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Truth is often Stranger than Fiction: Book Reviews about the Evolution of U.S. Capitalism

By Bill Schweke on 09/27/2007 @ 01:59 PM

Tags: Ideas in Development, Global Economy, Recommended Reading

Blessed Among Nations: How the World Made America is a fun, fascinating read. The author, Eric Rauchway, knows how to assemble his evidence and how to tell a story. The book is an examination of an earlier period of globalization. The country was in a unique position, from the Civil War to World War I. During this period, it was the place to invest and a massive amount of foreign capital flowed into the U.S., as its population soared and the Western frontier was developed.

The U.S. federal government was rather weak and there was little regulation of commerce, few protections for the working man or women, intense and violent conflict between labor and management, and constant additions of immigrants to the workforce, who were subjected to cruel exploitation and terrible working conditions.

This influx of foreign people and capital, along with the building of a transcontinental railroad and the conquering of the indigenous peoples, established the conditions for growth and a different relationship to the national government than existed in Western Europe. Indeed, although its comparative size was small, America’s citizens west of the Mississippi River felt colonized and resentful toward its government. These farmers and ranchers and miners and others also chafed under the domination of eastern financial interests and other absentee-owned businesses. This fueled populist not socialist politics, and a movement of debtors not workers. The scale of immigration and the growing gap between first and second generation new immigrants fragmented the working classes and encouraged longer-term American citizens, even those with very moderate incomes, to identify more with the business elite. After all, with some good fortune, they could make their bundle. These facts and trends made the creation of a strong central government unlikely.

Americans, especially those in the west did want government to do some things, such as put some controls on bankers, foreign business interests, immigrants and railways. (There was actual over-investment by foreign financiers that led to an exaggerated boom-and-bust cycle.)

But there was little interest in creating the kind of social insurance system that Germany pioneered under highly conservative leadership. The diversity of the proletariat made unionization harder. Success in improving public services and infrastructure occurred where public health issues were pushed. This was even true in the south, but also showed a race-related and low-road economic strategy that discouraged educational spending. Growth in the socialist parties and movement were hindered by ethnic character in the east and the populist, anti-globalization, anti-immigrant attitudes in the west.

The federal government finally grew significantly in the first two decades of the 20th century, but hardly anything was done for the poor or to support a strong military. After the end of WW I, policymakers shrank the public sector of numerous dual use functions. Thus, U.S. government has been shaped and limited by the capital of foreign investors, and a weak motivation to help immigrants, and other ethnic and racial groups. Its geography and size has allowed it to combine large markets with insularity.

But after World War I ended, the earth’s populace woke up and noticed that the U.S. was now the most powerful economy and Britain was no longer leading the pack. Sadly, after this “gift,” the United States, according to professor Rauchway “blew it” and “preserved neither peace nor prosperity for the world.” He hopes that similar failures do not accompany this era on global integration, where the U.S. is the sole superpower. This is a superb history.

Michael Perelman’s Railroading Economics: The Creation of the Free Enterprise Myth presents a critique of neo-classical economics by telling the story of pro-business economists, who decided that marginal cost pricing and competition were killing the railroad sector about a century ago. High fixed costs, combined with price wars and too many firms were leading to bankruptcy. Monopolies, oligopolies, or cartels should be allowed if this industry was to flourish. The author points out that pharmaceuticals, software, airlines and other industries in today’s economy fit this description. The book is an interesting interweaving of economics and history.

The author uses this example to contend that the textbook theory in economics diverges significantly from practice. And even in the capitalist United States of America, the market is guided and hemmed in by the business community itself. Conservatives such as Henry Ford, J.P. Morgan and Herbert Hoover believed that certain restrictions on free markets were need for certain industries to flourish.

Perelman, thus, explores a hidden history of corporate leaders and conservative economists trying to save the railroad industry from itself, the development of “welfare capitalism” (an employer-based movement to aid workers in times of trouble and defeat trade unionism), and Progressive and future New Deal-type public policy reforms.

In addition, it traces these and a number of related issues from the railroad competition era through the Great Depression, the post WW II “golden age” of capitalist growth, and the corporate takeover period. This last part of the book raises the dangers that financial speculation and gimmickry can play havoc with the “real” economy, leading to de-industrialization.

The Politics of Free Markets: the Rise of Neo-liberal Economic Policies in Britain, France, Germany and the United States (2006), authored by sociologist Monica Prasad, reaches a rather surprising finding regarding curbing governmental spending and powers.

The effort to decrease the size and functions of the state via tax cuts, privatization, deregulation and cuts in social spending, which got rolling during the Reagan and Thatcher Administrations, took much deeper root in the U.S. and U.K. and went much further than in France and Germany. What accounts for this greater policy shift?

Surprisingly, she argues and provides a fair amount of evidence for the proposition that it was caused by the left in these countries being too strong, not too weak! Prior to the pushback by the business community and Reagan victory, the Anglo-American nations had much more punitive taxes on corporations and the rich than Germany and France. The U.S. had recently enacted more than a dozen consumer, worker and environmental laws. Both the U.S. and U.K. exhibited a great deal of industrial actions—strikes, work slow-downs and so forth.

British policies toward business were much more redistributive than France and Germany and were still very committed to nationalization of the “commanding heights” of the U.K. economy and running such public enterprises in a much more socialist fashion. France looked on their public enterprises as “national champions” and its civil service technocrats were more collaborative than adversarial. Conservatives in Germany’s Christian Democratic Party, on the other hand, embraced a “social market” theory of economic policy and philosophy, while its Social Democrats supported a labor-management version of corporatism, which empowered organized labor, while still seeking to find common ground. In addition, both countries had lower corporate taxes and relied a lot on more regressive taxes, such as a Value Added Tax (VAT).

During the Carter Administration, the U.S. government raised capital gains taxes and unions and their allies mounted a strong effort to enact full employment legislation with “teeth” and significant labor law reform. The latter two proposals were both defeated, but not with ease. When the U.K. and U.S. economies were hit by a combination punch (e.g., energy shortages, an overheated economy due to not raising taxes to pay for the Vietnam War, a wage-price spiral, lots of plant closings), an improbable phenomenon, stagflation—a wicked escalation of inflation and joblessness—appeared for the first time.

Adept Conservative and Republican leadership were able to shift the terms of the debate, attribute fault to tax-and-spend liberalism/social democracy, and demand a new, freer market direction. The public was mad about current economic conditions and a variety of other issues and Reagan and Thatcher persuaded them that supply-side economics was the answer.

Earlier misuses of trade union power in the U.K., such as a major public employees strike, soured the public on the current union leadership and led to a number of reforms that weakened them. Meanwhile, sky-high interest rates, which were being used to slow and then roll back inflation, along with increased foreign competition from Japan and Western Europe, sparked a tidal wave of closings in the industrial heartland, where organized labor was most represented, and deprived them of their employment base, thus, accelerating the decline in a union membership and its countervailing power.

The tax loads in the U.S. and U.K. hit not just the wealthy but also the middle classes. The U.S. had also experienced a large hike in public spending in the sixties and early seventies. The Republicans were able to turn these efforts to combat poverty and heal the racial divide as almost a complete negative, playing to racial prejudice, widespread populace views that, at best, government was a “necessary evil’, and fears of governmental waste, fraud and abuse.

The American corporate community and their small business allies, in organizations such as the National Federation of Independent Businesses, became supreme in the political arena. The sixties and seventies had focused their minds on threats that needed serious attention. Heavy investments in conservative think tanks started to bear fruit as well. Conservatives now seemed to be the group with the “new ideas,” while the Democrats were backward-looking and protective of existing programs and ways of conducting the public business.

The historic domination of the Democratic Party since Roosevelt ended and a new Republican Majority, based in a new political geography, took power. Some political scientists termed it a new “realignment.”

According to the author, “theories that see neo-liberalism as caused by globalization, business group power, the rise of ideas, or national culture—miss the essential role of the policy process itself in policy outcomes.” Indeed, renowned historical sociologist Charles Tilly says that this work, The Politics of Free Markets, “clarifies how political institutions offer opportunities and threats to political entrepreneurs.” It raises good questions about the thesis of “American exceptionalism,” regarding whether its path of evolution in its polity and economy are really so, so different from Europe’s more social democratic, state-based model. However, in criticism, this book is not as well written, nor as compelling as the ones already reviewed.