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The dynamic dinosaurs
The economic zeitgeist of recent decades, which invigorated the right and ‘modernised’ the left, is that unplanned, privately-owned capitalism is the source of dynamic growth and development. State ownership, regulation and planning, on the other hand, have become synonymous with inefficiency, sluggishness and rigidity.
Mark Latham, who was the Australian Labor Party’s unsuccessful candidate for prime minister in 2004, wrote with typical certainty:
“The third way is at ease with the primacy of the market. It has no wish to gut its growth potential by moving closer to a planned economy. It does not see itself as some kind of economic commissar surrounded by five-year industry plans.”The Third Way, associated with Gordon Brown and Tony Blair and other ‘modernising’ leaders of labour and social democratic parties since the 1990s, is the path which is presumed to exist between, on the one hand, the post-World War Two consensus of widespread public ownership and the responsibility of states for the welfare of their citizens, and on the other hand the rampant free market. A key tenet of
“Without the productivity and prosperity of a market-based economy, it is simply not possible for government – through progressive tax / transfer policies – to redistribute the benefits of abundance.”
The thoughts of Mark Latham take first place in a hefty collection of 28 essays entitled The Global Third Way Debate, edited by Dr Anthony Giddens, who is Director of the London School of Economics and Political Science, and an advisor to Tony Blair. But argument and hard evidence to support these claims, that economic planning will ‘gut’ the ‘growth potential’ of a country and that the ‘benefits of abundance’ can only be made available to the masses when the economy is market-based, cannot be found in this volume. The working assumption of the ‘left modernisers’ is that the unashamed neo-liberals, and indeed the victory in practice of the free market over state planning in recent history, have already proved the point. To read the case for the dominance of the market rather than the state over the economy, we must turn to the openly right wing neo-liberals.
A cure for misery
Every year, the Wall Street Journal and the Heritage Foundation publish their Index of Economic Freedom, which purports to be a ranking of countries according to laissez-faire criteria into categories from ‘free’ to ‘unfree’. The criteria for being ‘free’ include having little or no government control of and involvement in foreign trade, capital flows and foreign investment, banking and finance, or wages and prices; regulation of businesses (eg, ‘burdensome environmental or health and safety regulations’) should be minimal; the government should not operate economic enterprises; there should be low taxes and a ‘secure rule of law’ to ensure property rights. In January 2005, Mary Anastasia O’Grady, Senior Editorial Writer at the Wall Street Journal and one of the co-authors of the Index of Economic Freedom, announced with satisfaction in a WSJ editorial:
“The 2005 Index finds that, on balance, freedom has again made strides around the globe…
“Policy makers who pay lip service to fighting poverty would do well to grasp the link between economic freedom and prosperity. This year the Index finds that the freest economies [mainly in Western Europe and the USA] have a per-capita income of $29,219, more than twice that of the ‘mostly free’ at $12,839, and more than four times that of the ‘mostly unfree.’ Put simply, misery has a cure and its name is economic freedom.”
This is not very convincing. If the compilers of this Index have their facts right, such a snapshot still tells us nothing about how the richer countries achieved their wealth. The dominant economic positions of the rich nations of Europe and North America were achieved over a century ago, and their most rapid and sustained periods of growth took place between World War Two and the 1970s – the policies being pursued at present in these countries can hardly be given credit for gains which were established many years in the past.
But the proponents of ‘economic freedom’ also rely on the attributes of the more recent arrivals to a
The credentials of Aaron Schavey PhD, another co-editor of the Index of Economic Freedom, are endorsed by the Heritage Foundation, a corporate think-tank which influences US government policy:
“Aaron Schavey is an expert on trade and international economics who understands why some countries prosper and others don’t. As an economic policy analyst for The Heritage Foundation’s Center for International Trade and Economics, he supports the statistical work of Heritage’s research staff and develops databases on international trade and economic growth. He also examines
“Schavey previously served as an international trade specialist for the International Trade Administration at the U.S. Department of Commerce, where he researched and identified key economic trends in the retailing industry.”
Doctor of prosperity:
Dr Aaron Schavey
In similarity to the
“…approximately 2.8 billion people—nearly half the world’s population—live on less than $2 a day. On a global scale, poverty is rampant. Behind these statistics are the people who don’t know where their next meal is coming from, suffer from diseases induced from widespread poverty, or spend 15 hours or more a day working just to earn a few dollars.”
Indeed, Aaron Schavey invokes the dreadful conditions and brutal choices faced by people in the
“If Americans truly understood global poverty they would realize that most people who work in the sweatshops prefer their current employment over the alternative of not working. When an employee in a textile factory loses his job the opportunities for finding another job are low or nonexistent. Simply put, citizens in developing countries prefer 'sweating' over starving.”
For sure, capitalism is all about giving people the opportunity to make this kind of free choice. But don’t mention the rich- it is in order to improve the lot of the poor, that governments:
“…must implement policies that encourage economic growth rather than the stagnant or even declining growth rates many poor countries experienced throughout the twentieth century."
These policies, of course, are those recommended by the Heritage Foundation and the Wall Street Journal:
“In those countries where economic freedom is maintained and individuals pursue their economic goals without government interference, economic growth follows.”
For proof of this thesis, Dr Schavey provides examples of three countries which took the road from rags to riches:
“The experience of countries such as
“These countries restructured their economies by creating institutions that allowed citizens to make economic decisions without government interference. By creating an environment where economic freedom flourishes, these countries experienced rapid growth and were able to lift themselves out of poverty.”
Hong Kong is given top place, and
In the writings of some other development specialists, though as yet rarely heard in the mass media and the statements of politicians, a rather different take on the relative successes of state involvement and ‘economic freedom’ is emerging.
The three authors did not write from any ethical perspective that countries should have the right to determine their own political and economic systems – indeed, they reassured readers that the more powerful nations should continue to require the weaker countries to abide by a set of norms including,
“…such basic principles as macroeconomic stability, outward orientation, accountable government and market based incentives…”
Presumably using the usual threats of trade and investment sanctions, or perhaps Western-funded orange revolutions or even military strikes to impose these. But accepting these limits, the article pleads:
“The many poor countries which have made progress on the general standards can better craft their economic course if they have adequate room for policy autonomy and experimentation.”
The evidence used by these hesitant heretics to advocate permitting the poorer nations to have greater flexibility in economic policy is that the
“Almost all successful cases of development in the past 50 years have been based on creative – and often heterodox – policy innovations. South Korea and Taiwan, for example, combined their outward trade orientations with unorthodox policies: export subsidies, directed credit, patent and copyright infringements, domestic-content requirements on local production, high levels of tariff and non-tariff barriers, public ownership of large segments of banking and industry, and restrictions on capital flows, including foreign direct investment. Since the late 1970s,
“Conversely, countries that have adhered more strictly to the orthodox structural reform agenda – most notably in
To resolve the issue of whether state ownership and control is generally a help or a hindrance to dynamic economic growth in a capitalist economy, we must consider in more detail some instances of successful economic development. Let us begin with the examples from
The Financial Times on 8th February 2003 carried an article under the interesting headline of ‘Singapore Sticks to State Planning’. The piece reported on the
“However, private economists criticised the government proposals for failing to dismantle
“…The panel acknowledged, however, that creating an entrepreneurial mentality in tightly regulated
“Adhering to its preference for state planning, the group proposed designating a cabinet minister ‘to be responsible for driving initiatives to develop a more entrepreneurial
“Analysts had hoped for more fundamental reforms to encourage the growth of venture businesses, which have been crowded out by the dominance of state-owned companies.
“…There have also been calls for the government to sell state-owned companies to reduce its stake in the economy and allow more competition. Temasek controls
The panel said Temasek should review the status of state companies to rationalise, consolidate or divest them where it makes commercial sense, but offered no schedule or list of what companies should be sold.”
Bizarre! While being held up by Heritage expert Aaron Schavey and the Wall Street Journal for “creating institutions that allowed citizens to make economic decisions without government interference” and thereby increasing the country’s wealth by 2,200%, Singapore is criticised in the Financial Times for being a non-entrepreneurial, state-directed, tightly regulated economy in which resources are allocated centrally and whose leading businesses are state-owned, thus allegedly holding back economic growth!
State-owned enterprise: Temasek, Singapore's giant investment firm
“It was to be a bold remaking of Singapore Inc., one that would replace technocrats with entrepreneurs as drivers of the economy. But market conditions and lethargy have conspired to make this transition more difficult than foreseen…”
In the global forced-march towards the free market,
“The man who is trying to bring about this transformation is Philip Yeo… He also co-chairs the Economic Development Board… which is in charge of developing high-value industry in the country. His main challenge is to turn
‘State domination was only part of the story’
The Commanding Heights, a best-selling book of popular economic history by Daniel Yergin and Joseph Stanislaw, makes an exciting tale of the global triumph of market forces. In their chapter on
“Gangs, crime and communists all made life in
As Lee Kwan Yew wrote in his memoirs:
"It is impossible in
Australian soldiers in action during the British Empire's military suppression of communism in Malaya
“Goh and Lee established the Economic Development Board to guide the creation of a modern economy. They put in place state-owned companies, which they went out of their way to staff with the best they could find. They forced civil servants to think like businessmen, tying their promotions to the profitability of the state-owned enterprises they ran. They financed social services – health care and housing – but were always careful not to make them so complete as to deprive Singaporeans of their sense of personal and family responsibility… they built upon the Chinese propensity to save by promoting a very high savings rate. In fact they implemented it through the Central Provident Fund, which at its height took 50% of all wages. The money was used to finance infrastructure, industry and housing…
“Throughout the process of modernisation, the government was a very active facilitator. It was the agenda keeper, the long range planner, a strategic player in its own right, and the manager of resources. A small elite of bureaucrats, selected meritocratically, ran the whole system… the secretary-general of the trades union council was a member of the cabinet.
“Yet state domination was only part of the story. For over the same period of time,
The Central Provident Fund was state-owned, controlled by one of the government’s network of statutory boards; despite the "Chinese propensity to save", the contributions to it, of up to 50% of income, were compulsory for workers and employers - hardly a low-tax regime.
Industrial technology was drawn into the country through the use of tax incentives and government subsidies to encourage FDI, and massive public investment in a state-owned infrastructure which suited the needs of trans-national companies. The government then subsidised the transfer of technology from foreign owned to local firms.
Through another statutory body, the Housing and Development Board, the state acquired 67% of all land by 1979 - which, according to the US Library of Congress Country Studies paper on Singapore, was greatly to the benefit of low-income voters. The paper states that the 83 statutory boards:
“…played the major role in the government's postindependence development strategy, and their activities usually served multiple economic and political goals…
“Statutory boards were managed by a board of directors, whose members typically included senior civil servants, businessmen, professionals, and trade union officials. The chairman of the board of directors, who was often a member of Parliament, a senior civil servant, or a person distinguished in some relevant field, was appointed by the cabinet minister who had jurisdiction over the board.”
State investment: Singapore Shipping Port
"A combination of factors including relative location, government policy, modem infrastructure, stable financial structure and banking institutions, information technology, and a highly-skilled work force have contributed to Singapore's role as the key regional distribution center linking the world to the Asia-Pacific region. The tightly controlled government, dominated by a single political party since 1959, has fostered an extremely efficient port facility through its development policy.
“This policy and capital investment funded by the government have allowed Singapore to develop advanced sea and air facilities that are competitive with others worldwide. The modem port and the establishment of a free trade zone that allows businesses to avoid import and export duties have attracted international businesses. Hewlett Packard, for example, has centered its regional operations in Singapore, distributing its products to smaller ports throughout the region.”
‘Globalisation’ and post-colonial power
Yergin and Stanislaw emphasise Singapore’s "crucial commitment to international commerce" as if this mitigates the importance of state ownership and central planning in the country’s rapid development. In doing so, they key into the modern idea of ‘globalisation’, a concept which confuses two processes which although they are connected, are clearly not identical. One is the extent to which the market rather than the state is dominant in directing the economy; the other is the extent to which countries are linked to each other through international trade, technology transfer, and financial transactions, rather than being economically isolated.
State power is nationally based, if not always limited to the territory of one nation in its scope, and international markets in our era of ‘globalisation’ are supposedly independent of nation states. This has helped the supporters of the ‘free market’, who are by and large the same people who support US domination of the world, to speak as if state-led development and isolation are more or less the same thing.
That this is not necessarily so is proven by the activities of the powerful state-directed bodies which set the rules of international economic activity, including the IMF, the World Bank, the World Trade Organisation, the European Union and the OECD. Dominated by a handful of the world’s richest nation states, and in particular the USA, these organisations demand that countries (and especially the weaker nations) relinquish state control of their own economies – counties which refuse to do this are denied access to international transactions, effectively putting them into semi-isolation.
The importance of the ‘Western’-controlled international structures, particularly since the defeat of the USSR, has given the dominant nations immense power to pressurise and manipulate both political and economic policy around the world, a power which is reminiscent of the colonial era. The European Union, for example, granted the Ukraine ‘market economy status’, allowing it to trade with EU countries on less restricted terms, only after the orange revolution of 2004 – 2005. At the time of writing, China has still not been granted ‘market economy status’ by the EU. After protracted negotiations which culminated in the announcement of the privatisation of major industrial sectors, Vietnam was admitted to the World Trade Organisation on 11th January 2007, thus ending most of the discriminatory trade barriers against it.
It is possible to imagine a world in which less powerful countries might gain access to the best available technology, and enjoy the benefits of international trade, without having to sacrifice the right to determine their economic or political direction.
But in reality there are very serious dilemmas for the poorer nations, especially those wishing determine their own policies while seeking to benefit by economic engagement with other countries.
Paradoxically, Singapore, South Korea and many other countries with anti-communist governments gained greatly from the existence of the Soviet Union. Not only did they adopt elements of the state-led economic model which was developed in the USSR, but because of their strategic importance to the ‘West’ they were allowed to do so, without pressure from the USA to privatise and de-regulate their economies for the duration of the Cold War.
Overshadowed through the 1950s and 1960s by the (then) stronger and more dynamic economy of communist North Korea, the South Korean military regime led by General Park Chung Hee began from the early 1960s onwards to implement a series of 5-year Economic Development Plans. The government nationalised the banks, took control of foreign exchange and merged private companies into industrial monopolies known as ‘chaebols’, orienting them towards exports, financing them through the state-owned banking sector and protecting them from domestic and foreign competition. Unwilling to allow foreign direct investment, the government instead financed the acquisition of high-tech production capacity by means of guaranteeing the repayments on foreign loans for selected firms.
In order to keep down wage costs and reduce the scope for political opposition, the government banned the trade unions and replaced them with more ‘moderate’ organisations.
It is unlikely that South Korea’s success would have been possible without the generous subsidies provided by the USA, which could not afford to see the anti-communist South fail in its rivalry with the North. The US Library of Congress Country Studies paper records that the US government gave $3 billion to South Korea in grant aid in the period up to 1968, covering 60% of all investment in the country, and a further $1 billion between 1968 and 1974; this was accompanied and followed by loans at concessionary rates from both the USA and Japan.
In Korea’s public-private partnership, it was the state which played the leading and organising role, providing also a safety-net to prevent corporate failure. Philip Wonhyuk Lim of the Korea Development Institute remarks:
“…private firms became agents of the state in carrying out its economic development plans and engaged in a government-monitored contest to secure loans guaranteed by the state.
“The system greatly reduced the risks of private firms in that they no longer had to bear the full consequences of their actions”
The growth models of South Korea and several other East Asian countries combined three factors:-
- Very high levels of state-directed investment in infrastructure, modern production technology and workforce skills, allowing increasingly high-quality goods to be produced;
- A workforce which was paid lower wages than those prevailing in the richer countries, thus keeping down costs and allowing profits to be made while selling goods at low prices;
- Orientation of the economy to exporting to the developed capitalist countries – therefore the relatively low average incomes of the population at home was not a restriction on the sales potential of the leading firms.
However, South Korea’s dependence on debt and foreign trade made it extremely vulnerable to international economic fluctuations. The government’s response to the insolvent position of several large firms in the early 1970s was to bail out the affected companies and to step up state involvement in industrial development. The Heavy and Chemical Industries Initiative, targeting six strategic industries (steel, petrochemicals, non-ferrous metals, shipbuilding, electronics and machinery) was launched in 1973. The basic investment decisions were made by central government. POSCO, the nationally-owned steel firm, became the world’s most efficient producer of steel.
By the 1980s, the Korean conglomerates had become major world manufacturers of ships, motor vehicles and electronics. South Korean workers engaged in a series of major strikes and secured significant improvements in wages. Despite some changes including the legalisation of foreign direct investment, the ‘Korean Model’ of state-led capitalism continued through a further round of technological development, despite another recession in 1989. A US Library of Congress article records that:
“In June 1989, panels of government officials, scholars, and business leaders held planning sessions on the production of such goods as new materials, mechatronics-- including industrial robotics-- bioengineering, microelectronics, fine chemistry, and aerospace.”
By the 1990s, South Korea had achieved developed country economic status. It was not until 1994, under US pressure, that the government reduced restrictions on imports, introduced a limited privatisation programme and ended controls on the import and export of capital. Following the Asian economic crisis of 1997, further economic ‘liberalisations’ on IMF lines and the privatisations of major sectors including steel, electric power, gas and financial institutions have been pushed through.
November 2000: South Korean workers protesting against neo-liberal reforms
Hong Kong – gateway to Red China
Unlike Schavey’s other examples, Hong Kong, a British colony until 1997, did achieve its post-WW2 growth under a regime which allowed strong elements of market dominance in the economy. But in reality, not merely state planning but communism has played an essential part in Hong Kong’s enrichment.
Like Singapore, Hong Kong has the advantage of being an entrepot port; however, the unique case of Hong Kong is that it became the main trading centre linking the massive population of the People’s Republic of China (PRC) to the capitalist world. When, following the communist revolution in 1949, the United States initiated sanctions against China and imposed these through the UN Security Council, the British authorities, like other US allies, officially supported the embargo. In practice, however, Britain allowed Hong Kong to prosper by supplying and processing goods in and out of the People’s Republic.
Between 1949 and 1979, the policy of the Chinese Communist Party was to expand foreign trade under state control in order to facilitate the industrialisation of the country; and commercial relations with and via Hong Kong served a special function in realising this objective.
During the 1950s, the USSR became China’s main trading partner, but Hong Kong continued as a major conduit for the PRC’s exports to the non-socialist countries. Following the falling out between China and the USSR from 1960 onwards, Hong Kong’s entrepot function for the PRC was enhanced again. When considering the significance of the following figures, it must be borne in mind that Hong Kong is a small peninsula and collection of islands which had a population of only 1,629,000 in 1950 and 3,191,000 in 1965. Macao is a tiny former Portuguese colony, with an even lower population than Hong Kong, which has played a similar but much smaller entrepot role. The sources for this table amalgamates the statistics for Chinese trade with Hong Kong and Macao, and compares them with the figures for Chinese trade with the Soviet Union and total Chinese trade.
People’s Republic of China: foreign trade in selected years
Imports in millions of US dollars
Year USSR Hong Kong and Macao total imports
1950 185.19 8.52 582.78
1951 497.31 429.79 1,198.41
1959 979.06 20.45 2,119.99
1965 185.77 17.71 2017.40
Exports in millions of US dollars
Year USSR Hong Kong and Macao total exports
1950 153.25 155.14 552.36
1951 311.29 194.45 756.92
1959 1,117.94 191.05 2,261.35
1965 221.67 461.62 2,227.90
Even after the USA commenced limited trade with China after Nixon’s visit to Beijing in 1972, Hong Kong continued to play an essential role for the People’s Republic as a channel for the imports of technology and investment finance, and the exports of basic commodities and manufactured goods; this trade was and remains an essential source of the profits of Hong Kong’s capitalists.
The Economic Overview of Hong Kong in the CIA’s World Factbook 2005 makes it clear that, at the most, ‘economic freedom’ has only been part of the story of Hong Kong’s economic growth and continued wealth:
“Hong Kong has a free market, entrepot economy, highly dependent on international trade… Gross imports and exports (i.e., including reexports to and from third countries) each exceed GDP in dollar value. Even before Hong Kong reverted to Chinese administration on 1 July 1997, it had extensive trade and investment ties with China. Hong Kong has been further integrating its economy with China because China's growing openness to the world economy has made manufacturing in China much more cost effective. Hong Kong's reexport business to and from China is a major driver of growth. Per capita GDP is comparable to that of the four big economies of Western Europe. GDP growth averaged a strong 5% from 1989 to 1997, but Hong Kong suffered two recessions in the past six years because of the Asian financial crisis in 1998 and the global downturn in 2001 and 2002. Although the Severe Acute Respiratory Syndrome (SARS) outbreak also battered Hong Kong's economy, a boom in tourism from the mainland because of China's easing of travel restrictions, a return of consumer confidence, and a solid rise in exports resulted in the resumption of strong growth in late 2003 and in 2004.” [My emphases]
State capitalism in Western Europe
Successful state-led development was not limited to East Asia. As the former-communist historian Eric Hobsbawm has remarked, the dynamism of centrally directed capitalism was a general phenomenon of the mid-to late 20th Century:
"The great post-war economic success stories of capitalist countries, with the rarest exceptions (Hong Kong), are stories of industrialisation backed, supervised, steered, and sometimes planned and managed by governments - from France and Spain in Europe to Japan, Singapore and South Korea...
"In 1945-46 France, for instance, set out quite consciously on a course of economic planning to modernise the French industrial economy. This adaptation of Soviet ideas to a capitalist mixed economy must have has some effect, since between 1950 and 1979 France, hitherto a by-word for economic retardation, caught up more successfully than any other of the chief industrial economies with US productivity, more so even than Germany."
The iconic Renault 5. While in public ownership, Renault was one of the world's most successful car manufacturers
“…European industry had missed the revolution in mass production and mass marketing that had brought Americans cheap and varied consumer goods during peacetime and had enabled them to achieve overwhelming superiority in materiel during the war. It was urgent to raise the standard of living of average Europeans visibly and quickly, lest they be attracted to communism. This higher standard of living could be achieved only through higher productivity.
“The study tours of the Marshall Plan Productivity Program reached almost every plant in every industry, introducing them to a technology more than as generation in advance of what they had been using. Within individual enterprises, productivity commonly rose 25-50% with little or no capital investment. Overall labor productivity rose at four times the historic annual rate, long before any liberalization in trade policy or increase in foreign investment.
“The total cost of the program was $300 million over 12 years for 15 European and 16 other countries, or just 1.5% of the much better known capital assistance program. About a third of this -- an amount about equal to staff costs -- was contributed by the participating countries.
“The Productivity Program used the reverse of the now conventional approach. Instead of sending large numbers of American consultants to Western Europe, it brought large numbers of carefully chosen, carefully designed and closely supervised study tours from Western Europe to the United States, each covering a particular subsector: steel foundry, machine tools, or electric power), or a particular function (materials handling, agricultural research and extension, or laboratory instrumentation). This allowed tour members to see for themselves the requirements of a competitive business in the post-war world: new concepts of workplace organization, marketing, business operation, new products, new design and engineering functions, and new equipment.
“A typical tour lasted six weeks, and consisted of 12-17 members constituting a cross-section of the people needed to make new ideas work: industrialists, managers, foremen, union leaders, Parliamentarians and government officials. Any firm was eligible to participate -- even ‘dinosaurs’ whose markets had previously been assured by cartel arrangements. Contrary to today’s received wisdom, these firms often registered dramatic productivity gains, even in the absence of effective competition.”
Allied to the jump-start which was funded and organised by the American government, the West European states began taking a much more active economic role. According to French official history:
"From 1945 to 1958, France set about rebuilding the country and modernising its industry. The state played an essential role in this process, through its national plans and the extension of the public sector. It took control of the major banks, the coal industry, gas and electricity distribution and some sectors of industry by nationalising companies like Renault. It also received American aid, under the Marshall Plan. The authorities initially made transport, energy production and heavy industry their top priorities...
"From 1958 to 1973, the rate of growth accelerated, with an average annual growth rate of 5.5%, compared with 4.8% in Western Germany and 3.9% in the United States. Only Japan did better. In inflation-adjusted francs, GDP doubled during this period and industrial production increased by 5.7% per annum. Private firms followed the state in making investments and there was a first wave of mergers... The Government improved transport infrastructures, focusing particularly on motorways, and subsidised ambitious programmes of aircraft construction and nuclear energy production. The economic imbalance between Paris and the regions lessened as industry was decentralised and a nationwide town and country planning policy implemented."
‘Strategic public ownership’
Among the reasons often put forward for the rapid economic growth in Western Europe after the Second World War is the formation of the European Economic Community (which afterwards became the European Community and later the European Union) and the economic integration which this generated. While the economies of scale facilitated by the EEC are likely to have had some effect, it is notable that non-EEC countries also grew very strongly. Among these was Austria.
At the end of World War Two, with the country occupied partly by the Red Army and partly by the US military, the Austrian authorities nationalised the German-owned firms including the largest banks, mining, mineral oil production and the bulk of heavy industry. Austria took a position of neutrality between the military alliances headed by the USA and the USSR, and did not join the EEC which was conceived as an economic bloc aligned politically with the United States.
The ‘Austrian School’ is the name taken by the group of right-wing free-market economists inspired by the ideas of Ludwig von Mises and Friedrich von Hayek who advocate the fully privatised, minimally regulated free market; they assert that the ‘invisible hand’ of the profit-seeking competitive market must be allowed full play, and that state planning prevents progress and stifles prosperity. Ironically, post-WW2 Austria ignored the prescriptions of the Austrian School and made impressive gains socially and economically. As a report in the European Industrial Relations Observatory noted:
"The explicit goal of 'strategic public ownership' was to achieve the 'optimum' for the national economy (including social and welfare goals), instead of the 'maximum' in terms solely of business profits. This approach proved very successful until the 1970s, when Austria had become one of the most developed countries in Europe in terms of productivity, employment and welfare standards."
By keeping the nationalised firms under a centralised management, Austrian governments used the state sector as a means of developing the whole economy. According to the US Department of State:
"Austria has a well-developed social market economy with a high standard of living in which the government has played an important role... For many years, the government and its state-owned industries conglomerate played a very important role in the Austrian economy...
"Austria has achieved sustained economic growth. During the 1950s, the average annual growth rate was more than 5% in real terms and averaged about 4.5% through most of the 1960s. In the second half of the 1970s, the annual average growth rate was 3% in real terms, though it averaged only about 1.5% through the first half of the 1980s before rebounding to an average of 3.2% in the second half of the 1980s."
Austria refrained from joining the European Community until 1995. In preparation for membership, Austria began breaking up and privatising its state-owned assets in the early 1990s. These changes did not yield any obvious benefits in economic performance:
“At 2%, growth was weaker again in the first half of the 1990s, but averaged 2.5% again in the period 1997 to 2001. After real GDP growth of 1.4% in 2002, the economy grew again only 0.7% in 2003, with 2001-2003 being the longest low-growth period since World War II. In 2004, Austria’s economy recovered and grew 2.0%, driven by booming exports in response to strong world economic growth, but it declined to 1.8% growth in 2005”
Britain – declining empire, rising welfare
In the mid-1940s, Britain was swept with enthusiasm for socialism following the triumphant wartime alliance with the USSR. There was another factor also. In wartime conditions, the British government had very successfully mobilised and co-ordinated production and distribution - the effectiveness of state planning had been demonstrated for all to see. People demanded that following the war they should have a better quality of life than the capitalist market would be able to provide. As the right wing economist Friedrich von Hayek, an Austrian exile living in the UK, complained in 1943:
“There exists now in this country [Britain] certainly the same determination that the organization of the nation we have achieved for the purposes of defence shall be retained for the purposes of creation.”
This prompted von Hayek, later to become Margaret Thatcher's favourite economist, to write his polemical treatise, The Road to Serfdom. Its thesis was that individualism, private ownership, competition and the market were essential to human freedom, and that Britain and other Western countries were threatened by a creeping collectivism which would, if not thwarted, eventually turn people into the slaves of a planned socialist economy:
"We have progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past. Although we had been warned by some of the greatest political thinkers of the nineteenth century, by de Tocqueville and Lord Acton, that socialism means slavery, we have steadily moved in the direction of socialism...
"The so-called economic freedom which the planners promise us means precisely that we are to be relieved of the necessity of solving our own economic problems and that the bitter choices which this often involves are to be made for us.”
The voters in 1945, lacking Hayek's enthusiasm for the bitter choices of the free market, elected the Labour government of Clement Atlee, with a manifesto commitment to nationalisation, planning and universal welfare services. During the following six years, major economic sectors including mining, steel, electricity and the railways and were nationalised and co-ordinated by planning boards, the Bank of England was taken into government control, and the National Health Service was created.
On behalf of the people: coal mining in Britain was nationalised in 1947
"Full employment through six years of peace is the greatest of all Labour's achievements. It has never happened before. It has meant a revolution in the lives of our people... Largely due to full employment, with everyone contributing to the national product, production in Britain since 1945 has risen twice as fast each year as under the Tories [Conservatives]. Our industrial and agricultural output is now 50 per cent above pre-war, but we must do better still to improve our living standards, to fulfil our obligations in collective defence and to play our part in assisting under-developed regions. Almost 20 per cent of the national income is now devoted to new capital equipment for the nation. This is higher than ever in British history."
However, as the reference to ‘collective defence’ indicates, Britain under Labour had become involved in the NATO build-up against the USSR, in the US war against North Korea, and in its own anti-communist colonial war in Malaya (later to be divided into the nations of Malaysia and Singapore).
The expense of these military campaigns reduced the resources available for industrial investment and was further offset by introducing charges for NHS prescriptions and dental treatment, with consequent divisions in the Labour Party and resignations from the cabinet. The Conservatives in contrast were united behind former war leader Winston Churchill as the country became embroiled in cold and hot wars - and in addition the Tories promised that the state would build more public housing than was being built under Labour (a promise on which they made good).
If, despite these very inauspicious circumstances, the 1951 election can be considered something of an electoral comment on the results of public ownership and the closest Britain has ever come to an economic planning system, the results are interesting. Labour's vote increased by more than two and a quarter million over the 1945 result - nearly 49% of a huge turnout supported the government. The Tories got in although they had fewer votes than Labour; they benefited from tactical voting by Liberals and inequitable constituency boundaries.
Although Conservative governments were in office for the majority of years between 1951 and 1979, the only major de-nationalisation was that of the steel industry (most of which was re-nationalised by Harold Wilson’s Labour administration in 1967). However, direct planning of the economy was largely abandoned. Instead, governments used deficit budgeting and public spending to moderate booms and slumps and maintain employment, alongside, as a perceptive observer noted:
"...selective intervention where potential growth areas were identified and firms encouraged to invest or to merge, sometimes with financial assistance. The form of intervention however was such that the firms themselves were largely left to their own devices once funds and advice had been made available... there was no intellectual framework to guide intervention nor administrative machinery to carry out interventions. Generally speaking industrial 'policy' was an ad hoc bundle of initiatives responding to specific crises; it was reactive rather than pro-active."
Britain’s great achievement during the post-WW2 generation was peculiar but notable. Supplanted by the USA, it lost the immense economic advantages of empire and much of its international influence, although it continued to bear the burden of a very high level of military spending, second only to that of the USA itself in the capitalist world. Britain’s prominence in industrial exports was ended by the challenges of continental Western Europe and Japan. Yet this relative decline was managed in such a way that the living standards of the majority of people markedly improved. Anthony Crosland, the Labour Party's ideological guru of the 1950s and 1960s, declared:
"Traditionally socialist thought has been dominated by the economic problems posed by capitalism, poverty, mass unemployment, squalor, instability, and even the possibility of the collapse of the whole system... capitalism has been reformed out of all recognition. Despite occasional minor recessions and balance of payments crises, full employment and at least a tolerable degree of stability are likely to be maintained."
Unemployment was lower than 2.5% for most of the twenty five years after the Second World War and did not rise above 5% until 1979; trade union membership grew as did workers' wages in manufacturing, in the docks, mining and other mass occupations; workers won entitlement to paid holidays and the dread of illness and old age was softened. Almost one and a half centuries after Britain became the ‘workshop of the world’, it became the rule that working class families would each have their own indoor bathroom.
London dock workers in the 1950s. After nationalisation, pay and working conditions greatly improved
And despite Britain’s relative industrial decline, it was not until 1982 under Margaret Thatcher that the UK lost its status as a net exporter of manufactured goods.
The ‘golden age’
By looking at the economic history of individual countries, the assertion that state planning and public ownership ‘guts a country’s growth potential’ is demonstrated to be untenable. Further evidence can be drawn from international comparisons and by looking at world economic growth during periods in which different policies were pursued globally.
Comparing rates of economic growth for different countries and in different historical periods is not a straightforward matter, due to changing exchange rates, the invention of new products, the changes in relative prices of different goods and numerous other complexities.
A further problem is that the published studies are based on gross domestic product, a measure which tends to give market-dominated economies an apparent advantage compared to state-managed economies, and can even make the symptoms of social breakdown appear as economic improvements. This is because the ‘product’ which GDP measures is the total value of commodities, that is, things and activities which are traded in the economic marketplace; whether the goods relate to improvements in people’s lives, or whether the activities would be recognised as useful services by most people is irrelevant. Advertising, PR, financial intermediation, private care homes and the legitimised part of the sex industry all count towards GDP; voluntary community activities, elderly people staying within the family, and non-industrialised sex do not.
Nevertheless, the available statistics do not provide evidence for the superiority of free-market rather than state-led economic growth. Dr Andong Zhu of the University of Massachusetts, in a study of data from 59 countries over 4 decades, looked at the effect of the size of the nationalised sector in the economy on the rate of GDP growth, concluding:
“Larger SOE [state-owned enterprise] sector is found significantly correlating with higher economic growth, after controlling initial conditions, fiscal and monetary policies, international economic environment and exogenous shocks. In other words, SOEs are contributing positively and significantly to economic growth. Furthermore, I identify investment growth as one of the channels through which SOEs contribute to growth.”
Far from being unproductive dinosaurs, the publicly-owned industries made a dynamic contribution to economic expansion and prosperity. Andong Zhu comments:
“The results from this study throw doubt upon the desirability of indiscriminate privatisation.”
Even more striking are the statistics for global economic growth in different periods. The figures given below are from the widely-quoted OECD study by Angus Madison entitled The World Economy: a Millennial Perspective.
Per capita annual GDP growth in regions and the world
1820-70 1870-1913 1913-50 1950-73 1973-98
W. Europe 0.95 1.32 0.76 4.08 1.78
USA etc* 1.42 1.81 1.55 2.44 1.94
Japan 0.19 1.48 0.89 8.05 2.34
rest of Asia -0.11 0.38 -0.02 2.92 3.54
Latin America 0.10 1.81 1.42 2.52 0.99
USSR etc** 0.64 1.15 1.50 3.49 -1.10
Africa 0.12 0.64 1.02 2.07 0.01
Total world 0.53 1.30 0.91 2.93 1.33
* The USA plus other settler-majority former British colonies: Canada, Australia and New Zealand
** Countries of the (former) Soviet Union plus (former) East-Central European allies.
These figures are far from perfect, and the trends they indicate encompass a wide variety of factors including the rate of technological progress, setbacks due to wars, the price of oil, levels of military spending, and international currency movements. But they hardly suggest that the period from the end of World War 2 to the mid-1970s, in which state-led development was the predominant model, was one of rigidity and stagnation.
Rather, in the world as a whole and in every region bar one, the period from WW2 to the mid-1970s was outstandingly the most successful one in terms of sheer growth, putting into the shade both earlier and later periods in which laissez faire has been more dominant. Madison remarks:
“Growth was not only faster than ever before, but the business cycle virtually disappeared. Investment rose to unprecedented levels…”
The continued strong growth of the ‘rest of Asia’ towards the end of the 20th Century is accounted for by the rise of China following the lifting of the US anti-communist sanctions against it, and with the continued application of the state-led export-oriented development model, which has been discussed above in relation to South Korea and some other East Asian economies.
It must also be noted that what appears as a small decline in the GDP performance of the (former) Soviet Union and its allies over the 1973-98 period divides into moderate growth until 1989, followed by a catastrophic slump in the 1990s following the re-introduction of capitalism.
Madison, like some other economic historians, uses the phrase ‘the golden age’ for the three post-war decades. Among various reasons which he adduces to explain the rising output of this period, he mentions that:
“There was a very serious East-West split from 1948 onwards, but the split reinforced the harmony of interest between capitalist economies, so the beggar- your-neighbour behaviour of pre-war years did not recur. The United States provided a substantial flow of aid for Europe when it was most needed, fostering procedures for articulate co-operation and liberal trading policies. Until the 1970s it also provided the world with a strong anchor for international monetary stability. North-South relations were transformed from the colonial tutelage of pre-war years to a situation where more emphasis was placed on action to stimulate development. The huge expansion of trade in the advanced capitalist economies transmitted a dynamic influence throughout the world economy.
“The second new element of strength was the character of domestic policies which were self- consciously devoted to promotion of high levels of demand and employment in the advanced countries…
“Additionally and more importantly, was the continued acceleration of technical progress in the lead country [the USA]. Furthermore, the United States played a diffusionist role in the golden age in sharp contrast to its role in the interwar years.”
To clarify: under the threat of rising Soviet power, the USA and Britain organised a Cold War order in which the element of co-operation rather than ‘beggar my neighbour’ competition in trading and monetary relationships between capitalist countries predominated. Currency speculation was suppressed. Under the Bretton Woods agreement negotiated between the USA and the UK, the US dollar was pegged to the gold standard, allowing countries with lower levels of productivity to make progress in exporting manufactured products and thus develop industrially. Governments were permitted to nationalise and subsidise firms. The US government organised the transfer of technology to its fellow major capitalist nations. Thus the capitalist economies not only grew fastest, but delivered the greatest improvements in prosperity to the masses, when the fear and influence of communism drove them to emphasise co-operation and collectivism rather than destructive competition.
It is worth noting that the research projects which led to the key technological developments in the United States during the early Cold War, particularly in electronics and aviation, were funded by state contracts and the massive investments by state-protected monopolies.
So the facts nationally, internationally and historically, provide no evidential basis for the claims of the neo-liberals and the proponents of the
Unfettered capitalism brings with it an array of costs and inefficiencies. To mention a very few of these, under market conditions a huge proportion of human effort is devoted to activities which are only necessary because there is a market- for instance advertising, PR, tendering, collecting and processing money. In
Another major factor is that the huge inequalities of market-dominated societies combine with the individualistic values which such societies generate to produce social breakdown, mental health problems, addiction and crime; the increasing cost of controlling these problems diverts resources away from the productive economy.
Let there be darkness: in 2001, the private monopoly Enron caused power shortages in California in order to increase electricity prices
Last on this list but far from last in reality, there are the booms and slumps which periodically misdirect and destroy investments and make productive workers redundant.
The necessity of ‘market discipline’ and material incentives as spurs to effort, and the role of individual talent and initiative in producing innovation, are sometimes cited as justifications for competitive markets. Consideration of this claim deserves an article in itself. For now, it suffices to point out that nations and industrial sectors which operated without the neo-liberal ethic of post-Reagan and Thatcher capitalism have been remarkably innovative and industrially progressive. Japan from the mid-1950s to the 1970s, where the key firms were centrally co-ordinated and protected from foreign competition, where unemployment was under 2%, where workers in large firms were guaranteed a ‘job for life’ and the pay gap between workers and executives was very low, had the most rapidly innovating and fastest growing industries of any major economy.
Capitalist profit has no patent on initiative, motivation or efficiency. Indeed, pro-market economists have invented the concept of ‘crowding out’ to describe situations in which private companies are unable to compete with more successful publicly-owned firms. This reflects their concern for private ownership and the abstract principles of microeconomics rather than the overall development of the economy.
A useful example of ‘crowding out’ is provided by post-WW2
Enter the neo-liberals
Why then, if such policies were so successful, were they abandoned? Peter Gowan’s The Global Gamble describes the methods by which the the USA under Nixon tore up its obligations under the Bretton Woods agreement, withdrew from the gold standard and ushered in a period of international economic instability and currency speculation, thus bringing the international order of the ‘golden age’ to a close in the mid-1970s. The immediate context of this US move included the cost of the Vietnam War and the declining market share of US firms against their Japanese and European rivals. The West European and Japanese economies, which were also struggling to cope with steep increases in petroleum prices, were hit very hard. Those advocating a return to full-blooded capitalism prepared to drive home their advantage.
The moderated, state-led, ‘mixed-economy’ capitalism of the post-war decades had led to contradictory and paradoxical effects. Because they refrained from ‘beggar-my-neighbour’ cut-throat competition, it had been easier for the capitalists to accede to working class demands for better housing, health, pensions and other benefits; very low levels of unemployment and high levels of trade union organisation led to increased wages and further expectations of continual improvements in social provision. In Western Europe, Japan and even in the USA, the gap between the rich and the poor narrowed significantly.
The left-wing activist Tony Benn, who headed the departments of Technology, Industry and Energy in the British Labour Governments of the 1960s and 1970s
But the stunning success of the ‘golden age’ carried with it very significant costs and increasing dangers. Much of the prosperity of the masses was accompanied by high progressive taxation on the very rich and a relative reduction in business profits – the real raison d’etre of the capitalist system. Increasing trade union power, and with it the struggles for further rises in wages and social provision, coupled with demands for further nationalisations and more state planning, were hard to oppose within the framework of the social-democratic ‘mixed economy’. Internationally, Third World countries were combining to improve their terms of trade with the ‘West’ by collectively increasing commodity prices; and within the advanced capitalist economies, the relative positions of the USA and Britain were slipping against continental Western Europe and Japan.
The rise of Reagan and Thatcher, and the pro-market counter-revolution which they led, had nothing to do with increasing overall growth and prosperity. It had a lot to do with closing off the ideological and practical possibilities for left-reformist encroachments towards socialism. And it had much to do with placing corporate profits, the enrichment of the wealthy and the global power of US and British capitalism back at the centre of economic and political priorities.
And the rest - to the detriment of most of humanity in most of the world - is our recent neo-liberal history.
Home page image: The RB211 turbofan. The development costs of this jet engine drove the UK's privately-owned Rolls Royce company into insolvency, and in 1971 Edward Heath's Conservative government rescued the project by nationalising Rolls Royce. Produced in Britain under public ownership, the RB211 became the propulsion unit for the Boeing 747, 757 and 767, the Lockheed TriStar, and the Russian Tu-204 airliner.
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