Freeman

ARTICLE

Has Capitalism a Future?

JANUARY 01, 1979 by PAUL JOHNSON

Mr. Johnson, a British historian and author, is a former editor of The New Statesman, a leading academic socialist weekly. His recent break from what he calls the Fascist Left in Britain Is explained in his book, Enemies of Society, reviewed in The Freeman, March 1978.

This article, an address at the May 1978 Bank Credit Analyst Conference, is reprinted by permission from the September 1978 issue of The Bank Credit Analyst publication.

Let me begin by defining my terms. By "capitalism" I mean large-scale industrial capitalism, in which privately-financed publicly-quoted corporations, operating in a free market environment, and with the backup of the private enterprise money market, constitute the core of national economies. This is a pretty broad definition, but I think it will do.

Now the first thing to be noted is that this phenomenon is pretty recent. I would date it, in its earliest phase in England, only from the 1780s. It is thus less than 200 years old anywhere. As a widely-spread phenomenon, it is barely 100 years old. Seen against the grand perspective of history, capitalism is a newcomer. We now possess some knowledge of economic systems going back to the early centuries of the third millennium B. C. I could give you, for instance, an outline account of the economic structure of Egypt under the Old Kingdom, about 2700 B. C. Our knowledge of how civilized societies have organized their economic activities thus covers a stretch of more than 4600 years.

And in only about 200 of those years has industrial capitalism existed. Now the next point to note is the remarkable correlation between the emergence of industrial capitalism and the beginnings of really rapid economic growth.

Throughout most of history, growth rates, when we have the statistical evidence to measure them, have been low, nil or minus. A century of slow growth might be followed by a century of decline. Societies tended to get caught in the Malthusian Trap: that is, a period of slow growth led to an increase in population, the outstripping of food supplies, followed by a demographic catastrophe, and the beginning of a new cycle.

There were at least three economic "Dark Ages" in history, in which a sudden collapse of the wealth-making process led to the extinction, or virtual extinction, of civilized living, and the process of recovery was very slow and painful.

The last of these three Dark Ages extinguished Roman civilization in Western Europe, in the 5th Century A. D. It was not until the 13th century that equivalent living standards were again achieved—the recovery thus took 800 years. Society again fell into a Malthusian trap in the 14th century and again recovery was slow, though more sure this time, as intermediate technology spread more widely, and methods of handling and employing money became more sophisticated. Even by the first half of the 18th century, however, it was rare for even the most advanced economies, those of England and Holland, to achieve one per cent growth in any year.

And there is a possibility (I myself would put it higher) that mankind would again have fallen into a Malthusian trap towards the end of the 18th century if industrial capitalism had not made its dramatic appearance.

And it was dramatic. By the beginning of the 1780s, in. England, an unprecedented annual growth rate of two per cent had been achieved. During that decade, the two per cent was raised to four per cent. This was the great historic "lift off," and a four per cent annual compound growth rate was sustained for the next 50 years, on average. Since this English, and also Scottish, performance was accompanied by the export of capital, patents, machine tools and skilled manpower to several other advanced nations, the phenomenon soon became international.

Phenomenal Growth

I don’t want to overburden you with figures, but some are necessary to indicate the magnitude of the change that industrial capitalism brought to human society. In Britain, for instance, in the 19th century, the size of the working population multiplied fourfold. Real wages doubled in the half-century 18001850, and doubled again, 1850-1900. This meant there was a 1600% increase in the production and consumption of wage goods during the century. Nothing like this had happened anywhere before, in the whole of history. From the 1850s onward, in Belgium, France, Austria-Hungary, above all in Germany and the U.S., even higher growth rates were obtained; and feudal empires like Japan and Russia were able to telescope a development process which in Britain had stretched over centuries into a mere generation or two.

The growth rates of twelve leading capitalist countries averaged 2.7% a year over the whole 50-year period up to World War I. There was, it is true, a much more mixed performance between the wars. The U.S., for instance, which in the 44 years up to 1914 had averaged a phenomenal 4.3% growth rate, and which in the seven years up to 1929 had increased its national income by a staggering 40%, then saw its national income fall 38% in the mere four years 1929-32.

But following World War H, growth was resumed on an even more impressive scale. In the 1950s, for instance, the 12 leading capitalist economies cited before had an average annual growth of 4.2%. In Germany it was as high as an average of 7.6%. In all the West European economies, the rate of investment in the 1950s was half as high again as it had ever been on a sustained basis. In several such countries it was over 20% of the GNP; in

Germany and the Netherlands it was 25%, in Norway even higher. Moreover, this high capital formation took place not at the cost of private consumption, but during a rapid and sustained rise in living standards, particularly of industrial workers. These tendencies were prolonged throughout the 1960s and into the 1970s. So far as the mature economies were concerned, the second industrial revolution, 1945-70, was entirely painless—and largely so even in Japan, where even higher investment and growth rates were sought, and obtained, to catch up with the U.S. and Europe.

The Key Was Capitalism

In short, after nearly five recorded millennia of floundering about, in relative or absolute poverty, humanity suddenly in the 1780s began to hit on the right formula: industrial capitalism. Consider the magnitude of the change over the last 200 years or less. We all know the wealth of present-day West Germany; all of us (I am sure) have seen it for ourselves. In the year 1800, in the whole of Germany there were less than 1000 people with annual incomes of 1000 dollars a year or more. Or again, take France. France now has more automobiles per capita even than Germany, and more second homes per family than any other country in Europe. In the 1780s, four/fifths of French families spent 90% of their incomes simply on buying bread—only bread—to stay alive.

Now I have said enough (I could say much more) to demonstrate that industrial capitalism, judged simply by its capacity to create wealth, and to distribute it, is a phenomenon unique in world history. It could be argued that it is the greatest single blessing ever bestowed on humanity. Why, then, am I giving a talk, not in any spirit of paradox either, called HAS CAPITALISM A FUTURE?

You may well ask. But I think we know the answer. I am giving it because capitalism is threatened, and we feel it to be threatened: the question is not academic. But before we go any further, I would like to clear up one important point. The idea has got around, and it is widely believed, especially among young people—and above all, alas, among young people who like to think they are well educated—that industrial capitalism is unpopular, and always has been. That is the work of a tiny, interested minority who have thrust it upon the reluctant mass of mankind.

Nothing, in fact; could be further from the truth. The storage economies of remote antiquity were often hideously unpopular. So was the slave-based economy, combined with corporatism, of the classical world. Agricultural feudalism was certainly unpopular; and mercantilism had to be enforced, in practice, by authoritarian states.

They Voted with Their Feet

But capitalism, industrial capitalism—no! From the very start it received the demonstrable approbation of the masses. They could not vote in the ballot box, but they voted in a far more positive and impressive manner, with their feet. And this for a simple reason. The poorest member of society values political freedom as much as the richest and the well educated—that is my belief. But the freedom he values most of all, the freedom which means most to him, is the freedom to sell his labour and skills in the open market. It was precisely this that industrial capitalism gave to men for the first time in history. Hence it is a profound error of fact, in my view, to see what Blake called the "dark, satanic mills" of the industrial revolution, as the enslavement of man.

The factory system, however harsh it may have been, was the road to freedom for millions of agricultural workers. Not only did it offer them an escape from rural poverty, which was deeper and more degrading than anything experienced in the cities, but it allowed them to move from status to contract, from a stationary place in a static society, with tied cottages and semi‑conscript labour, to a mobile place in a dynamic one. That was why the common man voted for industrial capitalism with his feet, by tramping from the countryside to the towns, in enormous numbers, first in Britain, then throughout Europe. And tens of millions of European peasants, decade after decade, moved relentlessly across the Atlantic in pursuit of that same freedom, from semi-feudal estates and small holdings in Russia, Poland, Germany, Austria-Hungary, Italy, Ireland, Scandinavia, to the mines and factories and workshops of New York, Chicago, Pittsburgh, Cleveland, Detroit. It was the first time in history that really large numbers of ordinary people were given the chance to exercise a choice about their livelihood and destiny, and to move, not as a member of a tribe or a conscript soldier, but as free individuals, selling their labour in the open market.

A New Freedom

They voted for industrial capitalism with their feet not only because they felt in their bones that it meant a modest prosperity for their children and grandchildren—and on the whole they have been proved abundantly right—but because they knew it meant a new degree of freedom for themselves.

Indeed, the success of industrialisation, despite all its evils, continues to persuade countless ordinary men and women, all over the world, to escape the poverty and restraints of rural status-society and to enter the free labour markets of the towns. Hence the growth of the megalopolises all over the world—Calcutta and Bombay, Teheran and Caracas, Mexico City and Djakarta, Shanghai and Lagos, Cairo and Johannesburg; there are now literally scores of million-plus cities all over the Third World.

This never-ending one-way flow from countryside to city is plainly a voluntary mass choice, for most governments fear and resent it and many are attempting, sometimes savagely but always ineffectively, to halt or reverse it. It is more marked in the free market economies, but it is marked everywhere. Short of evacuating the cities by force and terror, as is now apparently being practiced in parts of southeast Asia, there is no way to stop this human flood. There seems to be an almost irresistible urge in human beings to move away from the status society to contractual individualism—the central feature of industrial capitalism. And this operates even in totalitarian societies, as witness the efforts, for instance, of the Chinese and Polish governments to limit the urban explosions they are experiencing.

Well, then, if industrial capitalism is both unique in its wealth-producing capacity, and also has the endorsement of a popular mandate, why is it under threat? And who is threatening it?

Losing the Intellectual and Moral Battle

Let me look at five principal elements. The first, and in some ways the most important, is that the free enterprise idea is losing, if it has not already lost, the intellectual and moral battle. Not long ago I went into Blackwell’s, the great book shop at Oxford University. I wandered over the huge room which houses the books on politics and economics, and having been disagreeably surprised by what I saw there, I made a rough calculation. New books extolling the economic, social and moral virtues of Communism and collectivism—and there were literally hundreds and hundreds from all over the world—outnumbered books defending free enterprise, or merely seeking to take an objective view of the argument, by between five and six to one. Now this overwhelming predominance of collectivism was not due to any sinister policy on the part of Messrs. Blackwell’s, which is a highly efficient capitalist enterprise. It was a marketing response to demand, on the part of students and teachers. And this was Oxford University, not one of the new slum universities of recent years, some of which have been virtually shanghaied by Marxist factions, but one of the free world’s greatest centres of learning, where the battle of ideas is fought under the best possible conditions.

There can be no doubt that the intellectual and moral assault on free enterprise, and the exaltation of Marxist collectivism, which is such a striking feature of the 1970s, is directly related to the huge expansion of higher education, put through at such cost to the capitalist economies, in the 1960s. Now there is in this a huge and tragic irony. For in the 1950s, the decade when the university expansion was planned, it was the prevailing wisdom among the leading thinkers of the West, that the growth of higher education was directly productive of industrial growth—that the more university graduates we turned out, the faster the GNPs of the West would rise. This was the thesis outlined by President Clark Kerr of Berkeley, in his 1963 Godkin lectures at Harvard, and it was a thesis put forward, with immense effect in Britain, by Sir Charles, now Lord Snow. Kerr said: "What the railroads did for the second half of the last century, and the automobile for the first half of this century, may be done for the second half of the 20th century by the knowledge industry: that is, to serve as the focal point for national growth." And Kerr added that more graduates would not only mean a bigger GNP but act as a reinforcement for middle class democracy, with all its freedoms.

Anticapitalism

Now to speak of the "knowledge industry" was to ask for trouble. Knowledge is not a manufactured commodity. There is knowledge for good and knowledge for evil, as the Book of Genesis says. The 1960s, during which most Western nations doubled, and in some cases trebled, their university places, did not reinforce democratic freedoms, or enlarge the GNP or strengthen the free enterprise system. They produced the students’ revolts, beginning in Paris in 1968; they detonated the Northern Ireland conflict, which is still harassing Britain. They produced the Baader-Meinhoff Gang in West Germany, the Red Brigade in Italy, the Left Fascist terrorism of Japan. They produced an enormous explosion of Marxist studies, centered around the social sciences and especially sociology and a new generation of university teachers and school teachers, dedicated by faith and by a sort of perverted religious piety, to the spread of Marxist ideas.

There are ironies within the general irony. Thus, the new university of the air, created in Britain at enormous expense to bring higher education to adults, and therefore christened the Open University, sometimes gives the impression that it has become a centre virtually closed to any teacher not of proven Marxist opinion. Nuffield College, Oxford, founded by that great capitalist pioneer, Lord Nuffield, who created the British automobile industry, has become a centre of trade union ideology, of the very ideas which, slowly but surely, are putting the British automobile industry out of world markets and out of business. Warwick University, created in the 1960s as a powerhouse of ideas and clever graduate executives for the West Midlands industrial complex, Britain’s biggest, has often turned out Marxist and pseudo-Marxist agitators dedicated to the destruction of the wealth-producing machine which brought their university into existence.

I could go on. It is true, of course, that student unrest, as such, has quieted down. But the steady diffusion of ideas hostile to our free system continues remorselessly. Industrial capitalism, and the free market system, is presented as destructive of human happiness, corrupt, immoral, wasteful, inefficient and above all, doomed. Collectivism is presented as the only way out compatible with the dignity of the human spirit and the future of our race. The expanded university threatens to become not the powerhouse of Western individualism and enterprise, but its graveyard.

The Ecological Panic

There is a second threat, what I call in my book the "Ecological Panic." Now this movement, again, began with the best intentions. I well remember when Rachel Carson’s work, The Silent Spring, first appeared in The New Yorker, and the surprise and concern it rightly aroused. We were tending to ignore some of the destructive side effects of very rapid industrial expansion. The wave of concern that followed was justified, and the steps then taken, notably the clean air policies, and the policies for cleansing lakes and waterways have been spectacularly successful. Thanks to smokeless fuel, London fogs, which were real killers, have been virtually eliminated. The last really serious London fog was in 1952. The Thames is now cleaner, and has greater quantities of fish, and more varieties in it, than at any time since before the days of Spenser or Shakespeare. Similar successes are now being registered in the U.S., which adopted such legally enforceable remedies somewhat later than Britain did. These are examples of what can be done by thoughtful, unemotional, systematic and scientifically justified application of conservation and anti-pollution policies.

But most of these were put in hand before the ecological panic started. Once ecology became a fashionable good cause, as it did in the late 1960s, reason, logic and proportion flew out of the window. It became a campaign not against pollution, but against growth itself, and especially against free enterprise growth—totalitarian Communist growth was somehow less morally offensive. I beg those of you who have not already read it to get a copy of Professor Wilfred Beckerman’s In Defence of Economic Growth. Beckerman is one of the best of our economists, and was a member of the Royal Commission on Environmental Pollution; he knows the subject better perhaps than any other working economist and his book is a wonderfully sane and lucid summary of the entire subject.

Substitutes for Religion

I have never yet been able to persuade any committed ecology campaigner even to look at this book. Of course not. They have a faith, and they do not want to risk it. One of the most important developments of our time (I would argue) is the growth, as a consequence of the rapid decline of Christianity, of irrationalist substitutes for it. These are not necessarily religious, or even quasi-religious. Often they are pseudoscientific in form, as for instance the weird philosophy of the late Teilhard de Chardin. The ecology panic is another example. It is akin to the salvation panic of 16th century Calvinism. As I say in my book, when you expel the priest, you do not inaugurate the age of reason—you get the witchdoctor. But whereas Calvinist salvation panic may have contributed to the rise of capitalism, the ecology panic could be the death of it.

If the restrictions now imposed on industrial development had operated in 18th century England, the industrial revolution could not have taken place. It would in effect have been inhibited by law—as of course many landowners of the day wished it to be—and in any event legal requirements would have eliminated the very modest profits by which it originally financed itself. We would still be existing at 18th century living standards, and wallowing in 18th century levels of pollution, which were infinitely worse than anything we experience today—if you want to see what they were like, visit the slums of Calcutta or Djakarta.

As it is, the ecology panic has been a potent destructive force. The panic mongers played a crucial role in persuading the Middle Eastern oil producers, especially Iran, to quadruple the price of oil in the autumn of 1973, the biggest single blow industrial capitalism has suffered since the Wall Street crash of 1929. That was the beginning of the profound recession from which we have not yet emerged. In the end, as was foreseeable at the time, the huge rise in oil prices did not do anyone any good, least of all the oil producers. But it ended the great postwar boom and robbed Western capitalism of its tremendous elan, perhaps for good. As Browning put it, "Never glad confident morning again." And it is significant that the ecological lobby is now striving desperately with fanatic vigor and persistence, to prevent the development of nuclear energy, allegedly on the grounds of safety.

Nuclear Power

Now it is a fact, a very remarkable fact in my view, that throughout the West (we have no figures for Russia or China) the nuclear power industry is the only industry, the only industry, which over 30 years has contrived to avoid a single fatal industrial accident. Its record is unique, and has been achieved by the efforts of the industry itself, and the responsible governments, without any assistance from the ecolobby. But of course they would like a few fatal accidents. That would suit their purposes very well. In Britain recently, we had a long, public enquiry, what we call a statutory enquiry, into whether or not it was right to go ahead with the enriched uranium plant at Windscale. The enquiry was a model of its kind. The ecolobby marshalled all the scientific experts and evidence they could lay their hands on. At the end the verdict was that there was no reason whatever why the program should not proceed. Did the ecolobby accept the verdict? On the contrary. They immediately organised a mass demonstration, and are planning various legal and illegal activities to halt the program by force. Now it is notable that a leading figure in this campaign is the man who is perhaps Britain’s leading Communist trade unionist, Mr. Arthur Scargill of the Mineworkers. He has never, so far as we know, campaigned against Soviet nuclear programs, peaceful or otherwise. But the mass of the movement, in the U.S., Britain, France, Germany, and Italy, so far as I have been able to observe, is not politically motivated. They are simply irrational: but irrationality is an enemy of civilised society, and it can be, and is being exploited by the politically interested.

The Growth of Government

A third factor in the future of capitalism is the growth of government. Let me put it this way. Industrial capitalism, or rather the free enterprise economy, and Big Government, are natural and probably irreconcilable enemies. It is no accident that the industrial revolution took place in late 18th century England. It was a period of minimum government. Of all the periods of English history, indeed of European history, it was the time when government was least conspicuous and active. It was the age, very short alas, of the Night Watchman state. As a matter of fact, the industrial revolution—perhaps the most important single event in human history—seems to have occurred without the English government even noticing. By the time they did it was too late; happily—otherwise they would probably have stopped it.

It is almost inevitable that government, particularly an active, interventionist government, should view free enterprise with a degree of hostility, since it constitutes a countervailing power in the state. The tendency, then, is to cut free enterprise down to size, and this may be done in a number of ways. In the U.S. the characteristic technique is government regulation and legal harassment, and this of course has been far more pervasive and strident since the ecolobby swung into action. In Britain the technique is both through direct assault—nationalization—and slow starvation. In a way, nationalization is ineffective, since it allows the public to make comparisons between the performance of the nationalized sector and that of the free sector—nearly always to the latter’s advantage. Starvation is more insidious. By this I mean the progressive transfer, by taxation and other government policies, of resources from the private to the public sector.

The Starvation Technique

In 1955, for instance, public expenditure in Britain as a proportion of GNP was just over forty per cent. By 1975, twenty years later, it has risen to nearly sixty per cent. Moreover, this rise was accompanied by a record budget deficit of about 22 billion dollars, itself a further 11 1/2% of GNP. Of course, the taxation had to be provided, and the deficit serviced, by the private sector. We have, then, an Old Man of the Sea relationship, in which the parasitical Old Man is growing bigger, and poor Sinbad smaller, all the time. The shrinking productive sector has to carry the burden of an ever-expanding loss-making public sector. Thus Britain’s nationalized steel industry will lose one billion dollars this year, and it has just been authorized by statute to borrow up to seven billion dollars, guaranteed by government and taxpayer. Now the interesting thing is that in Britain the public sector, and the civil service, generally, are now paying higher wages, providing better conditions, and giving larger pensions—which in a growing number of cases are index-linked, and so inflation-proof–than the private sector can possibly afford. And of course they are financing these goodies out of tax-guaranteed deficits—that is, from the dwindling profits of the private sector. This is what I call the starvation technique. When a private firm goes bust, provided it is big enough, the state takes over, the losses are added to the taxpayer’s bill, and the private sector has one more expensive passenger to carry. This is the starvation method.

Trade Union Disruption

In this technique, the fourth factor, the trade unions, play an important part. In Britain it is demonstrably true that the legal privileges of the trade unions, which virtually exempt them from any kind of action for damages (including, now, libel), lead directly to restrictive practices, over-manning, low productivity, low investment, low wages and low profits. Thus trades union action tends, in itself, to undermine the performance of industrial capitalism as a wealth-creating system. In Britain, for instance, the trade unions can rightly claim that capitalism is inefficient, because they make sure it is inefficient. Ford workers in Britain, using exactly the same assembly line machinery as in West Germany, produce between 20% and 50% fewer automobiles. ICI chemicals, one of the best companies in Britain, nevertheless has a productivity performance 25% lower than its Dutch and German competitors. A recent analysis shows this is entirely due to over-manning and restrictive practices.

The private sector is now threatened by two further union devices: the legally-enforced closed shop, which compels the workforce to join designated unions on pain of dismissal without compensation or legal redress; and new plans to force firms to appoint up to 50% worker directors, these worker directors to be appointed not by the work force themselves, nor even necessarily from among them, but by and from the trade union bureaucracy (Bullock Report). This has to be seen against the explicit policy of some groups within the unions of driving private sector firms to bankruptcy, by strikes and harassment, so that the state will then have to take them into the public sector.

Follow the Leader?

Of course I don’t want to make your flesh creep by arguing that what is happening in Britain will necessarily happen elsewhere. But certainly if the bill now before the Senate giving unions much wider and more effective powers to organize goes through, the U.S. will be well launched on the road we have travelled; and I may say there are many other ways in which the present U.S. administration seemed determined to follow Britain’s example. The West Germans, too, are now beginning to adopt some of the institutions which flourish in British trades unionism, notably the shop stewards’ movement. Businessmen all over the free world may despise the performance of British industry, but trades unionists all over the world admire and envy the power of British trades unionists and are actively seeking to acquire it for themselves.

The Communist Threat

Let me end on a word of warning. I have said nothing of the fifth threat on industrial capitalism and the free enterprise system—the threat from without. But of course this is bound to increase as the military superiority of the Soviet Union over the U.S. is reinforced. I have never thought that the Communist system would triumph by a direct assault. I have always assumed that it would first establish an overwhelming military predominance and then, by pressure and threats, begin to draw the political and economic dividends of it. If the U.S. opts out of the competitive arms race with the Soviet Union, while providing, as she supposes, merely for her own defence, then we must expect to see this fifth threat hard at work winding up industrial capitalism and free enterprise all over the world.

Thus, when we ask HAS CAPITALISM A FUTURE? I answer: it all depends on the U.S. West Germany and Japan, it is true, have strong free enterprise economies; they also have a tradition of state capitalism, and would adapt themselves with surprising speed and readiness to a new collective order. France already has a huge public sector and a long tradition of dirigisme or etatisme. All three are Janus-faced. Britain, I believe, is profoundly anti-collective and will remain so if it continues to be given the choice. But its private enterprise system is now very weak, and its business and financial elites are demoralised and defeatist.

Is there demoralisation, is there defeatism, on this side of the Atlantic? You can answer that question better than I can. I myself think that capitalism will survive, because of its enormous intrinsic virtues as a system for generating wealth, and promoting freedom. But those who man and control it must stop apologizing and go onto the ideological offensive. They must show to ordinary people that both the Communist world, and the third world, are parasitical upon industrial capitalism for their growth technology. That without capitalism, the 200 years of unprecedented growth which have created the modern world, would gradually come to an end. We would have slow growth, then nil growth, then minus growth; and then the Malthusian catastrophe.

In short, those who wish to maintain the capitalist system must endeavour to teach the world a little history, and remind it, and especially the young, that though man’s achievements are great they are never as solid as they look. If man makes the wrong choice, there is always another Dark Age waiting for him round the corner of time.

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January 1979

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