During the past two decades, the logic of market-based economic and social theory has rarely been questioned – not until onset of Great Recession

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During the past two decades, the logic of market-based economic and social theory has rarely been questioned – not until onset of Great Recession

During the past two decades, the logic of market-based economic and social theory has rarely been questioned – not until onset of Great Recession

“Markets provide the most efficiency way of allocating value.” “Government involvement creates inefficiencies.”

This wisdom has seemed as immutable as the Ten Commandments
But in fact, the dominance of free market theory is relatively recent, and for much of the 20th century markets were widely viewed by economists and political theorists as sources of instability

Technological change transformed economic, social & political systems (power, transportation)

Technological change transformed economic, social & political systems (power, transportation)
Created two new, powerful elements in society

Very large industrial and financial firms
New urban working “class”

Led to new issues of governance

How to control large business units? (Who controls?)
What is the political role (political power) of new working class?

New political spectrum – focusing on control of new corporations and role of working class

New political spectrum – focusing on control of new corporations and role of working class

In Europe, a left-right political spectrum between socialism (demanded some sort of social control of elements of production and markets) and classic liberalism (insisted on market freedom)
In US, competition of “progressivism” (which sought to use power of reformed government to balance new power of business) and free market liberals

Industrial capitalism in first half of 20th century characterized by increasingly frequent and intense crises (“boom and bust”) leading to economic decline and unemployment.

Industrial capitalism in first half of 20th century characterized by increasingly frequent and intense crises (“boom and bust”) leading to economic decline and unemployment.

Worst was the worldwide Great Depression of 1930s.

Drove deepening political polarization in 1930s between more radical left (Communist) and more radical right (Fascist)

Capitalism was widely viewed as self-destructive by its very nature – inevitably leading to crises of excess production, collapsing demand, and desperate poverty and plummeting standards of living even in the richest nations

Capitalism was widely viewed as self-destructive by its very nature – inevitably leading to crises of excess production, collapsing demand, and desperate poverty and plummeting standards of living even in the richest nations
As war ended in 1945, deep pessimism about economic outlook

By mid-1950s, however, a new system seems to have emerged: high & stable growth; low inflation, low unemployment

By mid-1950s, however, a new system seems to have emerged: high & stable growth; low inflation, low unemployment
Dramatic change in the mainstream literature of economics, political and social philosophy: From deep pessimism to widespread optimism
Daniel Bell, The End of Ideology (‘60), Andrew Shonfield, Modern Capitalism (‘65) Kenneth Galbraith, The New Industrial State (‘66)

Bell: Class based social and political conflict much diminished "In the Western world...there is a rough consensus among intellectuals on political issues: the acceptance of a Welfare State; the desirability of decentralized power; a system of mixed economy and of political pluralism. The old passions are spent”, “The ideological age has ended.”

Bell: Class based social and political conflict much diminished "In the Western world...there is a rough consensus among intellectuals on political issues: the acceptance of a Welfare State; the desirability of decentralized power; a system of mixed economy and of political pluralism. The old passions are spent”, “The ideological age has ended.”
Shonfield: “The performance of capitalism since the end of the Second World War has been unexpectedly dazzling…It is hard for us to believe that the bleak and squalid system which we knew could have adapted itself to achieve so many desired objectives.”

Shonfield: “What…converted capitalism from the cataclysmic failure which it appeared to be in the 1930s into the great engine of prosperity of the postwar Western world?”

Shonfield: “What…converted capitalism from the cataclysmic failure which it appeared to be in the 1930s into the great engine of prosperity of the postwar Western world?”
Answer was government action – new policies ended cycle of economic crises and deepening class conflict

Macroeconomic management of the economy to minimize inflation and unemployment

Macroeconomic management of the economy to minimize inflation and unemployment
Social policies to protect the individual from circumstances with which she or he cannot contend: unemployment insurance, welfare payments, old age pensions, medical insurance
Action by governments to provide services that private sector cannot provide (“public goods”) — moderate-cost housing, health care, education, urban transportation
US is the outrider here but still in general consensus

Shonfield: New policies tamed the irrationality of markets, brought greater intellectual coherence in the economy and overcome the deep class divisions that characterized capitalist society

Shonfield: New policies tamed the irrationality of markets, brought greater intellectual coherence in the economy and overcome the deep class divisions that characterized capitalist society
Galbraith: “Much of this…has been thought of as smoothing and softening the harsh edges of capitalism.”
Government managed the economy – management is key term
These views represented mainstream consensus of business, government and intellectual leadership in this period

Late 1940s to ‘70s, efforts to rebuild capitalism were enormously successful:

Late 1940s to ‘70s, efforts to rebuild capitalism were enormously successful:

sustained high levels of economic growth, low inflation and low unemployment
rewards of growth widely distributed with rapid rise in standards of living, especially for middle and working class (Bottom up rather than top down)
strong political consensus
high levels of confidence in government, media, universities and businesses

In US, era still characterized by racial segregation

Galbraith looked at role of corporation in mid-century society, concluded that modern corporate managers had developed model for long-term, equitable corporate growth and resolved conflicts between corporation and key stakeholder groups

Galbraith looked at role of corporation in mid-century society, concluded that modern corporate managers had developed model for long-term, equitable corporate growth and resolved conflicts between corporation and key stakeholder groups

Firm & workers – long-term contracts, with constantly improving wages & benefits
Firm & competitors – controlled competition in oligopolistic markets, shared information
Firm & shareholders – long term growth, gradual increase in share value, regular distribution of profits
Firm & government – leaders become national business leaders, take strong role in public policy

Key governance issues resolved

Era of cut-throat cowboy capitalism over; firms embrace social and policy roles; focus on long-term incremental growth which focuses on wide distribution of gains

Era of cut-throat cowboy capitalism over; firms embrace social and policy roles; focus on long-term incremental growth which focuses on wide distribution of gains
New era characterized by rising income for all, but diminishing gap between top and bottom levels; emergence of “blue collar middle class”
Interlocking, collaborating public & private sector managers of enormous organizations: Public and private sector managers learned how to make capitalist system work!

Did consensus lead to economic growth or was consensus supported by economic growth that was a factor of other independent developments (such as technological development, the US’ unique role in world politics, catch up after Depression and war)?

Did consensus lead to economic growth or was consensus supported by economic growth that was a factor of other independent developments (such as technological development, the US’ unique role in world politics, catch up after Depression and war)?

“Social capitalism” always had critics, but hard to argue with reality of economic well being after WWII

“Social capitalism” always had critics, but hard to argue with reality of economic well being after WWII
In 1960s, consensus began to unravel – particularly over US policy in Vietnam and with rise of race and social issues

Revival of “critical thinking” – kind of Neo-Marxian perspective on society & politics
Much more important was economic thinking led by Chicago School and Milton Friedman; Moving into mainstream

In 1970s, changing economic reality of no growth, rising inflation and higher unemployment led to much wider questioning of post-war consensus

Election of Margaret Thatcher and Ronald Reagan symbolized a new era – new dominance of market theory

Election of Margaret Thatcher and Ronald Reagan symbolized a new era – new dominance of market theory

Markets tend of their nature toward equilibrium; largest source of market instability is government
After decades of seeing government as means of restoring economic health now see government as main cause of economic distress
Deep hostility toward earlier focus on large organizations (Big Government, Big Business, Big Labor)

Remarkable how quickly what people believed changed and how profoundly the new views made their way into the conventional wisdom

Galbraith dissected the critique of the post-war consensus: identified 3 lines of attack: the simplistic attack, the romantic attack, and the real attack

Galbraith dissected the critique of the post-war consensus: identified 3 lines of attack: the simplistic attack, the romantic attack, and the real attack
Simplistic attack consists of a generalized assault on government itself

Government represents wicked bureaucrats, malevolent interests, etc, etc
Government is the enemy of liberty

Romantic attack holds that all economic decisions should be left to the freely competitive market

Romantic attack holds that all economic decisions should be left to the freely competitive market

What government does will be done poorly and could be better done by private actors
Government is the enemy of efficiency

Government managers screwed up

Government managers screwed up

Expenditure on public welfare services lacked careful judgment on need/cost
Quality of public administration has been seriously deficient
Macroeconomic management of the economy failed to deal with unemployment and inflation

Was “Economic management” a charade and did it actually inhibit economic growth?

Since 1970s, almost all intellectual action has been on the right

Since 1970s, almost all intellectual action has been on the right

Confusing names: Neo-Liberal, Neo-Conservative

Anti-big business thinking (eg., Michael Moore) fairly thin
Most interesting, perhaps, is resurgence of traditional American populist anger – where anti-capitalist left, anti-Washington right and libertarians all share space
Moving again toward technology driven transformational change – affecting all aspects of our lives

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During the past two decades, the logic of market-based economic and social theory has rarely been questioned – not until onset of Great Recession

During the past two decades, the logic of market-based economic and social theory has rarely been questioned – not until onset of Great Recession

During the past two decades, the logic of market-based economic and social theory has rarely been questioned – not until onset of Great Recession

This wisdom has seemed as immutable as the Ten Commandments

But in fact, the dominance of free market theory is relatively recent, and for much of the 20th century markets were widely viewed by economists and political theorists as sources of instability

Technological change transformed economic, social & political systems (power, transportation)

Technological change transformed economic, social & political systems (power, transportation)

Created two new, powerful elements in society

Led to new issues of governance

New political spectrum – focusing on control of new corporations and role of working class

New political spectrum – focusing on control of new corporations and role of working class

Industrial capitalism in first half of 20th century characterized by increasingly frequent and intense crises (“boom and bust”) leading to economic decline and unemployment.

Industrial capitalism in first half of 20th century characterized by increasingly frequent and intense crises (“boom and bust”) leading to economic decline and unemployment.

Drove deepening political polarization in 1930s between more radical left (Communist) and more radical right (Fascist)

Capitalism was widely viewed as self-destructive by its very nature – inevitably leading to crises of excess production, collapsing demand, and desperate poverty and plummeting standards of living even in the richest nations

Capitalism was widely viewed as self-destructive by its very nature – inevitably leading to crises of excess production, collapsing demand, and desperate poverty and plummeting standards of living even in the richest nations

As war ended in 1945, deep pessimism about economic outlook

By mid-1950s, however, a new system seems to have emerged: high & stable growth; low inflation, low unemployment

By mid-1950s, however, a new system seems to have emerged: high & stable growth; low inflation, low unemployment

Dramatic change in the mainstream literature of economics, political and social philosophy: From deep pessimism to widespread optimism

Daniel Bell, The End of Ideology (‘60), Andrew Shonfield, Modern Capitalism (‘65) Kenneth Galbraith, The New Industrial State (‘66)

Shonfield: “The performance of capitalism since the end of the Second World War has been unexpectedly dazzling…It is hard for us to believe that the bleak and squalid system which we knew could have adapted itself to achieve so many desired objectives.”

Shonfield: “What…converted capitalism from the cataclysmic failure which it appeared to be in the 1930s into the great engine of prosperity of the postwar Western world?”

Shonfield: “What…converted capitalism from the cataclysmic failure which it appeared to be in the 1930s into the great engine of prosperity of the postwar Western world?”

Answer was government action – new policies ended cycle of economic crises and deepening class conflict

Macroeconomic management of the economy to minimize inflation and unemployment

Macroeconomic management of the economy to minimize inflation and unemployment

Social policies to protect the individual from circumstances with which she or he cannot contend: unemployment insurance, welfare payments, old age pensions, medical insurance

Action by governments to provide services that private sector cannot provide (“public goods”) — moderate-cost housing, health care, education, urban transportation

US is the outrider here but still in general consensus

Shonfield: New policies tamed the irrationality of markets, brought greater intellectual coherence in the economy and overcome the deep class divisions that characterized capitalist society

Shonfield: New policies tamed the irrationality of markets, brought greater intellectual coherence in the economy and overcome the deep class divisions that characterized capitalist society

Galbraith: “Much of this…has been thought of as smoothing and softening the harsh edges of capitalism.”

Government managed the economy – management is key term

These views represented mainstream consensus of business, government and intellectual leadership in this period

Late 1940s to ‘70s, efforts to rebuild capitalism were enormously successful:

Late 1940s to ‘70s, efforts to rebuild capitalism were enormously successful:

In US, era still characterized by racial segregation

Galbraith looked at role of corporation in mid-century society, concluded that modern corporate managers had developed model for long-term, equitable corporate growth and resolved conflicts between corporation and key stakeholder groups

Galbraith looked at role of corporation in mid-century society, concluded that modern corporate managers had developed model for long-term, equitable corporate growth and resolved conflicts between corporation and key stakeholder groups

Key governance issues resolved

Era of cut-throat cowboy capitalism over; firms embrace social and policy roles; focus on long-term incremental growth which focuses on wide distribution of gains

Era of cut-throat cowboy capitalism over; firms embrace social and policy roles; focus on long-term incremental growth which focuses on wide distribution of gains

New era characterized by rising income for all, but diminishing gap between top and bottom levels; emergence of “blue collar middle class”

Interlocking, collaborating public & private sector managers of enormous organizations: Public and private sector managers learned how to make capitalist system work!

Did consensus lead to economic growth or was consensus supported by economic growth that was a factor of other independent developments (such as technological development, the US’ unique role in world politics, catch up after Depression and war)?

Did consensus lead to economic growth or was consensus supported by economic growth that was a factor of other independent developments (such as technological development, the US’ unique role in world politics, catch up after Depression and war)?

“Social capitalism” always had critics, but hard to argue with reality of economic well being after WWII

“Social capitalism” always had critics, but hard to argue with reality of economic well being after WWII

In 1960s, consensus began to unravel – particularly over US policy in Vietnam and with rise of race and social issues

In 1970s, changing economic reality of no growth, rising inflation and higher unemployment led to much wider questioning of post-war consensus

Election of Margaret Thatcher and Ronald Reagan symbolized a new era – new dominance of market theory

Election of Margaret Thatcher and Ronald Reagan symbolized a new era – new dominance of market theory

Remarkable how quickly what people believed changed and how profoundly the new views made their way into the conventional wisdom

Galbraith dissected the critique of the post-war consensus: identified 3 lines of attack: the simplistic attack, the romantic attack, and the real attack

Galbraith dissected the critique of the post-war consensus: identified 3 lines of attack: the simplistic attack, the romantic attack, and the real attack

Simplistic attack consists of a generalized assault on government itself

Romantic attack holds that all economic decisions should be left to the freely competitive market

Romantic attack holds that all economic decisions should be left to the freely competitive market

Government managers screwed up

Government managers screwed up

Was “Economic management” a charade and did it actually inhibit economic growth?

Since 1970s, almost all intellectual action has been on the right

Since 1970s, almost all intellectual action has been on the right

Anti-big business thinking (eg., Michael Moore) fairly thin

Most interesting, perhaps, is resurgence of traditional American populist anger – where anti-capitalist left, anti-Washington right and libertarians all share space

Moving again toward technology driven transformational change – affecting all aspects of our lives