gracchusdixit

Donald Trump recently declared that one of the central themes of his 2020 reelection campaign will be an attack on progressive Democrats for threatening the American way of life with godless “socialism”.   Former Colorado governor John Hickenlooper, one of the latest Democrats to jump into the race, promptly played right into Trump’s hands by declining to give a direct answer to the question:  “Are you a capitalist?”  Hickenlooper was instantly raked over the proverbial coals, not only by the cable news host who asked him the question, but also by a keening Greek chorus of pundits and politicians, who professed horror at the very idea that any responsible person might have the slightest doubts about the reigning economic ideology.

This kerfuffle says all you need to know about our mindless public discourse, in which it is no longer possible to question the status quo.  It also reveals something about capitalism itself—which is less a successful economic system than an alluring but deceptive fairy tale.

The first chapter of this fairy tale was written in 1776, when Adam Smith, published his iconic book, The Wealth of Nations.  In its pages, he claimed that markets are moved by an “invisible hand,” spinning the straw of human greed, as if magically, into a cloth of gold for society as a whole.  

Modern-day conservatives treat Smith’s account with almost religious reverence, as if it were self-evidently true.  That is not at all the case.  Indeed, Adam Smith’s claims were based on no economic evidence whatsoever—for the simple reason that he was a political philosopher, not an economist.  In fact, there was no such thing at the time, because the social science we call “economics” had yet to be invented. 

Moreover, Smith’s fairy tale began to unravel almost immediately, as the nascent Industrial Revolution gathered momentum.  Its power looms, blast furnaces, and coal-fired steam engines upended the traditional economic relationships Smith had described by unleashing what we today call “automation”.  Those with enough “capital” to buy the machines made vast fortunes.  Millions who had once made a living with their skilled hands were condemned to soulless work in factories and mines.  This caused the most famous prime minister of the Victorian Age, Benjamin Disraeli, to lament the rise of:

Two nations between whom there is no intercourse and no sympathy; who are as ignorant of each other’s habits, thoughts, and feelings, as if they were dwellers in different zones, or inhabitants of different planets.  The rich and the poor.

So combustible a situation could not long be contained.  

In 1848, Karl Marx and Friedrich Engels published The Communist Manifesto, their cri de coeur against the social and economic divide Disraeli had described, in which they famously declared:  “Workers of the world, unite!  You have nothing to lose but your chains.”  No sooner had those words been written than most of Europe erupted in riots and revolution.  The turmoil was so threatening to the governing classes that they moved ruthlessly to suppress it.    Capitalism was thereby rescued from sudden death—but only by the skin of its teeth.  

The reprieve didn’t last long, however, for the simple reason that industrial capitalism was riven by inherent contradictions.  As the mechanization of work boosted the production of goods, it also drove down the wages of those destined to buy those goods.  This caused prices to fall.  Falling prices led, in turn, to even more production, as the system tried—desperately—to prop up declining profits.  Soon, the market was flooded with more goods than people needed, wanted, or could afford to buy, and prices fell again.

Adam Smith’s beatific fairy tale of the “invisible hand” had never anticipated such an outcome—but Karl Marx had.  He was one of the first to see that capitalism was at bottom a Ponzi scheme, and as such, bound to produce bubbles that would inevitably burst.  Which is precisely what happened next.

In 1873, financial markets around the world collapsed, precipitating the first “Great Depression”.  Economic output and wages collapsed.  In the United States alone, 10 states declared bankruptcy, thousands of private businesses defaulted on more than $20 billion of debt, and nearly 100 railroads went belly-up.  This was nothing less than an epochal economic catastrophe.  Its effects lasted for a generation and came very close, for a second time, to writing the final chapter of the capitalist fairy tale.  

Once again, however, and just in the knick of time, capitalism was rescued from extinction by political events.  As the 19th century drew to a close, the competing British, German, Austrian, and Russian Empires converged on a single purpose:  a rush to see who could out-gun whom.  Feverish nationalism ignited a mindless arms race, which ultimately led to the carnage of the First World War.  Perversely, it also saved capitalism.  Without vast infusions of public money, without the nationalization of economic activity demanded by “total war,” the depression that began in 1873 would never have ended.

It didn’t take long for this pattern to rear its ugly head again.  After Europe had exhausted itself on the battlefields of the First World War, the United States became the epicenter of the global financial system, and the “Roaring 20s” kicked in.   On October 24, 1929, the euphoria came to an abrupt halt, as the New York Stock Exchange began to tumble.  Within days, the market declined more than 25 percent; within a matter of months, it was down 50 percent; by the time the music stopped, the market had lost 90 percent of its value.  A second ‘Great Depression” gripped the world.  In the United States, thousands of banks closed their doors; entire industries all but shut down; and millions of Americans lost their jobs and their livelihoods, their homes and their hopes.

The administration of Franklin Delano Roosevelt strove to mitigate the worst effects of the collapse by pumping vast amounts of public money into the economy.  But even these audacious measures weren’t enough.   It took another world war to save capitalism from utter extinction by, in effect, replacing it. 

To fight the Second World War, the economies of the United States and the United Kingdom were, for all intents and purposes, “nationalized‘.   Industrial production, wages, the prices and supply of consumer goods—all were “centrally planned”.  The fact that “central planning” actually worked, and eventually won the war, merely deepened the rancor of those who still believed in Adam Smith’s fairy tale.  Although few public figures dared to admit it at the time, laissez-faire capitalism had been quietly laid to rest.

After the war, it was taken for granted—and correctly so—that government intervention was required to insulate citizens against the catastrophic flaws of “the market”.  In Britain, a Labour government was elected in a landslide, creating, among other things, the National Health Service (which, next to the monarchy, remains to this day the most revered institution in Britain).   In the United States, the federal government introduced the GI Bill, created the Federal Housing Administration, and spent billions building the Interstate Highway System, the biggest public works project since the Roman Empire.  In the process, a new middle class came into being, and millions of Americans were finally able to realize opportunities that had once been unthinkable for all but a privileged few.

These accomplishments were so pervasive and so effective that they were eventually taken for granted and, half a century later, all but forgotten.  This forgetfulness allowed Ronald Reagan and Margaret Thatcher to resurrect the failed ideology of laissez-faire capitalism under a new rubric, “neoliberalism,” and to demonize everything that true liberalism had accomplished.  

But they did far worse than that.  They and a small cadre of conservative intellectuals—Friedrich Hayek, Milton Friedman, and others—asserted for the first time that political freedom was synonymous with the free market, that human rights were inseparable from property rights. These deeply immoral ideas—which Adam Smith would have rejected as preposterous—have become the political and economic catechism of the world’s governing class.  From Washington to Brussels, from Davos to Aspen, “neoliberalism” now reigns supreme.  Despite the 1987 stock market crash, the collapse of the tech bubble in 2000, and the implosion of global financial markets in 2008, from which much of the industrialized world has yet to recover, the fairy tale lives on—not because it works, but rather, because it serves the interests of elites around the world, is sustained by endless infusions of tax dollars, and has been rationalized by decades of self-serving propaganda.  

Millions of people here and abroad are finally beginning to wake up to the fact that capitalism is not only a fairy tale but a fraud. Those who run the political and financial institutions underpinning this fraudulent system find themselves casting about for scapegoats to explain why their precious system is falling apart and why so many millions are turning to illiberal alternatives.  For some of the system’s defenders, the explanation is an irrational hatred of immigrants.  For others, it is a cultural divide between tech-savvy urbanites and the denizens of the agricultural or industrial hinterland.  For still others, the villain is the unprincipled demagoguery of would-be autocrats like Donald Trump.

There is a measure of truth in each of these explanations.  But they all miss the bigger point.

The bigger point is that capitalism is a fairy tale and its promises are a fiction.  Eventually, even the most credulous and wide-eyed children grow up and cease any longer to believe in fairy tales.