The retreat of welfare

As the introduction of nuclear weapons and changing ideas on inter­national law led to the loss of the state’s ability to expand at its neigh­bors’ expense, it turned its still considerable energies inward.

On the declamatory level, the move toward the welfare state started during the war itself. Both Churchill and Roosevelt were well aware that the efforts made by workers on behalf of their state would have to be compensated; when they signed the ‘‘Atlantic Charter’’ of early 1942, they officially declared ‘‘freedom from want’’ to be one of the Allies’ principal objectives. To bring it about, contemporaries pointed to the enormous increase in production which had been brought about by mobilization and the harnessing of all resources to the military effort. It was suggested that, if only a small fraction of those resources could be retained in the hands of the state and used for public purposes, it should be possible to solve or at least alleviate some of the most pressing social problems, such as poverty, unemployment (both of them very conspicu-

39

SeeM. Kaldor, New Wars for Old (London: Pergamon, 1998, pp. 13-30); and the section on ‘‘The threat to internal order’’ in this chapter, pp. 394-408. ous during the years of the Great Depression), inadequate health care, and insufficient access to secondary and tertiary education as a way toward a better life.

Broadly speaking, two series of steps were necessary to carry out this program. On the one hand, it was a question of concentrating much greater resources in the hands of the state - if not to the extent that this had been done during the war itself, then at any rate in comparison with the years before 1939. On the other, it was a question of devising new mechanisms for distributing those resources to those groups and those people who appeared to need them most. Both sides of the problem had this in common that, if they were to be tackled and solved, the number of those working for the state would have to be greatly increased with all that this entailed for career opportunities, promotions, and sheer power over society as a whole. From the beginning, in other words, the proposed reforms commanded a constituency in the form of the state bureaucracy and all its manifold organs - one which, over the next three decades, would prove capable of pressing its demands for greater state intervention in virtually all fields of life almost independently of the electorate’s wishes.^[399]

The first firm steps toward tightening the state’s grip on the economy had, in fact, already been taken during the interwar period. Not only had levels of taxation never gone back to pre-1914 levels - a problem that affected even the country that was most reluctant to embark on the new course, i.e., the United States - but in one state after another there was a tendency toward the nationalization of industry.

By way of further justifying the increased intervention of the state in the economy, several lines of thought were being developed. On the one hand, there was socialist and communist doctrine, going back to the Communist Manifesto and the Critique of the Gotha Program and most fully implemented in the Soviet Union. Throughout the interwar period, there existed a sprinkling of mostly middle-class, left-wing intellectuals in many European countries who looked at developments originating in Moscow as their shining example; feeling ashamed at what they called ‘‘poverty amidst plenty'' (the British writer John Stacey), they argued that nation­alization would result in greater responsibility, fairer prices, increased efficiency, more rapid growth, the disappearance or at any rate flattening of the trade cycle, and an end to the class warfare which had bedeviled capitalist countries since at least the time of the industrial revolution.⁴² In a curious way, many of the beliefs of these well-meaning people on the left were paralleled by the measures being implemented at that very time by the right-wing ‘‘totalitarian'' regimes of Mussolini and Hitler, although, to be sure, in their case the extension of state control over both production and other fields (such as family life, in encouraging population growth) had at least as much to do with preparing for war than with any desire to ‘‘lift up the masses.''

Left- and right-wing ideologies apart, for professional economists a further push toward increased state intervention was provided by a fa­mous book, John Maynard Keynes' The General Theory of Employment, Interest and Money (1936).⁴³ Written against the background of the Great Depression, it argued that aggregate supply and aggregate demand did not automatically balance each other, as had been argued by Adam Smith and so many of his successors.

⁴² See, for Britain, E. J. Hobsbawm, The Age of Empire (Harmondsworth, UK: Penguin Books, 1989), pp. 239ff.

⁴³ For the way Keynes’ influence made itself felt, see P. Weir and T. Skocpol, ‘‘State Structures and the Possibilities for Keynesian Responses to the Great Depression in Sweden, Britain, and the United States,’’ in P. B. Evans, et al., eds., Bringing the State back in (Cambridge: Cambridge University Press, 1985), pp. 107-68. downward spiral that was quite capable of lasting for years on end, making economies function at a fraction of their potential output, and even wrecking entire societies. Going against the traditional wisdom with its emphasis on balanced budgets and ‘‘sound” money, Keynes urged that the state should resolve such a situation by artificially stimulating demand. Whether this would be done by loosening credit, reducing taxes, or ‘‘deficit funding” - an elegant name for putting the printing press into operation - did not matter much; if necessary, all three methods were to be employed separately or in combination. The main thing was to get cash into people's hands. This would stimulate production, generate tax revenue for the state, and so on in a spiral whose direction, it was hoped, would be ever upward.

Whatever their precise origin, after 1945 the confluence of all these different modes of thought caused state intervention in the economy to explode. Among the first to take the road to the future was France. In 1946, it nationalized energy, including electricity, gas, and coal; the largest thirty-two insurance companies; the four largest deposit banks; Air France; as well as the aircraft manufacturer Berliet. Also caught in the dragnet were several firms accused of having cooperated with the German occupation regime, the most renowned of which was the car-maker Renault.

Most of the nationalizations which took place in the 1930s and 1940s had been carried out by left-wing governments for ideological reasons, and in the face of opposition from the right. However, in country after country it became clear that the movement was in fact part of a long-term historical trend that conservative cabinets found themselves powerless to resist. Sometimes the need to provide employment acted as the decisive factor; in other cases it was a question of enabling bankrupt companies to continue providing essential services in fields as far apart as transpor­tation and defense. For example, already in 1952-3 the new British Conservative government under Winston Churchill sought to restore steel back to private ownership; it failed, and not just because Labour threatened to renationalize in case it returned to power, but also because of interests which had grown up inside the government apparatus itself and which were already becoming vested.

44

Though in most countries the pace of nationalization showed signs of slackening after 1975, a few witnessed the greatest expansion of the public sector during the late 1970s and even the early 1980s. In Austria the socialist government of Bruno Kreisky, which was in office con­tinuously from 1970 to 1987, carried out massive state takeovers of enterprises in such fields as steel, chemicals, and mining. In France, which for twenty-three years after 1958 was controlled by the Gaullists, the victory of Francois Mitterand in the 1981 elections led to dramatic increases in state control over everything from mining and steel through pharmaceuticals, chemicals, glass, and electric equipment to banking.^[402] One of the last instances took place in Canada which in this respect resembled Europe more than it did the United States. Here, electoral considerations and the need to prevent unemployment led to the nation­alization of the - bankrupt - fishing industry in 1984.

Nor, during the decades in question, was the trend toward greater public ownership over industry limited to developed countries. On the contrary, many countries in the developing world proceeded even faster; considering that they regarded it as a major vehicle for modernization as well as a solution for every social problem. Thus the Mexican government between 1940 and 1980 founded 111 industrial enterprises, became a majority shareholder in 59, and a partner in 124 - 35 of which it was ‘‘forced” to save from bankruptcy.^[403] In Chile by 1970 the state was sole or majority owner of forty-four of the largest companies including elec­tricity generation, energy, and air transport; and this was before the socialist government of Salvador Allende took over 500 more during the three years when it was in office. In Argentina the expansion of the public sector was largely the product of the Peronist years between 1947 and 1955, showing once again how socialist and quasi-fascist ideas could meet. In Brazil it was carried out by the various military governments which ruled the country between 1963 and 1978, and which poured vast sums into industries considered vital to the national welfare such as chemicals, energy, cement, and arms.

However, even these developments were eclipsed by those which took place in Africa and Asia where, between 1960 and 1975 or so, the great majority of newly independent states adopted some kind of socialist development program that was heavily influenced either by the Soviet model or by the Chinese one. The outcome was a very large number of one-party political systems run on dictatorial or semi-dictatorial lines. Claiming to have liberated their peoples from imperialist ‘‘exploitation” and to be mustering the slender available resources for the public good, they nationalized - in other words, took over without compensation - virtually every form of economic enterprise, whether domestically or foreign-owned; beginning with the extraction of natural resources through energy production to the running of public transportation and even hotels. For example, in 1974 over three-quarters of Egypt's indus­trial production originated in state-owned plants.^[404] Nor were minor enterprises, particularly in agriculture, exempt. From Vietnam to Tan­zania, often even peasants engaged in little more than subsistence farming were deprived of their land - to the extent that it belonged to them in the first place - and concentrated in rural communes under tight state control.

While many developing states also tried to distribute at least some benefits in the form of free education and rudimentary medical care - e.g., China's ‘‘barefoot doctors'' - the real triumph of the modern wel­fare state took place in Western Europe, Canada, and New Zealand. By the late 1960s these states had extended free education until it covered all high school students and many college and university students as well. They were providing some form of free (or, at any rate, heavily subsidized) medical service that covered every phase in the individual's life from ante-natal to geriatric care; they had instituted huge public housing and vocational training schemes, as well as insuring their citi­zens against unemployment, accident, sickness, and old age at levels which in most cases should permit those affected to hold their heads above water and which were sometimes remarkably generous. Some countries had also introduced paid maternity (and paternity) leave, child allowances, free legal aid to those who could not afford it, meals and nursing services for the disabled and the old, and countless other programs.

In the United States, as the world's richest society and the one most committed to free-enterprise capitalism, federal welfare schemes had made little progress since the days of the New Deal. However, in the late 1950s and early 1960s, it too was shocked into action by a number of inquiries which revealed how the less fortunate Americans lived amidst all the plenty by which they were surrounded.⁴⁹ Once the budget-minded Eisenhower had finally left office, reforms designed to correct this situ­ation were started under the Kennedy administration. They were greatly accelerated by Lyndon Johnson who coined the term Great Society to describe them; in spite of the Republicans' conservative leanings, Demo­cratic control of both Houses of Congress ensured they would be carried over into the Nixon and Ford eras as well. Taken together, they com­posed the greatest expansion of welfare in American history. Among the best-known programs were Medicare and Medicaid; foodstamps; SSI (Supplemental Security Income, a scheme for guaranteeing income to the elderly, the blind, and the disabled); WIN (Work Incentive Program, meant to provide adults with the opportunity for vocational training); and a very large number of programs designed to help individual groups from single parents to members of minorities.

⁴⁹ See in particular J. K. Galbraith, The Affluent Society (Boston: Houghton Mifflin, 1959), as well as M. Harrington, The Other America: Poverty in the United States (New York: Collier, 1962).

In both Europe and the United States - to say nothing of developing countries - the expansion of state-directed welfare led to an equally great growth of the bureaucracy. By the second half of the twentieth century, the number of ministries, which during the state's formative years in the seventeenth and eighteenth centuries had seldom exceeded four, had risen to something nearer twenty in many of the most advanced countries. The ministers of justice, of foreign affairs, of war, and of the treasury were joined by ministers for interior affairs, police, agriculture, transportation, communications, education, health, labor, welfare, trade and industry, aviation, energy, planning, housing, science and technology, and tourism. Some countries thought it indispensable to have a special minis­ter for the infrastructure. Others considered that they could not get by without a portfolio for sport and leisure, while others still expanded their cabinets by including a minister who was responsible for ecological affairs and another to look after women. The number of government employees also grew by leaps and bounds: e.g., from 11 to 23 percent of the West European workforce between 1950 and 1980, and from 9.7 to 15.2 percent of the civilian workforce in the United States during the same period. In 1982 the Western countries with the largest number of gover­nment employees in the workforce were Sweden and Norway with 32 percent each. They were followed by the United Kingdom (22 percent), whereas France and the United States with 17 percent came near the bottom of the list.^[405]

To support all these bureaucrats, the share of government spending as part of GNP grew to proportions which, except in periods of total war, were without precedent in history. To focus on a few countries only, between 1950 and 1973 it rose from 27.6 to 38.8 percent in France; 30.4 to 42.0 percent in (West) Germany; 26.8 to 45.0 percent in Britain; and 34.2 to 41.5 percent in the Netherlands.^[406] Nor surprisingly, much of this increase was accounted for by the rise of various social services. Between 1940 and 1975 their share of GNP doubled in Germany (which, thanks to the Nazis, entered the period while in possession of a more developed system than any other Western country), trebled in the UK, quadrupled in the Netherlands, and quintupled in Denmark where the growth was from 4.8 to a whopping 24 percent.⁵² On the other side of the Atlantic the corresponding US figures rose from 23 to 35.8 percent of GNP (total government spending at both the federal and state levels). The share of welfare payments grew from 8.9 to 20 percent of the federal budget, which meant that, from the second half of the 1970s on, ‘‘social” spen­ding had easily become the largest part of government spending even in the one state whose commitment to ‘‘rugged individualism” was the strongest on earth.

As Northcote Parkinson had predicted in 1958, had the prevailing trends been allowed to continue then by the year 2195 every man, woman, and child in Britain would have been working for the gover­nment. That this did not happen was due above all to two factors, one external and the other internal. The external factor was represented by the 1973 Arab-Israeli War and the fourfold increase in the price of energy that came in its wake.⁵³ These events sent the majority of Western economies into a recession that lasted through most of the 1970s; from then until 1981 or so, each time the ministers of the Organization of Petroleum Exporting Countries (OPEC) held a meeting the world would hold its breath while waiting for the bad news which invariably followed. Nor were the economies of Western Europe and North America assisted by the intensification of East Asian, particularly Japanese, competition which took place during these years and which threatened to wipe out - in some cases, did wipe out - entire industries from textiles through auto­mobiles and photographic equipment to consumer electronics. One way or another, in most West European countries, unemployment soared to levels double and triple those which had been considered normal during most of the 1950s and 1960s.⁵⁴ The system of payments which had been designed to enable the unemployed to keep their heads above water, and which often gave them generous benefits such as retraining and reloca­tion, was swamped.

The other factor that drove the welfare state to the breaking point was its own success.⁵⁵ Whatever their precise form, the various programs had been designed to assist weak population groups such as the elderly, the sick, and, later, single mothers; however, it soon turned out that the

⁵² N. Gilbert, Capitalism and the Welfare State (New Haven, CT: Yale University Press, 1981), table 7.2.

⁵³ For a short account of the impact of the ‘‘crisis” on the international economy, see W. M. Scammell, The International Economy Since 1945 (London: Macmillan, 1983), pp. 193ff.

⁵⁴ For figures on Europe, see Milward, The EuropeanRescue of the Nation State, p. 30; for the United States, Monthly Labor Review, 103, 2, February 1980, p. 75.

⁵⁵ J. Logue, ‘‘The Welfare State: Victim of Its Success,” in S. R. Graubard, ed., The State (New York: Norton, 1979), pp. 69-88; M. Dogan, ‘‘The Social Security Crisis in the Richest Countries: Basic Analogies,” International Social Science Journal, 37, 1, 1985, pp. 47-61. greater the benefits offered, the larger the number of those entitled. For example, in Germany the number of people aged over sixty-five rose from 9.2 percent of the population in 1950 to 11.1 percent in 1961, 13.2 percent in 1970, and 15.5 percent in 1980.⁵⁶ Since the elderly get sick more often, but also because of the revolution in medical technology that took place during those very years, the cost of heath care rose dramati- cally;⁵⁷ this helps explain the near doubling of ‘‘social” expenditure (considered as part of either GNP or the state budget) that took place during the same period.⁵⁸

To adduce another example, the number of children in the United States rose by 41 percent between 1952 and 1972, but the number of those eligible for benefits under the Aid for Dependent Children Program (AFDC) increased by a stunning 456 percent. The reason is that, given the rise in both illegitimacy and divorce (which by 1980 had increased from 26 to 50 percent of all marriages), a majority of children could now expect to spend at least some of their first eighteen years in a single parent household; similar developments took place in most other developed countries.⁵⁹ By way of a final case in point, Denmark with its remarkably generous system of sickness benefits (90 percent of the average industrial wage) discovered that the average number of sick days claimed by each worker per year doubled between 1967 and 1977.⁶⁰ Nothing could be better proof of the welfare state's amazing ability to aggravate the very social problems which it was destined to cure. In fact, the same had been true ever since the first programs had been instituted around the turn of the century.

Old habits are hard to discard. Trapped in the thinking of the previous two and a half decades, initially most of the governments confronted by these problems refused to look them in the face. Though slowing down, both the expansion of the welfare state and the wave of nationalizations that accompanied it continued through the first half of the 1970s, some­times even into the second. Thus, in West Germany, the great improve­ment in provisions for the elderly came after Helmut Schmidt took over as chancellor in 1974. In Britain it was EEC membership which led to

⁵⁶ R. Tylewski and M. Opp de Hipt, Die Bundesrepublik Deutschland in Zahlen 1945/49-1980 (Munich: Beck, 1987), p. 38; for Britain there are parallel figures in A. F. Stiletto, Britain in Figures: A Handbook of Social Statistics (Harmondsworth, UK: Penguin Books, 1971), p. 31.

⁵⁷ For some figures on this development, see C. W. Higgins, ‘‘American Health Care and the Economics of Change,” in Finley, Public Sector Privatization, pp. 99ff.

⁵⁸ Tylewski and Opp de Hipt, Die Bundesrepublik in Zahlen, pp. 183-4.

⁵⁹ US data from Freeman, The Growth of American Government, p. 11; figures for selected other countries in L. Bryson, Welfare and the State: Who Benefits? (London: Macmillan, 1992), p. 193.

⁶⁰ J. Logue, ‘‘Will Success Spoil the Welfare State?,” Dissent, Winter 1985, p. 97. the introduction of maternity benefits in 1975, whereas the same year saw the European welfare state reach its apogee as unemployment bene­fits were increased and their average duration extended from twenty to forty-four weeks.^[407] Similarly in the United States, Title XX of the Social Security Act consolidated a vast array of benefits in such a way that, between 1975 and 1977, the number of recipients rose from 2.4 million to 3.5 million, leading to a situation where almost half of the population were receiving payments of some sort.^[408] Average social expenditure in the Organization for Economic Co-operation and Development (OECD) countries rose, reaching almost 25 percent of GNP.^[409] The result, in every case, were government deficits and inflation. For example, the US federal government was never in the black from 1969 until 1998 (even now, the ‘‘balanced budget” allegedly achieved by the Clinton administration conceals an enormous gap in social security). In the late 1970s, Italy, Belgium, Britain, Japan, and West Germany were all running deficits in excess of 5 percent of GNP.^[410] So did that world- renowned bastion of sound money, Switzerland - with the result that inflation ran between 3.6 percent in 1979 and 6.5 percent in 1981.^[411]

By this time, though, a reaction was already setting in. Squeezed by a combination of rising taxes and inflation, and fearing a future which promised nothing but greater burdens, in one country after another the electorate signified its disgust with the welfare state and those who promoted it. For example, Canada from 1975 on started cutting the Unemployment Insurance Program with an eye to reducing expenditure. In 1977 the federal government in Ottawa put a cap on the amount of funding it provided for the provinces’ social welfare programs;^[412] from then on, the story has been one of more or less constant cuts.^[413] In Britain the construction of public housing came to a halt in 1977, i.e., while the country was still under Labour government. A year later a program aimed at pushing people out of the state pension plan and into private funds was started, with the result that, by 1983, 45 percent of those concerned had made the switch. For the United States, the decisive turning point at the grass-roots level was probably represented by the 1980 California citi­zens’ tax revolt, which led to the adoption of Proposition 13 and demon­strated that people had had their fill of the ever-growing welfare state. In fact, the late 1970s and early 1980s saw the rise to power in both Britain and West Germany of conservative governments whose avowed purpose was to carry out a right-wing revolution, while in the United States President Reagan in his inaugural speech promised ‘‘to check and reverse the growth of government which shows signs of having grown beyond the consent of the governed.’’^[414]

Since then, and with few exceptions such as Norway whose economy is kept afloat on a lake of oil, all over the world the news for the welfare state has been almost uniformly bad. The methods used to cut back on benefits and services have been numerous and varied. One such was to put an arbitrary ceiling on expenditure, thus cutting the quality of services and forcing people to look elsewhere. Then there was the introduction of means tests to limit the number of recipients; the substitution of tax credits for direct transfer payments, a method which often benefited middle-class families at the expense of lower-income ones; the broaden­ing of the tax base so that welfare payments now counted as income; cuts in housing, education, and health programs; various changes in eligibility rules (such as raising retirement ages, and for Medicaid in the United States); requiring fees to be paid for services which used to be provided free of charge; and, in places where they existed, canceling or reducing subsidies for everything from cultural services (tertiary education, mu­seums, libraries, the theater, the plastic arts, music) to housing, public transportation, and bread.

By the second half of the 1980s, there probably was no country left anywhere in the developed world that had not adopted at least some of these changes. However, even where the cuts had been kept to a mini­mum, the real quality of service was often eroded. The methods used were continuing inflation; lengthening waiting lists, as in the case of ‘‘nonessential’’ surgical procedures that might take months or years before they were carried out; and bureaucratic intimidation whose effect - whether deliberate or not - was to make sure that at least some of those entitled to benefits would not show up to claim them. For example, one study dating to the mid-1980s pointed out that an American widow with several children, one of whom was retarded, was entitled to participate in seven different welfare programs at both the state and the federal levels. To obtain the benefits she would have to go to four different offices, complete five different forms, and answer 300 different questions. No fewer than 1,400 pieces of information were needed to determine the level of her income alone - and this before she ever saw a penny disbursed.^[415]

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As the various welfare systems shrank, the gaps between the incomes of rich and poor began to widen. The extent to which thirty or forty years of social legislation in the most advanced countries had succeeded in achieving its aim, i.e., promoting a more equal distribution of wealth, has often been debated; while data are often hard to obtain, if any conclusion emerges, it seems to be that it may have made a modest contribution in this direction.^[416] However, beginning in the early 1980s there were unmistakable signs that whatever progress in this direction had taken place was being undone, or else soon would be. Thus, in Canada as one of the richest and most comprehensive welfare states, poverty rates which had fallen continuously from the mid-1960s on began to rise again, with the result that in 1985 one-fifth of all children were living in poverty.^[417] In Britain the number of poor - defined as those with less than half the average EEC income - rose from 5 million in 1979 to 12 million in 1993, while the share of gross domestic product that the lowest 10 percent commanded dropped from 4 to 2.1 percent.^[418] In the United States the share in national income of the poorest fifth of the population dropped by some 5 percent between 1977 and 1990, whereas the richest fifth became 9 percent wealthier.^[419] In both the United States and Europe some of the hardest hit consisted of unskilled laborers who saw state-provided benefits - such as unemployment insurance - being cut even as their real wages fell;^[420] first the United States, and then parts of Europe, witnessed the rise of the so-called working poor. Most of them were employees in service industries who did not enjoy benefits of any kind and, though holding jobs and often working long hours, were unable to make a decent living.^[421]

To justify and explain the changes that were taking place, economic doctrine too was changing. Though Keynes himself died in 1946, his ghost - in the form of generations of economists who worked out the implications of the last of his equations - went marching on. He enjoyed what was perhaps his greatest triumph in 1969 when, much to the consternation of a few die-hard fellow party members, incoming Repub­lican President Nixon announced that ‘‘I am a Keynesian.” That tri­umph, however, was short-lived. The energy crisis brought about a combination of inflation and stagnation which was previously considered to be impossible and which was quickly given a new name, ‘‘stagflation.” From the mid-1970s on, it forced economists to take a fresh look at the established Keynesian orthodoxy.

In some respects the new developments in the field of economic theory merely constituted a return to older prophets, notably Gustav Hayek and his so-called Austrian school who throughout the 1950s had criticized Keynesian doctrines in the name of sound money.^[422] Later the mantle of leadership was assumed by Professor Milton Friedman of the University of Chicago. Having been awarded the Nobel prize for economics in 1976, more than anybody else he initiated the emergence of so-called monetary or supply-side economic theory. The notion that government should deliberately incur budget deficits to iron out the business cycle went out of favor as bad for entrepreneurship and productivity and good only for inflation. Friedman’s ideas were carried a step further by another Nobel prize winner, Professor Robert Lucas, III, and his ‘‘rational-ex­pectations’’ school. Previous economists had regarded states and their populations as partners in a common enterprise; not so Lucas who, in a way that was highly characteristic of the time, viewed them as opposed players. Using the framework provided by game theory, he argued that the former could not do anything to make their economies grow.^[423] Though few countries went that far, the upshot was the revival of something closer to ‘‘classic’’ economic doctrine, including a strong emphasis on balanced budgets, private enterprise, free competition, and the survival of the fittest.

By the mid-1980s, even the idea that the state should necessarily be responsible for looking after the currency - which for at least 400 years had been one of the pillars of sovereignty - found itself under attack.⁷⁸ Much as had been the case in England under the last Stuart kings, it was argued that governments were too powerful to be trusted with the man­agement of money, as was evident from the inbuilt tendency toward inflation that had resulted as well as the highly irresponsible manner in which it was sometimes handled. Again, to date no state has gone so far as to put the management of the currency back into private hands; in other respects, however, the monetarists have long been triumphant. Economi­cally speaking, much of the world found itself heading back to nineteenth­century capitalism - not by accident or apologetically, but as part of a well-thought-out, deliberate design. From Canada to New Zealand, the goal was to lower inflation and create the conditions for steady, unspec­tacular economic growth. This was to be achieved even at the cost of doing away with central planning, allowing the business cycle to run its course, and incurring insecurity for both employers and employees. In many places it also recreated what Marx in Das Kapital called the indus­trial reserve army - a more or less permanent core of unemployed people who could be, and were, used to keep the wages of the remainder within bounds.

As part of the new program, the industries which governments had spent so much money nationalizing during the years 1945-75 were being reprivatized. As it happened, many of the industries which European governments in particular took over were already in decline: so, for example, in the case of coal, whose place was being taken by oil; steel, which was increasingly being manufactured in Japan; and shipbuilding (ditto). The same was also true of railroads, which were being overtaken by motor transport. In other cases nationalization affected firms which had suffered years of neglect during World War II, with the result that their equipment had become run-down and they were badly short of capital. In time, many of the nationalized industries were further weakened by being run on political principles - as when they were made to provide unprofitable services, or employ too many workers, or keep their tariffs at artificially low levels, rather than along sound business lines ⁷⁸ E.g. R. L. Greenfield and L. B. Yaeger, ‘‘A Laissez Faire Approach to Monetary

Stability,” Journal of Money, Credit and Banking, 15, 1983, pp. 302-15; L. H. White, ‘‘The Relevance of Free Banking Today,” printed in Collins, Central Banking in History, vol. I, pp. 434-49; R. Vaubal, ‘‘The Government’s Money Monopoly: Externalization of Natural Monopoly,’’ Kyklos, 37, 1984, pp. 27-58; and, above all, F. A. Hayek, Denationalization of Money (London: Hobart Special Paper, 70, 1978).

- to say nothing of the fact that senior posts in state-owned corporations were often treated not as jobs requiring expertise but as perks for politi­cians and bureaucrats in and out of office.

Be the precise reasons as they may, the hopes of those who had advocated nationalization, i.e., that it would permit profits to benefit the community as a whole instead of shareholders only, were seldom realized. From the late 1960s on, many of them began to hang like albatrosses round their owners' necks, employing vast numbers of superfluous workers and very often generated equally vast rivers of red ink. Thus, in Britain, all nationalized industries except gas were losing money, closing plants, and dismissing employees in a never-ending cycle which during the second half of the 1970s was reducing entire regions to poverty and despair.⁷⁹ In Italy, the state-owned industrial holding companies - IMI, ENI, EFIM, and IRI (the latter having grown into the largest employer in the country) - were all bankrupt by the mid-1970s. By the mid-1980s, the 20 percent or so of Austrian industry that was in government hands had turned into monuments of inefficiency and red tape. The list, which went on and on, was by no means limited to developed countries: witness, for example, the vast problems experienced by the Arab countries as well as numerous Latin American ones.

Whether in order to escape these losses, or simply as a means for raising money to cover their deficits, many governments were beginning to reprivatize the companies which during the previous decades they had spent so much money and effort acquiring; at the same time, they began contracting out services which they had previously provided in-house. The lead in both fields was taken by Britain, which during the years 1964-78 had been governed mainly by Labour but which in 1979 put the Conservatives back into office. Prime Minister Margaret Thatcher and her government were among the most strident representatives of the new economic conservatism. Acting with conscious, deliberate intent, they began offering to the public the shares of one state-owned company after another, including British Petroleum, British Aerospace, Cable and Wireless, Britoil (the company responsible for extracting North Sea oil), Associated British Ports, British Airways, British Steel, and National Freight, the government-owned road haulage corporation which had been in existence since the 1950s.

After Margaret Thatcher formed her second government in 1982, the pace of privatization accelerated. Additional slices of the above-listed companies were put on the market, together with British Gas, British Telecom, British Sugar, British Rail Hotels, Royal Ordnance, and parts

79

See R. Pryke, The Nationalized Industries: Policies and Performance Since 1968 (Oxford: Robertson, 1986), particularly pp. 237-66. of British Leyland including the prestige car manufacturer Jaguar.^[424] By 1988 nearly 40 percent of the industries which, in 1979, had been government-owned had been transferred back to private hands, while the proportion of GNP in the hands of the government had fallen from 10.5 to 6.5 percent. Some 650,000 people ceased to be state employees, and 90 percent of them also became shareholders either in the companies for which they worked or in others. Meanwhile, the percentage of all adults who owned shares tripled, a development which was itself regarded as creating a constituency in favor of continuing reform and which, in fact, had been deliberately planned for from the beginning. Plans were also announced for the complete or partial privatization of services such as water supply, sewage treatment, Crown Supplies (the central purchasing agency for all government departments, including the armed services), and prisons. In the field of health alone a whole series of ancillary services, including hospital cleaning, catering, and laundry were privatized bet­ween 1981 and 1988, as were the performance of abortions and the task of looking after the mentally ill. The result was a 33.5 percent drop in the number of ancillary jobs in the National Health Service. From the pa­tients’ point of view, it also spelt a considerable reduction in the quality of service provided and a rise in their cost.^[425]

The road taken by Margaret Thatcher was often described as ‘‘the British cure,’’ though ‘‘the British enema’’ might perhaps be more ap­propriate. During the 1980s, it provided a beacon for numerous other governments which followed along the same road. For example, in Italy between 1983 and 1989, the state holding companies sold off assets to the tune of $5 billion in order to cover their losses, including also such national symbols as the Alfa Romeo car maker, the Italtel communica­tions group, and juicy chunks of the banking system with the Banco di Roma at their head. Though France’s Socialist president Mitterand was destined to remain in office until 1995, here too the turning point was brought about by the elections of 1986; led by minister of finance Edouard Balladur, the government started selling off some state-owned companies in such fields as industry, insurance, banking, and finance. In 1987 alone the sum realized from these sales amounted to $11.5 billion. The number of people employed by the government fell by 800,000, while the number of shareholders - in other words, those who had bought up the newly privatized firms - increased by 5,000,000.

In West Germany, too, privatization gathered steam during the 1980s. Led by the Christian Democrat Helmut Kohl, the government - whose share was already smaller than in most other countries - sold off over fifty companies, including aluminum, chemicals, energy, vehicles, and ban­king. In Canada, the last important wave of state takeovers was accom­plished in 1984. It was followed almost immediately by the massive sale of government-owned industries, including rail transportation, aircraft manufacturing, fish processing, ammunition, finance, mining (including uranium), nuclear energy, trucking, air transport, and power generation. And this continued in one economically developed country after another, from the United States - where Conrail was sold in 1982 - to the Netherlands and Belgium through Turkey, all the way to New Zealand and Australia.

Though taking a different form, the trend extended even to those very strongly governed states, South Korea and Taiwan. In both countries, Chaebol and Guanxiqiye (large industrial firms) were started by private individuals and always remained privately owned. During the so-called developmental period which lasted from the early 1950s to the early 1980s they were often so closely controlled by the state as to form virtually a part of it. Strongly dirigiste governments dictated what sectors should be developed. Having done so, they set out to provide the necessary pre­requisites. These included custom barriers, a docile labor force, kept in check by law, the virtual absence of a social security network, and a suitable dose of Confucian propaganda,^[426] and, as more resources became available, an improving infrastructure on the form of roads, telecom­munications, electricity generating plant, ports, and airports. In return, the firms themselves provided governments, parties, and officials with massive subsidies, often amounting to bribes.

Around 1985, though, the pattern began changing. In part, this was because many of the most important industries in question had themsel­ves become multinational, thus forcing them to pay more attention to the demands of foreign governments and international organizations. In part it reflected the gradual evolution toward democracy; as a new, prosperous middle class made its appearance, the old authoritarian forms of government came to be questioned. The cozy relationship between government and industry was now regarded as corrupt, leading to some spectacular trials of South Korean politicians in particular.^[427] Then, in the middle of 1997, most East Asian countries were struck by a severe economic crisis. Their industries, having become accustomed to the hothouse conditions provided by custom barriers and the ‘‘protec­tion” of leading politicians, began to suffer from overcapacity. Prices of their real estate (which had often served as collateral for bank loans in aid of expansion) collapsed, their exports declined, and their currencies had to be devalued. At the time of writing it seems as if most of them will weather the crisis, albeit at the price of slowed-down growth and IMF- imposed reforms which will further weaken the relationship between government and industries.^[428] Some, like Indonesia, may not.

Even as the majority of countries were privatizing as fast as they could, the movement was given a tremendous, and for the most part unexpec­ted, boost by the collapse of the communist bloc. Coming to power in 1917, the Bolsheviks’ proclaimed goal was to do away with all forms of private enterprise, and in fact most major resources and firms were taken over by the state within a few years. The onset of the New Economic Policy, or NEP, in 1923 delayed the completion of the process; by 1932, however, Stalin had eliminated all remaining ‘‘capitalists,’’ not seldom by ‘‘liquidating’’ them, as happened to millions of peasants. The resources which collectivization made available were used to build up industry, with the result that, from the start of the first Five Year Plan in 1928, heavy industry in particular began to expand by leaps and bounds. By 1939, it had become the second largest in the world after the United States.^[429]

After World War II left Germany in ruins, the Soviet lead over the remaining European countries increased, peaking between about 1965 and 1975.^[430] Though they operated on a much smaller scale, the Soviet Union’s proteges in Eastern Europe took a similar course during the twenty or so years after 1945 and, thanks in part to their abysmally low starting points, also enjoyed exceptional rates of industrial growth.^[431] In particular, during the late 1970s and early 1980s, East Germany, a country of fewer than 20 million people, developed into the showcase of the East. It was being touted as the world’s ninth-largest industrial power (after the United States, USSR, Japan, West Germany, France, Britain, Italy, and Canada), with a standard of living to rival Britain’s.^[432]

While the facade may have impressed some people - not, presumably, those who had actually visited East Germany and seen the empty shops - by that time the rates of growth achieved by all communist countries were already beginning to fall. The highly centralized bureaucracies respon­sible for laying down plans and allocating resources had proven very successful in providing huge amount of standard products such as raw materials, power, steel, and chemicals.^[433] Partly because of deliberate neglect, however, and partly because their methods proved ill adapted to meeting the infinitely varied demands of consumers, in agriculture and light industry they had been much less so. The first to fail was agriculture, forcing the Soviets to purchase American and Canadian wheat from 1963 on. Then came their failure and that of their satellites to adapt to the tougher conditions which prevailed on the international market from 1973 on, including specifically the rising price of oil; and finally they proved unable to effectively harness emerging technologies such as mic­roelectronics and computers.^[434] While many Soviet products had always had something crude about them, now they began looking as if they came out of some bygone Stakhanovite age - which was often actually the case. Productivity stalled and the gap between per capita income in East and West, which had seemed to close, began rising again.^[435]

The first important communist country to start rolling back state control over the economy was, surprisingly, China. Once it had estab­lished itself in 1949, the Chinese Communist state had in some ways followed in the wake of its European comrades in arms, nationalizing the land and resorting to collectivization so as to squeeze the countryside and free resources for rapid industrialization. More than most, it allowed ideological considerations to throw its economy into chaos, first during the Great Leap Forward in 1957-61 and then during the even more destructive Cultural Revolution. So long as Mao lived, the Chinese economy, as well as Chinese society, wove a violent zigzag course bet­ween strict centralized planning and tumultuous populism; but his death in 1976, followed by the removal from the scene of his would-be succes­sors in the form of the ‘‘Gang of Four,” finally opened the way to reform.

In 1978 the Party's new secretary-general, Deng Xiao-ping, formally announced the ‘‘Four Modernizations” in the fields of science, agricul­ture, industry, and the armed forces. From then on there was no looking back. One field after another was thrown open to private enterprise; by the late 1980s collective agriculture had all but disappeared and a stock exchange, the first to be permitted in China since 1949, was operating in Shanghai - as clear a sign as any that the processes which were overtaking other countries were operating here, too.

During the 1980s and 1990s, the willingness of the Chinese state to relax its hold over the economy led to phenomenal rates of growth. Often it was assisted by foreign (mainly Japanese and Taiwanese) capital pour­ing in in search of cheaper labor, as well as less stringent environmental requirements than the ones that existed in their own countries. While heavy industry tended to remain in the hands of the state and turned into monuments of backwardness and inefficiency, light industry and services were revolutionized as hundreds of thousands of new companies sprang out of the ground.^[436] The changes were much more evident in the south than in the north, and along the coast than in the interior; urban areas tended to benefit more than rural ones, leading to peasant unrest as well as a vast migration from the latter into the former. For all the problems that growth created - including inflation and corruption on a massive scale - for the first time in its history China was acquiring something like a mass consumer class. Provided it could sustain the rate of growth achieved, the leadership could look forward to the day when their country would turn into the world's largest economic unit (by some measures it is already the third largest) even though there was still no prospect of ever matching the per capita product and living standards of the developed countries. As the end of the millennium approached, the major question confronting China did not so much appear its ability to pursue its drive toward economic growth, as whether that growth, and the social stresses that it generated, could be reconciled with the continuing dictatorship of the Communist Party.^[437]

China's success in loosening state control over the economy without (so far) undergoing a major political upheaval was not emulated by most other communist countries. As already noted, Soviet recovery from the ordeal of World War II had been relatively quick. From the mid-1970s, however, growth slowed down, and by the time Brezhnev died in 1982 the Soviet leadership was aware that economically and technologically it was falling behind the West. Still his immediate successors, Yuri An­dropov and Konstantin Chernenko, were reluctant to introduce far- reaching reforms. Given his KGB background, the former in particular preferred to speak about the need to tighten discipline. By way of sym­bolizing his intentions, he launched a campaign against drunkenness.

When, after 1985, Mikhail Gorbachev did initiate fundamental chan­ges, the road he took was the opposite from the Chinese one. Instead of relaxing the state's hold on the economy, Gorbachev introduced open­ness or glasnost. Instead of providing people with an incentive to work by opening the road to private enterprise, he permitted them to talk freely about politics. Talk freely they did, the main subject of conversation being the system's repeated and persistent failures. From the autumn of 1980 the Soviet Union had been involved in a bloody war in Afghanistan. When that adventure ended in defeat, in 1988, the Soviet leadership was left without an armed force which could have imposed unity on the country. Economic and, even more so, nationalist pressures manifested themselves; first the Baltic countries, then parts of Central Asia, broke away. In 1991 communism as a political regime collapsed with surprising suddenness. With it went perhaps the largest, most centralized, and militarily most powerful state that the world had ever seen, and, as far as can be judged at present, will see.

While the collapse was probably inevitable, in Gorbachev's defense it must be said that under his supervision it proceeded with remarkably little bloodshed. The same was not true after he left the scene. Out of the ruins there emerged no fewer than fifteen new republics; some of which lost no time in going after each other's throats and exterminating or driving out the members of ethnic minorities. Once the USSR started disintegrating the loss of Soviet control over, as well as the collapse of communism in, the countries of Eastern Europe was a foregone conclusion. As in the USSR, and mainly because communism seemed to have remarkably few people left willing to defend it, the process was for the most part a peaceful one - in Czechoslovakia it even earned the name ‘‘the velvet revolution.” The major exception was Yugoslavia which went up in flames as its various constituent nationalities renounced the central gov­ernment and embarked on a bloody civil war. Whatever the precise route taken, once the excitement subsided, all the countries in question dis­covered that forty-five years of state ownership and control had left their economies badly outdated and unable to compete in world markets. Partly to liberate their own citizens' energies, partly to attract foreign investment, all hastened to embark on a course of democratization, liberalization, and privatization. Since then, though the pace of reform has slackened in some places, in most it is still going on.⁹⁴

Not only in West and East, but on every continent scarcely a country

94

See R. Frydman, et al., The Privatization Process in Central Europe (New York: Oxford University Press, 1993). couldbe found that was not privatizing as fast as it could.^[438] Often this was done at the price of considerable social disruption: subsidies were cut, the prices of basic commodities went up, fees began to be required for services such as housing and medical care which had previously been provided free of charge or almost so, the size of the bureaucracy was cut, and state-owned firms disgorged streams of superfluous employees into labor markets that were ill equipped to absorb them. So powerful was the trend that it even reached countries whose very raison d'etre since in­dependence had been bound up with left-wing ideology such as Vietnam, India, Syria, Israel, Egypt, Tunisia, Algeria, and many others throughout Africa and Asia.

When ‘‘restructuring’’ proved too difficult a task, many developing countries were forced to turn to the World Bank and the International Monetary Fund. By early 1998 the latter had programs in no fewer than seventy-five countries with a total of 1.4 billion people; the list began with Albania and ended with Zimbabwe.^[439] Staffed by adherents of the new supply-side economics, the two institutions provided their proteges with immense and badly needed loans. In return, they demanded thorough­going reforms including, above all, an end to deficit spending, the dis­mantling of the state-owned or -controlled sector, and the liberalization of financial markets. In addition they were to set up stable currencies; relax their hold on natural resources; allow foreign capital to enter; and provide the latter with various privileges, beginning with the right to repatriate profits freely and ending with the establishment of special ‘‘free-trade,’’ meaning tax-free, zones.

Toward the year 2000, economic policy in most countries, like the science of economics which provided it with both an explanation and a justification, had made a complete about-turn. The trend toward greater state intervention in the economy which had started in the 1840s and gathered steam after 1900 or so was dead or dying; its place was taken by a renewed emphasis on private enterprise and competition. Often such competition and such enterprise manifested themselves in their wildest and least civilized forms: for example, as when the scramble for property that used to be government-owned led to the rise of the ‘‘Russian mafia.’’ Often, too, it has been accompanied by incredible gaps between different

social classes, a rising tide of organized and unorganized crime, and considerable misery for the great majority of the population, including in particular those - such as old age pensioners and the like - who for one reason or another were unable to break their dependence on a now bankrupt state.

Naturally the details varied from one region to another. In East Asia, as already noted, the virtual absence of a social security network meant that most important parts of the process were probably formed by the liberal­ization of markets, the loosening of the ties between government and industry, and a general tightening of belts. In the United States, carried on a wave of prosperity but divided between a Democratic president and a Republican Congress, politicians preferred to defer hard decisions as social security was threatened with bankruptcy soon after the year 2000. In much of Europe the welfare state still lingered on, more because of inertia and the lack of an alternative that would appeal to voters than for any other reason. In Ukraine, as in large parts of Eastern Europe, Central Asia, and Africa, the collapse of one-party communist and socialist re­gimes have left in their wake ruined economies that barely function at all. Almost everywhere governments struggled to retain at least parts of the welfare state, including above all elementary and secondary education. That apart, the dream of using government to ‘‘lift up” the masses was clearly in ruins and indeed even avowedly ‘‘left-wing” parties took a centrist stance and declared themselves no longer socialist. The old forms of political-economic organization have been largely discredited, and the search for others to take their place is on.