PostCapitalism-_Paul-Mason_-_z-library.sk_-1lib.sk_-z-lib.sk_

This was growth driven by productivity on an unprecedented scale. The results are evident in the GDP per-person data. For the sixteen most advanced countries, per-person GDP grew at an average of 3.2 per cent per year between 1950 and 1973. For the entire period between 1870 and 1950 it had averaged 1.3 per cent.⁵ Real incomes soared: in the USA, the majority of households saw their real incomes rise by more than 90 per cent between 1947 and 1975;⁶ in Japan the average real income increased a staggering 700 per cent.⁷

Across the developed world, the new techno-economic paradigm was clear – even if each country had its own version. Standardized mass production – with wages high enough to drive consumption of what the factories produced – was unleashed across society. There was male full employment and, subject to cultural variations, increased employment of teenagers and women once the reconstruction phase was over. In the developed world, people moved from the land to the factories in large numbers: between 1950 and 1970 the agricultural workforce in Europe declined from 66 million to 40 million; in the USA it collapsed from 16 per cent of the population to just 4 per cent.⁸

The most frenetic period of growth in human history was bound to produce glitches. But there were sophisticated economic management techniques to overcome them: realtime statistics, economic planning bodies at a national level, armies of economists and number crunchers in the HQs of the big corporations.

As the boom unfolded, it produced disorientation on the left. Varga – Stalin’s tame economist – actually got it right: in 1946 he warned the Soviet leaders that the state-capitalist methods pioneered during the war could stabilize the West.⁹ The dominant Anglo-Saxon powers would, he forecast, probably loan the rest of the world enough money to kickstart consumption again, and the wartime methods of state organization would replace the ‘anarchy of capitalist production’.¹⁰ For saying this he was hounded from

his post, forced to recant and admit to being ‘cosmopolitan’. Stabilization of the Western economies was impossible, Stalin had decreed.

In the West, the far left remained on the doomy side of the argument: ‘The revival of economic activity in capitalist countries weakened by the war … will be characterised by an especially slow tempo which will keep their economies at levels bordering on stagnation and slump,’ wrote the Trotskyists in 1946.¹¹

When this was proved nonsense, Marxists were not the only ones left confused. Even the theorists of moderate social-democracy were so perplexed that they declared the West’s economic system had effectively become non-capitalist. ‘The most characteristic features of capitalism have disappeared,’ wrote Labour MP Anthony Crosland in 1956, ‘the absolute rule of private property, the subjection of all life to market influences, the domination of the profit motive, the neutrality of government, typical laissez-faire division of income and the ideology of individual rights. ’¹²

By the mid-1950s, almost the whole left had embraced the theory of ‘state monopoly capitalism’ – first suggested by Bukharin, then by Varga, and now turned into a full-blown theory by the US left economist Paul Sweezy.¹³ He believed that state intervention, welfare measures and permanently high military spending had abolished the tendency to crisis. The falling profit rate could be offset by rising productivity – again, permanently. The Soviet Union, it was clear, would have to get used to coexisting with capitalism; the Western labour movement would have to forget revolution and take the upside of the boom, which was considerable.

For the whole period, the focus of debate was on what had changed at the level of the state, the factory, the supermarket, the boardroom and the laboratory. Very little attention was paid to money. However, the crucial factor that underpinned economic reality in the 1950s and 60s was a stable international currency system, and the effective suppression of financial markets.

THE POWER OF EXPLICIT RULES

On 1 July 1944, a special train delivered a cargo of economists, statesmen and bankers to White River Junction, Vermont, from where they were ferried to a hotel in New Hampshire. ‘All trains, regular or scheduled, had to look out for us,’ the train’s fireman remembered, ‘we had the right over everything.’¹⁴ Their destination was Bretton Woods. There they would design a global monetary system that, like the train, had ‘the right over everything’.

The Bretton Woods Conference agreed a system of fixed exchange rates designed to restore pre-1914 stability, only this time with explicit rules. All currencies would be pegged against the dollar, and the USA would peg the dollar to gold at \$35 an ounce. Countries whose trade balance became seriously out of kilter would have to buy or sell dollars to keep their own currency at the agreed peg.

At the conference, the British economist John Maynard Keynes pushed for the creation of a separate global currency, but the USA rejected the idea. Instead, it secured the dollar’s position as the unofficial global currency. There was no global central bank, but the International Monetary Fund and the World Bank were designed to reduce friction in the system, with the IMF acting as a short-term lender of last resort and enforcer of the rules.

The system was overtly stacked in favour of the USA: not only was it the biggest economy in the world, it had an infrastructure undamaged by the war and – for now – the highest productivity. It also got to appoint the boss of the Fund. The system was also stacked in favour of inflation. Because the link to gold was indirect, because there was leeway in the currency peg, and because the rules on balanced trade and structural reform were loose, the system was designed to produce inflation. This was recognized by the freemarket right even before the train to Bretton Woods left the station. The journalist Henry Hazlitt, a confidant of free-market guru Ludwig von Mises, railed against the plan in the New York Times: ‘It would be difficult to think of a more serious threat to world stability and full production than the continual prospect of a uniform world inflation to which the politicians of every country would be so easily tempted.’¹⁵

But this was a system also stacked against high finance. Strict limits on bank leverage were imposed by law and ‘moral suasion’ – quiet pressure from central banks on banks that lent too much. In the USA, big banks were required to hold cash or bonds equivalent to 24 per cent of the money they’d lent out.¹⁶ In the UK it was 28 per cent. By 1950, bank loans across fourteen advanced capitalist countries equalled just one fifth of GDP – the lowest since 1870, and much smaller than the scale of bank lending during the pre-1914 upswing.

The result created a form of capitalism that was profoundly national. Banks and pension funds were required by law to hold the debt of their own countries; and they were discouraged from making cross-border financial trades. Add to that an explicit ceiling on interest rates and you have what we now call ‘financial repression’.

Here’s how financial repression works: you hold interest rates below inflation, so savers are effectively paying for the privilege of having money; you prevent them moving money out of the country in search of a better deal, and force them to buy the debts of their own country at a premium. The effect, as the economists Reinhart and Sbrancia have shown, was to shrink the combined debts of the developed world dramatically.¹⁷

In 1945, because of war spending, the public debts of the developed countries were close to 90 per cent of GDP. But with an inflation spike straight after the war, and then moderate inflation throughout the post-war boom, real interest rates became negative: in the USA between 1945 and 1973, long-term real interest rates were on average minus 1.6 per cent. Because the banking regulations acted as an effective tax on financial assets, economists calculate they raised the equivalent of a fifth of all government income during the boom, even more in the UK.¹⁸ The result was to shrink advanced country debts to a historic low of 25 per cent of GDP by 1973.

In short, Bretton Woods achieved something unprecedented: it shrank the debts run up during a global war, suppressed speculation, mobilized savings into productive investment and enabled spectacular growth. It pushed all the latent instability of the system into the sphere of relationships between

currencies, but US dominance ensured these were, at first, contained. Rightwing outrage over the inflationary aspect of Bretton Woods was overcome by the greatest period of stability and full production ever known.

Keynes had emphasized, at the design stage the importance of explicit rules – going beyond the gentlemen’s agreement that lay behind the Gold Standard. In the event, explicit rules backed by a global superpower had a multiplier effect few could have imagined.

If the Depression was in part a product of Britain’s decline and America’s refusal to become a global superpower, then it was at Bretton Woods that the USA assumed the duties of a superpower with great passion. In fact, the twenty-five post-war years are the only time in modern history when a great power was truly hegemonic. Britain’s nineteenth-century dominance was always negotiated and relative. Within the capitalist world of the midtwentieth century, America’s dominance was absolute. This acted like a massive reset button on the world economy, amplifying the upswing. But this was not the only reset button pressed.

THE POST-WAR BOOM AS A CYCLE

A second major change had taken place during wartime, with the state taking control of innovation. By 1945, national bureaucracies had become adept in the use of state ownership and control – and indeed mass communication – to shape private-sector behaviour. Perfectly ordinary managers, under the ultimate pressure of ‘you lose, you die’, had fine-tuned technocracy. Even in the Axis powers, where the state was dismantled in 1945, this culture of innovation and a large part of the technocratic system survived the war.

The case of General Motors is instructive. In 1940, the US government hired GM’s president, Alfred Knudsen, to run its Office of Production Management, which coordinated the whole war economy. He proceeded to place \$14 billion-worth of contracts with GM during the war. The corporation converted all of its 200 factories to war production, making – among other things – 38,000 tanks, 206,000 aircraft engines and 119 million shells. It became, in other words, a massive arms company with a single customer. Within this and other giant segments of American industry management effectively operated like a profit-driven state-planning bureau. Nothing like it had been seen before – or since.

At the Federal level, research and development was centralized and industrialized by the Office of Scientific Research and Development. Key to the whole deal was the prohibition of profit directly from research. ‘Profit is a function of the production activities of an industrial establishment, not of a research department,’ the OSRD decreed.¹⁹ Contracts were placed where skills were high, where the danger of massproduction overload was least and ‘spread among as many organizations as possible’. Only when all these criteria were equal could the lowest cost be brought into consideration. Competition and patent ownership issues were put on hold.²⁰

These were remarkable things to achieve within capitalism: to treat research as public property, to suppress competition and to plan not just production but the direction of research. And though the USA perfected it, all major combatant states attempted it. The result was to stimulate an unprecedented culture of cross-fertilization in strategic disciplines. The new approach inserted maths and science into the heart of the industrial process; economics and data management into political decision-making.

It was the OSRD that took Claude Shannon, the founder of information theory, out of Princeton and put him into Bell Labs to design algorithms for anti-aircraft guns.²¹ There, he would meet Alan Turing and discuss the possibility of ‘thinking machines’. Turing, too, had been scooped out of academia by the British government to run the Enigma codebreaking operation at Bletchley Park.

This culture of innovation survived the transition to peacetime, even as individual corporations tried to monopolize the results and scrapped over patent rights. And it was not limited to technical innovation.

In 1942, GM gave management theorist Peter Drucker open access to study its operations. Drucker went on to write The Concept of the Corporation, arguably the first modern management book, which advocated the breakup of command structures and the decentralization of control.

Though GM rejected his advice, thousands of other firms did not: the postwar Japanese auto industry adopted them in full. Management theory became a generalized discipline, not secret knowledge, with a whole cohort of consulting firms dedicated to spreading successful techniques rather than hoarding them.

In this sense, the wartime economy gave birth to one of the most fundamental reflexes within the capitalism of the long boom: to solve problems through audacious technological leaps, pulling in experts from across disciplines, spreading the best practice in a sector, and changing the business process as the product itself changed.

The role of the state in all this contrasts with the meagre role of finance. In all normative models of long cycles, it is finance that fuels innovation and helps capital flow into new, more productive areas. But finance had been effectively flattened during the 1930s.

What emerged from the war was a very different capitalism. All it needed was a raft of new technologies – and these were plentiful: the jet engine, the integrated circuit, nuclear energy and synthetic materials. After 1945, the world suddenly smelled of nylon, plastic and vinyl, and buzzed with electrified processes.

But one key technology was invisible: information. Though the ‘information economy’ lay decades in the future, the post-war economies saw information used on an industrial scale. It flowed as science, as management theory, as data, as mass communications and even – in a few hallowed places – out of a computer and into a tray of folding paper.

A transistor is simply a switch with no moving parts. Information theory plus transistors gives you the ability to automate physical processes. So factories throughout the West were re-tooled with semi-automated machinery: pneumatic presses, drills, cutters, lathes, sewing machines and production lines. What they lacked was sophisticated feedback mechanisms: electronic sensors and automated logic systems were so crude that the latter used compressed air to do what we now do with iPhone apps. But human beings were plentiful – and for many manual work became the act of controlling a semi-automated process.

The Cambridge economist Andrew Glyn believed the extraordinary success of the post-war boom could only be explained by ‘a unique economic regime’.²² He described this regime as a mixture of economic, social and geopolitical factors, which operated benignly throughout the upswing until they began to clash and grind in the late 1960s.

State direction produced a culture of science-led innovation. Innovation stimulated high productivity. Productivity allowed high wages, so consumption kept pace with production for twenty-five years. An explicit global rules system amplified the upside. Fractional reserve banking stimulated a ‘benign’ inflation which, combined with financial repression, forced capital into productive sectors and kept speculative finance marginal. The use of fertilizers and mechanization in the developed world boosted land productivity, keeping the cost of inputs cheap. Energy inputs were, at the time, also cheap.

As a result, the period 1948–73 unfolded as a Kondratieff upswing on steroids.

WHAT CAUSED THE WAVE TO BREAK?

There is no dividing line in economic history clearer than 17 October 1973. With their armies at war with Israel, the majority of the oil-exporting Arab countries imposed an oil embargo on the USA and slashed output. The oil price quadrupled. The resulting shock pushed key economies into recession. America’s economy shrank by 6.5 per cent between January 1974 and March 1975,²³ Britain’s by 3.4 per cent. Even Japan – which had averaged growth rates close to 10 per cent in the post-war period – went briefly negative.²⁴ The crisis was unique because in the worst-hit countries falling growth coincided with high inflation. By 1975, inflation in Britain reached 20 per cent, and 11 per cent in the USA. The word ‘stagflation’ hit the headlines.

Yet even at the time it was obvious that the oil shock was merely the trigger. The upswing had already been stuttering. In each developed country, growth in the late 1960s seemed beset by national or local problems: inflation, labour troubles, productivity concerns and flurries of financial scandal. But 1973 was the watershed, the point where the energy driving the fourth wave upwards caused it to peak and then invert. What made it happen is a question that has defined modern economics.

For right-wing economists, the answer lay in the exhaustion of Keynesian policy. For the left, however, the explanations have varied over time: in the late 1960s, high wages were seen as responsible; in the following decade, economists of the New Left tried to apply the Marxist overproduction theory.

In fact, 1973 can best be understood as a classic phase change on the Kondratieff pattern. It occurs about twenty-five years into the economic cycle. It is global in scope. It heralds a long period of recurrent crisis. And once we understand what caused the upturn – high productivity, explicit global rules and financial repression – we can understand how it became exhausted.

The post-war arrangements had effectively locked away instability into two zones of control: relations between currencies and relations between classes. Under the Bretton Woods rules, you were not supposed to devalue your currency to make your exports cheap and boost employment. Instead, if your economy was uncompetitive, you could either protect yourself from international competition through trade barriers, or impose ‘internal devaluation’ – cutting wages, controlling prices, reducing the amount spent on welfare payments. In practice, protectionism was discouraged by the Bretton Woods rules and wage cutting was never seriously attempted until the mid-1970s – which left devaluation. In 1949, Britain devalued Sterling by 30 per cent against the dollar and twenty-three other countries followed suit. A total of 400 official devaluations took place before 1973.

So, from the outset, Bretton Woods was a system where states were repeatedly trying to offset their economic failings by manipulating their exchange rates against the dollar. This was seen in Washington as a form of unfair competition, and the USA fought back. By the 1960s, it was devaluing its own currency in real terms, as measured by price differences, against those of its competitors. This subcutaneous economic warfare became overt during the inflation crises of the late 1960s.

Inside the factories, the long boom had been a productivity story and a wages story. In the advanced countries productivity grew at 4.5 per cent per year, while private consumption grew at 4.2 per cent. The rising output of automated machinery more than paid for the rising wages of those operating them. All this was the result of new investment. But the upswing ended once investment could no longer increase productivity at the previous rate.

There are clear signs of a productivity slowdown in the pre-1973 data, and of a fall in the ratio of output to capital invested.²⁵ Productivity, as a counter-tendency to the downward pressure on profits, ran out of steam. But as conditions tightened, the sheer strength of working-class bargaining power in countries with full employment and no will to break the post-war social contract made wage cuts a non-starter. Rather, managers were forced to increase wages and non-wage benefits, while reducing working hours.

As a result, a ‘profit squeeze’ kicked in. Comparing profit rates for America, Europe and Japan in 1973 to their respective peak years during the boom, Andrew Glyn found that in each case they had fallen by onethird. With falling profits, rising wages and alarming levels of shop-floor militancy, there were two pressure valves: to let inflation rip, eroding the value of real wages without having to provoke more disputes; and to go along with social wage rises – easing the pressure on individual businesses by, for example, boosting family allowance and other payments from the state to workers. As a result, social spending by the state – on benefits, subsidies and other income-boosting measures – soared to dysfunctional levels, especially in Europe: from 8 per cent of GDP in the late 1950s to 16 per cent by 1975.²⁶ Over roughly the same period in the USA, Federal spending on welfare, pensions and health doubled to 10 per cent of GDP by the late 1970s.

All it needed to tip this fragile system into crisis was a shock. And in August 1971, Richard Nixon delivered one, unilaterally breaking the commitment to exchange dollars for gold, and thereby destroying Bretton Woods.

Nixon’s reasons for doing so are well documented.²⁷ As America’s competitors caught up in productivity terms, capital flowed out of the US into Europe, while its trade balance declined. By the late 1960s, with every country engaged in expansionary policies – with high state spending and low interest rates – America had become the big loser from Bretton Woods. It needed to pay for the Vietnam War and the welfare reforms of the late 1960s, but could not. It needed to devalue but could not, because to make that happen, other countries had to raise their own currencies against the dollar, and they refused. So Nixon acted.