Putting politics back in charge of the economy

In the neoliberal era, economics marginalised the social sciences. But, Sheri Berman writes, only politics can tame capitalism’s chaotic gyrations.

Decades of capitalist triumphalism following the collapse of Soviet Communism came to an end with the financial crisis of 2007-09. Since then, recognition of capitalism’s downsides has grown.

Today, capitalism is attacked by a revitalised socialist left and parts of the growing populist right. Even establishment pillars, such as Bloomberg, the Council on Foreign Relations and McKinsey, regularly feature discussions about ‘the future of capitalism’—implying that is in question.

One clear reflection of the changing assessment of capitalism is the economics profession. During the early 21st century, as one influential study declared, neoliberalism was essentially hegemonic within it—and economists were accordingly sanguine about the ability of the economy to flourish relatively unfettered. But over the last decade or so scholars such as Thomas Piketty, Emmanuel Saez, Gabriel Zucman, Mariana Mazzucato, Adam Tooze, Anne Case and Angus Deaton have come to the forefront of debate by highlighting the economic as well as social flaws of capitalism.

Interpreting capitalist development

Into these waters steps J Bradford DeLong, an influential professor of economics in the United States, a former deputy assistant Treasury secretary and the author of a widely-read economics blog. DeLong’s Slouching Towards Utopia: An Economic History of the Twentieth Century provides an interpretation of capitalism’s development which reflects how much contemporary economists are grappling with its vicissitudes. Yet the book also makes clear how difficult it is to understand these things by looking at capitalism alone.

DeLong frames Slouching Toward Utopia around the assertion that the 20th century was ‘the first century ever in which history was predominantly a matter of economics: the economy was the dominant arena of events … and economic changes were the driving force behind other changes’. This perspective, which might be termed the ‘primacy of economics’, leads DeLong to periodise modern history in a particular way.

He argues that a new era began in 1870 when the ‘door’ to capitalist development was unlocked by globalisation, the industrial research laboratory and the modern corporation, enabling humanity to begin ‘slouching toward utopia’. This era, which DeLong (echoing Giovanni Arrighi) terms the ‘long twentieth century’, ended in 2010 when the financial crisis left unclear whether capitalism was still a force for progress.

Hayek and Polanyi

To illustrate how capitalism changed and developed during this period, DeLong utilises two major thinkers, Friedrich Hayek (1899-1992) and Karl Polanyi (1886-1964). As readers of Social Europe will be well aware, they had dramatically different views of capitalism.

Hayek was of course a champion of ‘free-market’ capitalism, arguing that it generated more freedom and progress—or, in DeLong’s terms, could bring humanity closer to utopia—than any other system. So strong was Hayek’s faith that he viewed political interventions to achieve outcomes which capitalism did not spontaneously engender as not merely inefficient but entailing a slippery slope to totalitarianism.

Polanyi, by contrast, was a harsh critic, arguing that, left to itself, capitalism undermined values, such as justice and fairness, which were primary rationales of human existence. Indeed Polanyi believed that the socially destructive and dehumanising forces unleashed by untrammelled capitalism would cause a backlash—and it was this which raised the spectre of totalitarianism.

DeLong breaks the ‘long twentieth century’ into five periods, each illustrating the insights of Hayek or Polanyi or both.

Progress, then backlash

The first is 1870-1914. Economic growth began consistently outpacing population for the first time in history, pulling humanity out of the dire poverty which had been its lot hitherto and generating unimaginable medical, technological and cultural progress. This economic revolution also helped break down the social-status hierarchies and oligarchic political systems which had previously limited human freedom. During this period capitalism did indeed, as Hayek would argue, help humanity ‘slouch towards utopia’.

This came, however, with downsides. New inequalities arose between urban and rural areas and between the expanding middle and working classes, with the latter subjected to abominable living and working conditions. Traditional values and communities collapsed, leaving many without safety nets and generating widespread social alienation. Internal (rural to urban) and external migration exploded, forcing many to adapt to dramatically new living conditions as well as to living alongside dramatically different people.

As Polanyi predicted, the next period (1914-45) saw a backlash. During the late 19th and early 20th centuries, nationalist movements feeding off the fear and anger generated by rapid change had grown, contributing to the catastrophe of the first world war. The interwar decades brought endless economic problems: high unemployment, massive inflation and of course the Great Depression.

The ‘Hayekian’ or economically orthodox ‘solution’ to these problems—laisser-faire and austerity—was, as DeLong puts it, ‘completely insane’ and made ‘matters worse’. The suffering caused by capitalism, combined with the failure of establishment figures and parties to deal effectively with it, contributed to growing support for left (Communist) and right-wing (fascist and National Socialist) extremists, who promised to ‘solve’ capitalism’s problems and create a ‘better’ world.

Capitalism tempered, then unleashed

Chastened by the lessons of the interwar years, the west entered a new period after 1945, characterised by DeLong as a ‘shotgun marriage of Polanyi and Hayek blessed by Keynes’. Capitalism re-emerged, in contrast to the hopes of its ardent critics, but it was a capitalism tempered by government interference designed to avoid its disadvantages, disappointing ‘free-market’ advocates as well. If humanity slouched towards utopia between 1870 and 1914, during the postwar social-democratic era it ran. In the decades after 1945, western economies grew faster than ever, while inequality, class conflict and extremism declined.

Despite its successes, this social-democratic era too came to an end. Economic difficulties beginning in the 1970s provided an opening for ‘Hayekian’ attacks on the system and the disappearance of Communism after 1989 emboldened the right. A new neoliberal period thus began, swinging the pendulum back towards Hayek and a greater role for markets, and away from a Polanyian or even Keynesian emphasis on the importance of government intervention to protect citizens from capitalism’s negative consequences.

The outcomes in the west were tepid growth, rising inequality, stagnating productivity and entrepreneurship and a financial crisis which brought this period to an end. (The developing world had a different experience during these decades, with capitalism generating tremendous economic gains and progress akin to that experienced by the west between 1870 and 1914.)

This brings us to DeLong’s fifth period, the contemporary one, characterized by a Polanyian backlash to the negative consequences of the neoliberal era. During the last decade or so the west has experienced rising social discontent and political extremism, as well as a widespread questioning of whether capitalism can still help humanity slouch towards utopia.

Important parts missing

Analyses which identify economic forces as the motor of history remind us of the centrality of capitalism to modernity. But this perspective misses important parts of the story.

DeLong’s narrative of the ‘long twentieth century’ stands in direct dialogue with that of the great European historian Eric Hobsbawm, whose Age of Extremes was subtitled The Short Twentieth Century 1914-1991. Hobsbawm’s periodisation was determined by his belief that modern history was defined by political events—the rise and fall of totalitarianism, particularly Soviet Communism—rather than economic ones. Similarly, Polanyi wasn’t merely a critic of capitalism but a radical reinterpreter of it: he insisted its origins and development could only be understood through the lens of the ‘primacy of politics’.

Polanyi argued that capitalism did not emerge spontaneously and nor was it ultimately the consequence of the factors (globalisation, research labs, modern corporations) stressed by DeLong. Rather, Polanyi claimed that political decisions and changes were necessary for the transition to capitalism to eventuate—as well as to prevent capitalism from undermining social stability.

Markets and capitalism

Alongside other economic historians such as Ferdinand Braudel, Polanyi understood that markets and capitalism were not the same. Markets are mechanisms for exchanging goods which have existed throughout history. But it was only in the 18th and 19th centuries, when European leaders began removing restrictions on them and creating conditions enabling research, free trade, corporations and so on to thrive, that capitalism emerged. (China, for example, may have had the most extensive market system in the world during the early modern period. Its leaders, however, restricted crucial areas of economic activity, hindering the rise of capitalism of which instead Europe became the global power centre.)

And it was not just the emergence but also the development of capitalism that was determined by politics. What a Polanyi-esque focus on the ‘primacy of politics’ makes clear is that when capitalism operated relatively unfettered by political authority—as during 1870-1914 and the neoliberal era—it generated not only economic crises but also widespread social discontent and political extremism. It was only when political institutions asserted their power to counteract capitalism’s negative aspects—most successfully in western Europe after 1945 and in the US beginning with the 1930s New Deal—that not merely capitalism but also social stability and democracy could flourish.

The challenge to western capitalism now is thus also primarily political rather than economic. Whether capitalism can once again be a force which helps humanity ‘slouch towards utopia’ depends on whether political authorities prove willing and able to put in place policies that enable its upsides to be maximised while protecting citizens from its downsides.

That Polanyi is the figure to whom even some economists now turn to understand capitalism’s cycles and vicissitudes is a good sign. The next step is grappling with the radical implications of his insistence on the primacy of politics.

This is a joint publication by Social Europe and IPS-Journal