After the Second World War the Global north created a gilded age in modern capitalism. That era ended in the 1980s,  when it sped off, out and over the cliff, Road-runner-like, into the 2008 Crash. The political direction that was taken in both was underpinned by economic philosophies which had and now has implications for global stability. I want to examine how this came to be.

The Great War marked the end of the political dominance in Europe of the landed aristocracy. The dismantling of the three empires (Russian, Austro-Hungarian and Ottoman) was fuelled by nationalism, revolution and resentment. There were some 32 rebellions, wars and revolts across wider Europe. That resentment raged from Ireland to Russia, from Egypt to India and between Japan and China. Not surprisingly, Europe fell into a recession until mid-1920s. Meanwhile in the USA, with their infrastructure intact, they recovered more quickly and there were boom times. Electrification enabled a middle-class to grow as they filled their homes with consumables and roads were laid to accommodate cars built on electrified assembly lines. As we know, the subsequent bubble led to the stock market crash and the onset of depression in the 1930s. Neo-classical economics set the strategy of contraction, both in the US and Europe. Austerity. They sought to reduce debts by budget surpluses through cuts in wages and welfare and interest rates were increased. In the US, Hoover refused ‘handouts’, insisting that the working class tighten their belts and business leaders offer voluntary assistance. He imposed trade tariffs (as Trump claims he would do). Britain leaving the gold standard helped mollify sentiments there; not so in mainland Europe, especially reparation-restricted Germany. Not having work in the 1920s & 30s was to be living in absolute poverty. In 1932, unemployment of those insured in the UK was 17% and nearly 23% in the US[1]. This was an era of human suffering and it left a deep cynicism about the economic system’s capacity to meet needs.

It was Roosevelt who challenged mainstream laissez-faire thinking with his New Deal. He went on a spending spree expanding state infrastructure projects and regulated finance by separating commercial and investment banking.   

Those ten years in the lead up to the second World War were times of resentment as empires were dismantled by rising nationalism and uprisings. There were some 32 rebellions, wars and revolts during the interwar years. Bellicose speeches delivered with confidence in their messaging drew crowds who saw that only the man who delivered them knew what the answers were. And with such clear messaging, such men insisted they acquire all the authority available to implement those answers. Those dire economic conditions created ‘tyrannies of certitude[2]’.

Six years later, in 1945,  when fascism and Japanese imperialist expansionism was defeated, memories of 1930s hardship endured.  Keynesianism placed employment, not inflation, as the highest priority. Keynes argued that during recessions, by giving people jobs, the demand so created would restart the economy. And so began one of the fastest periods of economic expansionism since the 1870s. Throughout Europe in particular, health care, housing, education, were acknowledged as base layers that enabled many working-class families to aspire to mobility. There was a conception of community that extended to services regarded as providing universal benefit for all of society; the major utilities, heavy industries, transport, Bank of England and telecoms and postal services were all nationalised. The state’s responsibility was from ‘womb to tomb’, all cemented by people’s memories of the 1930s vulnerabilities. It was an acknowledgement of the fragility of wage labour.

Also emerging out of the war was an international justice and financial system. The IMF, the UN and the 1948 Declaration of Human Rights were all key (UNDHR) The UNDHR declared that human rights were universal and undeniable and were ‘rights inherent to all human beings, regardless of race, sex, nationality, ethnicity, language, religion, or any other status”. The emphasis was on political rights and protections for individuals against the state. (Fourth Geneva Convention 1949, Convention on Genocide prevention 1948, Convention on Reduction of Statelessness 1961, Convention on Civil & Political Rights 1966, Covenant on Economic, Social and Cultural Rights 1966, Covenant on Elimination of all forms of Discrimination 1965).

When people feel they have momentum and become aware they have a voice, they shout. And shout we did. Civil Rights in US, Civil Rights in Northern Ireland, Anti-apartheid in South Africa, rise of anti-colonialist resistance, anti-racist opposition in urban areas. From this awareness of a humanity that was culturally defined, emerged morality challenges leading to more liberal acceptances of relationships, of women challenging their conventional roles in society, religious belief critiques, multi-culturalism and rise of youth culture and music. Post Second World War asserted a model of social democracy that had at its core inclusivity and social justice. The fact that this core had to be demanded was because it was seen to have a fundamental moral justification behind it. How could you possibly argue that people ought not to be treated fairly? This broadening liberal democracy was achieved with a wider interpretation of the state and a changed economic philosophy. But it was challenged.

In 1980, Thatcher and Reagan championed a new neo-classical economic philosophy, even if they didn’t actually ‘roll back’ the state. They argued that Keynesian interventionist states were responsible for inefficient nationalised industries that smothered innovation without the stimulus of competition. Keynesians themselves had no answer to the stagflation of the 1970s. In stepped Milton Friedman and free markets. The solution was to be found in allowing markets the liberty to find their equilibrium. Markets give people what they want instead of what the state thinks they want. A new definition of liberty emerged that was shaped by the conception of a market place as one of interacting individuals. Caveat Emptor. There is no place for society when price levels are determined by individual consumers and sellers.

This new economics argued that placing employment as a priority over inflation was to ultimately fail those who were most vulnerable to unemployment; it rendered them reliant on welfare, robbing them of the pride that comes from self-reliance. These new ‘neo-liberals’ argued that markets were the most efficient ways of allocating resources and trade tariffs, subsidies, minimum wages, price & wage controls including Trade Unions, monopolies, central banks would all prevent efficiency. If markets were given maximum liberty, the long-term impacts would be income equality, but fairness was never seen to be the outcome of free markets. Hayek (1899-1992) stated that “The idea that you can arrange for distribution of incomes . . corresponding to . . merit or need is incompatible with the need for prices, including the prices of labour, to direct people to go where they are needed.” He argued that any intervention in an attempt to achieve a just outcome would require the whole of society to be organized “. . in all essential respects . . (to be) the opposite of a free society[3].” This is what Hayek described as the ‘road to serfdom’. He stated that egalitarianism and permissiveness (he had lived through the 1920s) were obstacles to a functioning society. Egalitarianism was “a product of the necessity under unlimited democracy to solicit the support even of the worst.” Unlimited democracy meant conceding “ a right to equal concern and respect” to those who break the code[4]” or those who don’t deserve it.

Neo-liberalism espoused an economy which had a low tax regime, privatised industry at all levels and free markets. The state’s role would be reduced to doing only what markets could not do and  to enforce the ‘rules of the game’. Accompanying this economics was a growing financial sector that Martin Wolf of the FT described as Rentier Capitalism because it profited out of capital growth while contributing nothing to the productive sector that generated that growth. In 1965 equity market turnover was 9.7% of GDP. By 1985 it was 28% and in 2007 it was 295.6% of GDP[5]. Today, the entire US equity market is distorted by the size of only seven corporations;  they represent 75% of the value of the entire US stock market, the highest level since the 1930s[6].

In 1989, the Berlin Wall came down marking the end of the Soviet Union of Socialist Republics. It was widely declared that the West had won, that free markets had triumphed over planned economy models. The ex-Soviet states along with Russia fell into economic depression with Russia facing economic collapse. Goods distribution disintegrated and Russians began growing their own food with bartering becoming the main form of exchange. Russian privatisation in the 1990s was a disaster with the lucrative industries being sold off to Yeltsin’s cronies to create today’s oligarchy of billionaires. For ordinary Russians this was literally free markets for those in a position to grab what freedom permitted. When Putin brought the oligarchs to account, it presented authoritarianism as a necessary counter. Democracy had never been sampled and why would it be if top-down imposition was a more familiar format.?

Meanwhile in the Global north, capitalism was in a frenzy of excess. This was the era of ‘loads a money’. Prosperity was assured. Gordon Brown in delivering his last chancellor’s budget in 1997 declared, “So, against a background of mounting uncertainty and instability in the global economy, we set about establishing a new economic framework to secure long-term economic stability and put an end to the damaging cycle of boom and bust[7]“. Then, ten years later,  a Crash that mainstream economists didn’t see coming struck.

In the 1970s when Keynesianism failed to deal with stagflation, Friedman was in the right period of history to step in to provide an alternative. When the 2008 Crash happened, there was no economic alternative waiting in the wings that could be heard to explain it. However, Roosevelt’s lessons from the 1930s were applied. There was enormous injection of public funds to bail out private lending excess by commercial banking. Such was the complexity of financial securitisation, that no commercial bank or insurance company had faith in lending. Had central banks not stepped in, the Global north’s economic system would have collapsed. To ameliorate the impact, the US began Quantitative Easing One in November 2009, three months after Lehman Brothers collapsed. Britain began their QE in 2009. The European Central Bank held on to non-intervention longer and delayed until 2015 making for a prolonged ‘recovery’. What QE did was to use public funds to buy up the problematic debt. This was done at the expense of hugely increasing the assets of those who possessed them making the wealthy even more wealthy and extending inequality.

The outcome of Thatcher’s brand of free-market economics was to bring wealth to those who had it and to reduce the well-being of those who had little to give. “. . . during the subsequent Conservative governments of Mrs. Thatcher, 1979-90, the Gini coefficient of income inequality shot up in just ten years to the highest in Europe and the proportion of children growing up in official poverty more than doubled to over 30%.” (Resolution Foundation, 2018). That legacy lingers on: “In 2021, despite the continuing existence of its welfare state and its NHS, the UK had now attained the undesirable status of being one of the most unequal societies in western Europe. A substantial proportion of its more than 30% of children in households below the poverty line are now fed by over 2,000 volunteer foodbanks, a new form of dependent vulnerability and inequality that did not exist before. the Conservative government’s decade-long policy of tax reductions for corporations and the wealthiest, combined with austerity for the poorer half of the population[8]”.

I argue the political fallout from the failure of neo-liberal economics is the rise of the far Right throughout the Global north. Consider the social impact of falling living standards. The Centre for Social Justice summarises it in this way: “The economic vulnerability of the most deprived is highlighted, with work often proving financially unrewarding due to poor-quality, insecure jobs and stagnant wages. The welfare system ends up topping up the incomes of over two million people, creating a scenario where being economically inactive due to sickness becomes a more viable option for many.” At the lower ends of the income spread this creates “family breakdown, addiction, worklessness, serious personal debt and educational failure.” At the other end of the income scale, inflation is an academic concern where there is the money to afford private health care, social care, school fees and accountants. For them, a failing public sector is an occasion for nostalgia. What this does for those with diminishing power is reduce confidence in existing institutions and political structures. This waning confidence became entrenched as stagnation set in after the 2008 Crash. Austerity became the policy of the Cameron and subsequent Tory governments, which failed to deal with the sluggish economic growth characteristic of the period. During this time, austerity moved from a government policy to a government strategy to convince financial markets that debt investments were secure. Market recovery was the dominant aspiration rather than the well-being of the population.

The legacy of the 2008 Crash is that confidence in neo-liberal economics has been seriously undermined. Trickle-down presumptions have been seen to exacerbate inequality creating disillusionment amongst working class voters and some middle class. Every political party since 2008, by stressing the need for balanced budgets and pointing negatively at the size of public debt, leaves no other conclusion but that we cannot afford our public sector. Therefore when instability, created by political upheavals and climate changes in regions already impoverished, sends migrants looking for safety, both physically and economically, the conclusion is obvious. If the Global north cannot provide for its own citizens, it certainly cannot afford refugees. The populist radical Right uses the inequality divide to point to a distant, self-serving elite and attributes inequality to globalisation. Policies to counter that would be capitalism within national boundaries with trade tariffs and no migration. 

Perhaps more worrying is that some far-Right parties attribute the economic decrepitude to liberal democracy itself. The economic well-being that was created after the second World War is in sharp contrast to the social dislocation between the how-to-spend-it elites and the how-to-budget masses in the twentieth-first century. The crowing of the economic superiority of the capitalist Global north after the fall of the wall and the collapse of the Soviet Union in 1991, now may sound hollow. With the dominance of American hegemony challenged by the growing confidence of a Global south, especially in the far east, liberal democracy is seen to be in serious social and economic deficit territory.

The economics of capitalism is not allied with any political regime. It can thrive under fascism, totalitarianism or communism as much as it can under liberal democracies. In fact, with private property at its heart, it requires authority to protect and then enforce contract and proprietorial rights. There is therefore a tension between the economics of capitalism and politics of liberal democracy. That is why the later will become increasingly fragile in the coming decades, because it relies on its populations feeling the benefits of its economic prosperity. And that hasn’t happened, and isn’t happening now. When the next crash happens, there will be more political parallels with the 1930s

The economics of capitalism is not allied with any political system. It can thrive under fascism, totalitarianism or communism as much as it can under liberal democracies. In fact, with private property at its heart, it requires authority to protect and then enforce contract and proprietorial rights that marks liberal democracy as an outlier. The political element of liberal democracy invites input and participation, whereas in the economic sphere, power is expected to be top down. Therein lies the tension between the economics of capitalism and politics of liberal democracy. This is why when power in the economic sphere is threatened, alliance with authoritarian capitalism acquires a greater attraction than democracy. Liberal democracies are strengthened when all of its populations feel the benefits of economic prosperity while also having security of health, housing, warmth and food as they did after the Second World War. Since 1980, those benefits have gone to the asset rich while state safeguards against the social risks endemic to wage labour have been handed back to wage labourers. These were deliberate political choices both after the ’45 War and in 1980. Political choice needs to be made again; it can, if the options are loudly declared.

Alas the sentiments expressed in 1945 . . .

“Upon all of us, in all our countries, is now laid the duty of transforming into action these words which you have written. Upon our decisive action rests the hope of those who have fallen, those now living, those yet unborn — the hope for a world of free countries — with decent standards of living — which will work and cooperate in a friendly civilized community of nations.

This new structure of peace is rising upon strong foundations.Let us not fail to grasp this supreme chance to establish a world-wide rule of reason — to create an enduring peace under the guidance of God.”

 President Truman closing the UN Conference, June 1945.

. . . ring hollow in today’s banging war drums and heated rhetoric. It has elicited this sobering observation that takes us two steps forward when we think we are taking one back:

“The defence industry is having a moment. As the world becomes more dangerous, with Russia’s war in Ukraine, conflict in Gaza and beyond and the back drop of great power competition, defence budgets across the globe are rising.” 

Eric Schmidt  Weekend FT 21/2 Sept 2024.

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[1] https://academic.oup.com/oxrep/article/26/3/285/374047?login=false

[2] Daniel Chirot, sociologist. 1996

[3] von Hayek F.A. 1974 lecture. https://academic.oup.com/isq/article/67/1/sqad002/7033795?login=false

[4] von Hayek F.A. The Mirage of Social Justice: Law, Legislation and Liberty, vol 2 1976

[5] FT Weekend 15/6  Nov 2008

[6] https://www.wsj.com/livecoverage/stock-market-today-dow-jones-02-15-2024/card/how-big-is-the-magnificent-seven-s-dominance–YXaLTCV3ObmH1Lq2blcx

[7]https://www.channel4.com/news/articles/politics/domestic_politics/factcheck%2Bno%2Bmore%2Bboom%2Band%2Bbust/2564157.html

[8] Simon Szreter. The History of inequality: the deep-acting ideological and institutional influences. Institute of Fiscal Studies. https://ifs.org.uk/inequality/wp-content/uploads/2021/11/IFS-Deaton-Review-The-history-of-inequality-1.pdf

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