialist’ economy in the Soviet Union. The Soviet system that emerged from the Second World War was a full ripe Stalinist one, based on terrible repression – the secret police had executed over 680,000 people in 1937-8 alone. Although direct repression significantly abated after Stalin’s death in 1953, this was still a police state and, moreover, one based on the expropriation by a small ‘nomenklatura’ of the wealth created by the mass of people. This nomenklatura – comprising about 1 million people or 0.4 per cent of the population – even had their own health service which was, unsurprisingly, vastly better than the one ordinary people had to rely on. And this property-hungry elite, incidentally, was first in the queue to buy up all the Soviet-era assets when ‘communism’ collapsed in Russia in 1991 and mass privatisation was rushed through by Kremlin decree.

The idea – common in the West after 1991 – that the Soviet system was, economically, profoundly dysfunctional and inefficient, may also have been true. But what was also true, the evidence strongly suggests, is that this dysfunctionality was hidden by – or perhaps overwhelmed by – the vigour of the post-war boom.

 However, if this is true – and we should include the Soviet Union in any analysis of the post-war boom – then none of the explanations for its existence quite fit:

1 Reconstruction after the Second World War made an economic boom all but inevitable

This is the explanation most favoured by the Right because it excludes government policy and a strong labour movement from any credit for what ensued. The immense physical destruction caused by the six years of total war, the argument runs, guaranteed robust economic growth once peace had returned because so much work needed to be done rebuilding cities and repairing physical infrastructures.

This account makes sense for many post-war economies such as Japan (whose GDP grew at 7.8% between 1950 and 1973 but at only 2% from 1973 to 2008), Germany and Italy. It is also very plausible for Western Europe and, to a degree, Britain. And it most certainly works for the territory of the ex-Soviet Union which had been devastated by Nazi invasion at the loss of 20 million lives.

But for other economies which grew strongly in the post-World War Two decades, this rationale is far from convincing. The United States enjoyed robust GDP growth after the Second World War and, although it played a decisive role in its outcome, internally the country was untouched by it. So there was no rebuilding to be done.

True, the United States was pivotal in the rebuilding efforts of other countries – in Europe through the Marshall Plan and in the case of Japan – but were those endeavours sufficient to set its own economy on an upwards trajectory for around two decades? In recent years US companies have made huge investments in China and the country’s largest corporation, Walmart, sources 80% of its products from China. But these connections have not shown up in US GDP growth.

There were also countries in Europe – namely Portugal, Spain, Sweden and Switzerland – that enjoyed strong post-war economic growth (and in the case of Spain caught up with the rest of Europe) despite not being involved in the Second World War.

Moreover, the basic premise here – that economies emerging from war always experience impressive economic growth – is dubious. In the years since the post-war boom there have been many devastating wars – wars of independence from colonial control and civil wars – but nothing to compare with the post-Second World War boom. To take one example, the countries of the former Yugoslavia endured a brutal four year civil war from 1991-95, but – despite the devastation – subsequent economic growth has only been marginally better than the EU and global average and pales in comparison with the 20% growth rates achieved in Europe in the post-1945 years.

2. A benign policy environment aligned with powerful labour movements

In contrast to the Right, the mainstream Left (by which I mean Left Keynesians and some Marxists) draws attention, not to the physical environment, but the policy one. Free market capitalism had been thoroughly discredited by the experiences of the 1930s and the rise of Fascism and what emerged from the wreckage of World War Two was a regulated, managed capitalism. There were heavy restrictions on fractional reserve banking – the practice of banks’ inventing money by lending out a multiple of their capital assets – and a stable international exchange rate which nipped currency speculation in the bud.

This was allied with the acceptance by private owners and capitalists of strong and unyielding trade unions that had to be negotiated with. Welfare and health spending, in conjunction with pension provision, also increased. As result, real wages rose impressively, and because workers were also consumers, effective demand sustained an economic boom. And unlike today, this auspicious economic environment ensured productivity – output per worker – rose healthily, reaching 5% a year on a regular basis. All this without, it seemed, the downside of capitalism: there were no significant recessions for three decades after World War Two.

There are problems with this explanation even if the Soviet Union is not included. These are ones of timing. According to GERG’s figures, economic growth started falling around 1963 or ’64 – well before this benign policy architecture began to be dismantled. The ‘Nixon Shock’ – the refusal of the US allow the conversion of the US dollar to gold, thus effectively ending the Bretton Woods system and paving the way for free floating currencies, took place in 1971. Efforts to “zap labor” (the phrase belongs to Arnold Weber, the head of Nixon’s Prices and Wages Board) gestated in the 1970s but began in practice – in the United States under Reagan and the UK under Thatcher – in the 1980s. And in Germany, hostility to organised labour only really materialised (in the form of the ‘Hartz’ labour market reforms and wage repression) in the first decade of the 21^st century.

However, include the Soviet Union, and the ‘unique economic regime’ explanation becomes even less tenable. The Soviet Union was not in any sense a consumerist society and its economy did not depend on effective demand on the part of consumers. Wages were deliberately supressed under Stalin – until the 1950s they were lower in real terms than they were in Tsarist times. They rose somewhat in the post-Stalin era but the economy cannot be said to have been driven by consumer spending. Nor was there any finance sector in the Soviet Union to regulate. There was no need to ensure banks invested in the productive economy in Soviet-era Russia because private banks did not exist. But the country still experienced a post war economic boom.

3. The decline of profitability

This third explanation is definitely less in vogue that the first two – it is far from universally supported even among Marxian economists – but it deserves elucidation nonetheless. According to Marx, ‘the fundamental law’ of capitalism is for profit to decline – profit in the sense of the financial return on the amount of capital initially invested. This is known as the ‘Tendency of the Rate of Profit to Fall’ – TRPF for short. Barring certain counter-veiling tendencies – such as the opening up of new markets – this will deplete economic growth and lead to a recession. However, contrary to myth, in Marxist theory this is not a terminal problem. If the resulting bust is allowed to play itself out and companies permitted to go bankrupt, the stage is set for a new boom. In Marx-speak, ‘capital value’ has been destroyed and so profitability spikes again, inaugurating a new cycle of economic expansion.

According this group of Marxists, this is exactly what happened in the aftermath of the Great Depression. In the laissez-faire atmosphere of the 1930s, businesses were allowed to go the wall and unemployment to rise inexorably. But this prior destruction is exactly why conditions were ripe for prolonged economic expansion after the Second World War.

However, given the consequences of allowing the Great Depression to unfold without ameliorative action – political radicalisation, the rise of Fascism and World War – governments since then have been determined to stop all economic downturns wreaking the havoc they are bent on. They have been usually been washed away – as in 2008-9 – with bail-outs, stimulus programmes and subsidies. As result, economic downturns have not been nearly as devastating as in the 1930s. But they have also not paved the way for any subsequent boom – precisely because ‘capital value’ has not been destroyed to any great extent.  So economic growth has gradually and inexorably declined, an erosion which, in Freeman’s words, “shows no signs of ending” (the one partial exception since the 1930s to government action arresting economic downturns may well have been the recession of 1980-81, which was exacerbated by the hiking of interest rates in the US and UK and led to a quarter of UK manufacturing industry being wiped out. Coincidentally it was followed by an “8-10 year blip” in the trajectory of slowing growth).

The chronology problems in the second explanation are manageable here. Although there are disputes among TRPF economists about precisely when in the post-war era profit began to fall, one, Michael Roberts, places the tipping point in the mid-1960s.

However, this explanation applies to capitalist societies. That the Soviet Union was not ‘socialist’ is not in dispute. A self-selecting elite ruled over the mass of society, denying most people any democratic rights or control over their work. It is not widely appreciated how unequal the Stalinist Soviet Union was – a ruling class enjoyed a materially comfortable existence while, in anti-Stalinist revolutionary Victor Serge’s words, “the rest of the population, 85 to 88 per cent lives in primitive conditions, in discomfort, in want, in misery”. Such a society fully deserves to be described as accumulative – a small minority exploited and benefitted from the labour of others. But it wasn’t actually capitalist. Investment decisions were not based on the level of profit they would accrue.

That the ‘law of the tendency of the rate of profit to fall’ did not apply to the Soviet Union can perhaps been seen by what transpired when it collapsed. As noted above, the law is cyclical – if capital value is decimated, then profitability is restored and economic expansion can begin anew. But in 1991-94, in the transition crisis in the former Soviet Union, the conditions for the destruction of capital value were undoubtedly met. Production “fell by almost half in the 1990s” and 80% of the 27,000 Russian state enterprises were privatised. Life expectancy endured the largest falls in modern history outside of war and natural disaster. But Russian economic performance in that decade ranged from terrible to mediocre.

So if gross profit – as opposed to profit share – did not spike in the ex-Soviet Union in the 1990s, one can be fairly sure that rising profit expectations were not behind the economic boom that undoubtedly occurred there in the post-war years.

What does it all mean?

According to the GERG report’s author, Alan Freeman, the findings have “profound implications”. The high growth of the post-war years was the result of a “long historical process”, rather than wise policy decisions, he affirms. The other side of the coin is that the protracted decline of economic growth since the mid-1960s cannot be undone by reversing government policy and replacing austerity with fiscal and monetary stimuli. Such policies may be urgently necessary socially, but they will not transform the economic environment of ‘advanced’ industrialised countries.

Rather – and I’m extrapolating here – if the post-war boom was the consequence of epoch-making events such as the Great Depression and World War Two, for any new boom to occur similarly momentous phenomena have to precede it.

And we have every reason for not wanting this to happen. Firstly, because deep economic downturns and hugely destructive armed conflict are intimately connected – you’d have to try very hard not to see a causal link between the Great Depression and World War Two. Secondly, because the world cannot endure a repeat of the high economic growth of the post-war decades. We are already in a situation where GDP growth levels are causing CO₂ emissions to rise year on year when they have to fall drastically and rapidly if a future of submerged cities, huge refugee flows and mass hunger is to be mitigated. And this is happening when the growth levels of industrialised nations are – in historical terms – insipid. The annualised growth of OECD countries (35 industrialised countries, excluding China and India) currently stands at 2.4%. The growth rate of GERG’s 16 Northern industrialised countries is probably just over 2 per cent. Caveats apply about how growth has been outsourced to the Global South and global trade, rather than economic growth per se, drives climate change. However, the “routine” growth rates of the 1950s – 6 per cent and higher – are unthinkable even if, though some miracle, they are achievable.

Logically, therefore, the requirement is for an economic system that provides stability and material assurance to people’s lives whilst at the same time keeping growth at negligible levels. Regardless of the visible effect of austerity policies, declining economic growth clearly has human consequences. Even in the Soviet Union, high economic growth spurred the rebuilding of cities and rising health spending, while economic stagnation produced its opposite.

Therefore the necessity is for an economic system that retains the socially benefits of high and equitable growth without relying on such growth. Such a system will not be capitalism – it will be post-capitalist – and it will negate capitalism’s fundamental characteristic: the accumulation of profit which is then used to reinvest in new profit-making schemes, and so on ad infinitum, thus turning the system into a perpetual growth machine.

We may be nearer to that outcome than we think. The ebbing of the post-war boom in the Soviet Union was accompanied by rising mortality and declining health spending. In the mid-1970s, its demise was predicted, though at the time few were listening, by someone who noticed that infant mortality figures were going up. And in 25 years’ time, that prediction came true.

And, now in the heartland economies of the industrialised North, life expectancy is falling. Granted, in countries such as Britain, this is intimately connected to austerity policies, but it is also apparent in the United States, a country that has shunned austerity, at least at the federal level. The question is, are we a quarter of a century away from the end of capitalism in its heartlands?

The spectacular and unheeded failure of corporate tax cuts

“When corporate tax bills are cut,” Oxfam remarked matter-of-factly earlier this month, “governments balance their books by reducing public spending or by raising taxes such as VAT, which fall disproportionately on poor people.”

A 0.8% cut in corporate taxation across the 35 OECD countries between 2007 and 2014, the charity pointed out, was accompanied by a 1.5% increase in the average VAT rate. VAT (or sales tax in America) is a flat ‘regressive’ tax. When you buy a packet of chocolate digestives you pay the same amount in tax as Richard Branson, Rupert Murdoch or Bill Gates. This switch is, quite simply, a huge redistribution of wealth from poor to rich.

But while corporation tax has been reduced across the world in response to economic crisis and has been heading resolutely southwards ever since the 1980s, we are about to see corporate tax cuts on monster truck tyres. Donald Trump wants a US corporate tax rate of 15% compared to the current 35%. Theresa May’s ambition meanwhile is for the lowest corporate tax rate in the G20 (lower than Trump’s America, in other words, which is in the G20). Britain’s corporate tax rate is 17%, 11 percentage points lower than when the Tories took office in 2010 (the previous Labour government also reduced it).

This is the other arms race. Except in this one, governments fight to give money away, not accrue weapons.

I could spend paragraphs fulminating about the injustice of continually cutting taxes for the richest people on the planet while the poorest shoulder all the pain of a policy designed to repair the damage caused by a financial crisis they weren’t responsible for. I could waste energy pointing out the bizarre logic of claiming to cut a government deficit by deliberating slashing your income. But I’ll content myself with one salient fact – corporate tax cuts are presented as invigorating the economy, freeing more money for investment and jobs. They’re about making Britain ‘super competitive’, proclaiming we’re open for business, increasing research and development spending blah, blah, blah. But on that score, they’re a spectacular failure. An unexpurgated flop.  But it’s a failure almost everybody manages not to notice.

The fallacy

Because corporation tax cuts do not stimulate investment. Quite the opposite.  According to economist Michael Burke the private sector investment ratio in Britain (gross fixed capital formation as a proportion of firms’ operating surplus,) peaked at 76% in 1975, dropping to just 53% in 2008. By 2012, it had plummeted to 42.9%. By a strange coincidence in 1975 corporation tax in Britain, at 52%, was the highest it’s ever been. That’s at the same time as the peak in the investment ratio. In 2008 the corporate tax rate was 28% and in 2012, 24%.

According to Burke, corporation tax cuts are based on the ‘fallacy’ that they will ‘spur investment’. The investment rate has fallen by around a third in Britain since 1970, the same period that has seen corporation tax cut by more than 50%.

Other countries paint a similar picture. The investment ratio in the US peaked in 1979 at 69%. In 2008 it was 56% and it declined further to 46% in 2012. In Canada, which has undergone three waves of corporate tax ‘reform’ since the ‘80s, business investment has fallen steadily for two decades. In the words of one economist, Michal Rozworski, “For every dollar earned before tax, only about 60 cents goes back into maintaining and expanding business capital.  Compare this to 80 or more cents just a decade ago.”

But the political class of the western countries refuses to see the obvious. Decades of evidence that corporate tax cuts don’t work in the sense of producing more private sector investment, are met with renewed determination to institute even more drastic reductions. Even business seems to be saying, 'enough is enough'.

As Burke points out, a dynamic capitalist economy could well produce an investment ratio of over 100%, financed by borrowing in the expectation of greater profits in the future. So 69% (the US 1979 peak) is nothing to write home about, and 46% is “a sign of enfeeblement”.

The cash mountain

One rather glaring indicator that a further corporate tax giveaway won’t generate new streams of investment is that the corporate sector is already sitting on a mountain of cash that it is not using. Worldwide, this unused mass of money was estimated at $7 trillion in 2014. This year non-financial US corporations alone were judged to have $1.68 trillion in spare cash. All this while ‘underinvesting’  is the order of the day and there is pressure from shareholders to increase capital expenditure.

Apart from sitting in bank accounts, where does this mountain of cash go? The answer is in increased dividends to already bloated shareholders (which may be other companies), in share buy backs so that the company, in stock market terms, appears much healthier than it actually is, or in acquiring other companies. So the corporate sector comes across very active (mergers and acquisitions are at an all-time high), but this fevered activity just worsens inequality and increases the value of assets while producing very little of worth to society. Actual investment – new products, new machinery, new workplaces – is frequently perceived as too risky.

One theory that may tentatively rear its head at this point is that there is a negative correlation between reduced corporate taxation and investment – in other words, higher corporate taxation (and it was much higher in previous decades) is actually responsible, in some little known way, for greater levels of investment. The anthropologist David Graeber goes some way down this path in his essay Of Flying Cars and the Declining Rate of Profit, suggesting that the heyday of corporate research in the 1950s and ‘60s was really the outcome of high rates of tax – companies preferred to divert money into research, investment and rising wages rather than seeing it appropriated by the government. When that environment was transformed in the tax cutting, deregulating ‘80s and ‘90s the incentive, so to speak, for research and investment vanished.

“In other words,” writes Graeber, “tax cuts and financial reforms had almost precisely the opposite effect as their proponents claimed they would.”

Apple won’t make those ‘darn computers’ in America

Donald Trump’s proposed tax holiday for US multinationals repatriating cash gives credence to what Graeber is saying. Prior to 1986, corporations had to pay a 15% tax penalty for hoarding cash. Under Ronald Reagan, though, multinationals were allowed to hold unlimited amounts of cash provided they did so overseas. This produced a huge influx of money into tax havens. Rather than reinstituting the penalty on squirrelling away profits in other countries, Trump is proposing reduced taxation on repatriated cash as a way of incentivizing investment in manufacturing. The last time this trick was tried (under George W Bush in 2004), more than 90% of the repatriated money was used for share buybacks, increased dividends and larger salaries for executives. Another example, if one were needed, of corporate tax cuts having an altogether different effect to the one advertised.

But I think we have to look further than Graeber’s implicit suggestion that higher corporate tax is integrally linked to higher levels of private investment. If corporations are actively preferring alternatives to investment, such as share buybacks, bigger dividends or hoarding cash, the question is why has investment become so unappealing? Why has capitalism, which presents itself as a the apogee of a vigorous system transforming the world for the better, become so feeble?

Part two to follow

Living standards and economic growth; a depressing tango

At the risk of sounding like an anally retentive stat obsessive, I found some interesting figures about real wage growth in Britain, or its absence, on Saturday and put them together with statistics on GDP growth (alright I admit I’ve got a problem but it’s one way to spend your weekend).

Both sets of figures are from the Office for National Statistics. Real wages mean the increase or decrease in the value of wages taking account of the effect of inflation.

	UK GDP growth %	UK real wage increase %
1970-1980	2.55	2.9
1980-1990	2.67	2.9
1990-2000	2.22	1.5
2000-2010	1.82	1.2
2010-2014	1.32	-2.2

What’s interesting is that wage growth, and now wage decline, has tracked GDP quite closely, and GDP has fallen substantially since the end of the ‘80s and since the ‘60s. According to ONS figures, annual growth in Britain averaged 3.27% from 1960 to 1970. The figures are quite kind to Margaret Thatcher, it should be said, since the second Thatcherite recession began in the first quarter of 1990 when she was still Prime Minister.

The drop in the increase in wages was very definitely apparent in the 1990s and 2000s when virtually no-one thought there was a problem. Now there is wage decline, an awful lot of people have noticed the problem. The conventional liberal-left explanation is that Thatcher’s war on the unions and the decline in collective bargaining has belatedly fed through to how well employees are paid. I’m sure this is a factor – the precipitous drop in real wage increases from the 1980s to the 1990s, has doubtless a lot to do with the “Thatcher effect”. But that is not the whole story. Wages have faltered as growth has declined. Frances O’Grady, general secretary of trade union representative body, the TUC, said in response to the wage figures that “average pay rises have been getting weaker in every decade since the 1980s, despite increases in productivity, growth and profits”. But productivity and growth have also been getting weaker. I believe there is hardly any chance of the UK economy turning things around and returning to the growth levels of ‘60s, ‘70s or ‘80s. In those circumstances, real wages will either continue to decline or, at best, show slight increases.

The figures are evidence of an economic system in decline and the prospects for most people, while TINA is securely ensconced in the political consciousness, are not enticing. Consumer debt, which has trebled since the early ‘90s in the context of faltering wage growth, is likely to grow even larger, leading to further economic tremors.

Crony Capitalism - the convenient explanation for our evasive times

In Spain they suffer from amiguismo. Greece is fatally afflicted with rousfeti. Japan has never outgrown the effects of keiretsu. In South Korea chaebols have been a perennial blight.

Beyond the superficialities of debt, bank collapse, and government bail-outs, these are the real causes of economic distress. In a London Observer article last week, John Carlin explained the Spanish “infantile” attitude to work and rampant “amiguismo” – “friendism” – were the “root cause” of economic collapse and an unemployment rate in the mid-20s.

In English, this malaise is known as crony capitalism.

The “Spanish disease”, Carlin said, is an economic system where advancement depends on who you know. Greece is similarly benighted by “rousfeti”, which means according to a 2011 BBC article, “political favours and cronyism”.

In Italy, so says the Wall Street Journal, even emergency room doctors get promotion on the basis of their political affiliation. Apparently, “one routinely finds highly intelligent people employed in menial jobs while mediocre people often hold distinguished positions,” (which actually sounds like bog standard capitalism).

Like a receding tide, economic recession has merely exposed these countries’ integral failings, the argument runs.

Crony capitalism and Europe’s economic miracle

History is good at placing contemporary explanations in perspective and Tony Judt’s 2010 Postwar: A History of Europe Since 1945 systematically exposes the truth about crony capitalism. Unfortunately there is scant solace for believers in the cancerous effects of crony capitalism. Because if history is any guide, as far as capitalist economic health is concerned, the cronier the better.

Judt explains how Austria was governed in the 1950s and ‘60s, a system known as “Proporz”. “At almost every level jobs were filled, by agreement, with candidates proposed by the one of the two dominant parties [People’s party and Socialists],” he writes. “Over time, this system of ‘jobs for the boys’ reached deep in Austrian life, forming a chain of interlocking patrons and clients who settled virtually every argument either by negotiation or else through the exchange of favours and appointment.”

Judt is clear this arrangement didn’t just apply to public services and the media, but “much of the economy” as well.

In Italy, the story was similar, possibly even more extreme. “Jobs and favours were created and delivered proportional to local, regional, national political clout,” Judt tells us “…. From the point of view of Economic Man the system was grossly wasteful, and inimical to private initiative and fiscal efficiency.”

What were baleful economic effects of this grossly wasteful system? Well, in Austria, Judt relates, per capita (per head) GDP rose, between 1950 and 1973, from $3,731 to $11,308. GDP per head in France grew by 150%. “The Italian economy, starting from a lower base, did even better.” Spain, then labouring under the time-warp of Franco’s clerico-Fascist dictatorship as well as doubtless rampant amiguismo, saw GDP increase from $2,397 to $8,739. These were, for all their sclerotic cronyism, “golden years” economically.

At the end of the twentieth century, in the wake of the East Asian economic crisis, the same underlying “reasons” were uncovered. And they made as much sense then. South Korea chaebols – family-owned corporations where “the managers are brothers and cousins and in-laws who steer business one another’s way and cover up mistakes”, according to the New York Times in 1998 – were blamed for an “outmoded form of crony capitalism”.

But this outmoded system had, prior to the 1990s, produced the highest rate of economic growth of any country in the world for three decades.

Infantile attitude to work

In his Observer article, Carlin says the Spanish “infantile” attitude to work is behind the country’s dreadful economic situation. Young Spaniards, he says, have flocked to London, where “pure merit” is rewarded. But, disaster! A similar malaise is eating through the work ethic in the UK. Most people, according to the new breed of Tory MPs, would rather spend half the day in bed obsessing about celebrities, that do a decent day’s wealth creation. This regrettable attitude explains poor productivity. Britons should be more like hard working East Asians, who doubtless have been victorious by now in banishing the predations of crony capitalism.

The trouble is, celebrity obsessions aside, things were even worse in the past. To return to Tony Judt, Britain’s economy, in the post-war era, suffered from the blights of innumerable craft unions each demanding separate pay rate and demarcating activities, terrible labour relations, and mediocre management that would not invest in research and development.

But despite these impediments, economic growth was much more successful. The British economy grew at an average annual rate of 3% between 1950 and ’73. After 1980, when the power of trade unions was destroyed, the rate has been 2.2%. Productivity growth – output per worker – has been 1.9% between 1980 and 2008. Between 1961 and 1973 – an era of awful labour relations and frequent strikes – it was 2.95%. In the three day week of 1974 production hardly declined at all.

Dissolve the people and elect another-ism

As far as I can see, three conclusions are possible from an honest appraisal of this comparative economic performance. One, attitudes to work and crony capitalism make absolutely no difference to economic success. Two, post-1980 changes, the war against trade unions, privatisation, the dominance of finance, have, despite eliminating inefficiencies in production, damaged the economy. Three, capitalism as an economic system is declining. It is simply less able to deliver economic growth, jobs and prosperity for most people.

But rather than face these issues, the right-wing (and not just the right-wing), unconsciously echoing Bertolt Brecht’s desire to “dissolve the people and elect another”, blames people for just not being good enough for the demands of the economy. The real tragedy is that, while this agenda dovetails perfectly with the corporate desire for a more efficient and obedient workforce, it obscures the causes of economic distress, which annoyingly, will not go away.