The relentless revolution: a history of capitalism (52 page)

Cassandra was a Trojan princess to whom the god Apollo had given the power of prophecy linked to the fate of never being believed. A U.S. Foreign Service officer named James Akins became a modern-day Cassandra. Undertaking a secret oil study for President Nixon’s State Department, he laid out in great detail the consequences of a rapidly expanding use of oil in the face of America’s declining control over its production. His recommendations sound familiar because they have been posted so many times since: development of synthetic fuels, greater conservation efforts, a hefty gas tax, and research on alternative ways to run industry’s machines.
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Akins’s proposals were summarily dismissed as exaggerated, possibly mendacious, and certainly un-American.

E. F. Schumacher, a German economist working in London, faired a bit better with
Small Is Beautiful,
a lovely book that appeared in 1973. Schumacher presented the oil crisis as a challenge to the West to mend its profligate ways. His critique of incessant consumption unfolded alongside his poetry, wit, and Buddhist wisdom. Admiral Hyman Rickover, developer of the atomic submarine, had sounded this alarm even earlier, in 1957. Schumacher’s and Rickover’s prescience reveals yet once again how self-interest can sharpen the mind. Schumacher worked for the British Coal Council, and Rickover was a prominent advocate of atomic energy.

For many observers the multiple setbacks of 1973 were just a bump in the road. In one sense they were right, but only if we ignore the shift in perceptions and attitudes. Artists and intellectuals were the first to get bored with the miracle years of prosperity. They began competing with one another to determine whether we had entered a postindustrial age or a postcapitalist or a postmodern one. Whatever it was, it was definitely “post.” In truth many had become sated with the market’s unending succession of new conveniences, new recreations, and new distractions. Several books published in the United States in the early sixties raised major issues that grew more insistent after the 1973 crisis.

Rachel Carson’s
Silent Spring
caught the nation’s attention in 1962 with its description of the environmental poison of pesticides and herbicides. A zoologist working for the U.S. Bureau of Fisheries, Carson detonated a fire storm with
Silent Spring.
Waiting in the wings were hundreds of experts who had been studying just how destructive the twentieth century had been to the planet that we inhabit. Environmentalists mounted one of the most successful political movements in history. In 1962 Michael Harrington in his
The Other America: Poverty in the United States
reminded the public that not everyone was prospering. Three years later Ralph Nader’s
Unsafe at Any Speed
took on America’s automakers; its subtitle delivers the message:
The Designed-in Dangers of the American Automobile.
Their words seemed even more prophetic with the multiple blows of an oil crisis, rising unemployment, and an inflation rate spiraling upward.

A younger generation took up the causes of the degrading environment, product safety, and the persisting plight of the poor and made them their own. Drawing upon the Enlightenment tradition of faith in reason with a commitment to social progress, the environmental movement took off in the 1970s. Dedicated to reestablishing a balance between human beings and nature, it also helped ease the tension generated in Western societies by the angry confrontations of the 1960s over civil rights, women’s status, sexual mores, and the war in Vietnam. For decades Westerners had been busy polluting their air, their soil, their waterways, and the habitats of themselves and the animal world without caring much about it.

At the same time, other experts were predicting the inexorable spread of industry. In 1953 W. W. Rostow, who served as special assistant for national security affairs to President Johnson, published the book that popularized the idea of inexorable modernization. What the general reader took away from
The Stages of Economic Growth: A Non-Communist Manifesto
was the ease with which a few good Western programs were going to transform the rest of the world in their image. Flush from the success of the Marshall Plan in Western Europe, Westerners had every reason and many incentives to believe this to be true. Traditional societies had built-in resistances to profound changes, much like Europe before the seventeenth century, but outside forces could bring them along with the introduction of technology and, above all, capital. A critical contribution of this theory was the idea that countries were not destined to be backward, poor, and dominated by atavistic cultures; all could aspire to capturing “the magic of modernity.” Today, having been immersed so long in the hopes and disappointments of modernization, we can easily miss how pathbreaking an idea this was.
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Readers could assume after reading Rostow that the quality of labor was a negligible factor in industrialization, as turned out not to be the case.
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Capital was much easier to introduce into underdeveloped countries than were production skills and entrepreneurial energy. America’s Alliance for Progress with Latin American countries had been a failure, as were other efforts to bring the Third World into the First, like the U.S. Point Four program in India. Evidently, it took more than the West’s insistence and World Bank loans to deflect the course of traditional societies. The categorization of traditional and modern began to appear too crude, too truncated to do justice to the variety of social settings in which the world’s people lived and drew meaning.
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As it turned out, the West was merely impatient and had to wait longer to see the sprouts from its investment seeds.

Probably the most striking feature of capitalism has been its inextricable connection with change—relentless disturbances of once-stable material and cultural forms. More than promote change, it offered proof that the common longings of human beings for improvement could be achieved. It opened up to a significant proportion of men and women in the West the possibility of organizing their energy, attention, and talents to follow through on market projects like forging a new trade link or meeting an old need with a commercial product. And one could do it on one’s own. One didn’t have to be tall, good-looking, young, rich, well connected, or even very smart to form a plan, though all those qualities were helpful. Capitalism sustained popular support by commanding this imaginative field. Newcomers found it hard to attract venture capital, and there were more failures than successes. Even when individual ventures were successful, few foresaw the unintended consequences of all this manipulation of nature and society. Turbulence was written into the system, but capitalism had already become self-sustaining before anyone could clearly see this.

It took a bit of time to realize that the shocks of 1973 marked the end of the “golden age” of capitalist prosperity in its homelands. Rising prices usually accompanied periods of growth, but, this time around, they came in with stagnating production. This introduced a new condition and term, “stagflation,” which in turn promoted an interest in monetary theory. In another disturbing trend, the gap between low and high incomes began its long stretch of stretching in 1969, though concern with this phenomenon rarely moved beyond rhetoric. With mounting studies documenting the neglect of the environment and the safety of workers and consumers in the most advanced societies, we could say that the greatest chapter in the history of capitalism ended with more of a whimper than a bang.

Meanwhile, back in the laboratories of Intel in Palo Alto, California, and Sony in Shinagawa, Tokyo, engineers were mapping out uses for something called a transistor. The transistor—short for “transfer resistor”—is a device that amplifies or switches the flow of electricity. It had been around for a couple of decades but now was being upgraded. Attached to an electronic circuit board, the transistor could do wondrous things because of its smallness and adaptability. Ingenuous people had found a new way to exploit the electromagnetism of our planet. This technological newcomer “creatively destroyed” the vacuum tube that had started off wireless technology. The relentless revolution continued without the benefit of a forward-looking name for the dawning era, though the United States acquired a new place-name, Silicon Valley, where things called start-ups and initial public offerings were creating a new crop of millionaires.

CAPITALISM IN NEW SETTINGS

I
N THE EARLY 1970S
the unexpected rise in oil prices forced people to give some attention to other negative indicators in the industrial world: the slowing growth rate, intractable inflation, rising unemployment, the plunging dollar, and fluctuating exchange rates. The comfortable understanding among big business, big labor, and big government was coming apart. The unwelcome appearance of stagflation also signaled that national policy makers could no longer depend upon the economic prescriptions of John Maynard Keynes. He had given a central role to government to spend when private investments could no longer achieve full or near-full employment, as in the Great Depression. Most countries in the postwar West followed Keynesian policies to ward off recessions. Alas, few had had the courage to cut off popular spending programs when they no longer were needed to boost the economy. This negligence contributed to inflation, exacerbated by the 1973 spike in oil prices. But now inflation was accompanied by high unemployment. The facts no longer supported the original Keynesian proposition. Government spending, which he had recommended in times of falling demand, had created the “flation” in stagflation, and stagnating sales the “stag.” What had seemed a stable, comprehensible, and predictable economic environment became fluid and puzzling.

When the smooth performance of the advanced industrial countries came to an abrupt end in the early 1970s, it was time to look for help in a new theory. This gave an opening to Milton Friedman, who had some insights appropriate to the time, or so they seemed. A University of Chicago economist, Friedman wrote extensively on consumer behavior and public policy, often in partnership with his wife, Rose. Friedman analyzed the new data and explained why a volatile inflation rate actually contributed to unemployment because it increased uncertainty. Its harm to creditors and those on fixed incomes also put pressure on governments to do something—wise or not. Friedman advised cutting back on government activity in the economy so that the market could do what it does best: communicate simple, unadulterated information through its prices to market participants, who could then make the soundest decisions with their resources.

As an influential writer on monetary theory Friedman recommended that government confine itself to a small increase in the money supply. As a public figure he wrote tirelessly to bring the public back to an appreciation of “economic man,” that rational chooser upon whom Keynes had cast doubt. Friedman reaffirmed economists’ early conviction that the market helped people choose what was in their interest. Competition, he said, worked best for consumers and producers alike. He won a Nobel Prize in economics in 1976. His ideas soon percolated into public policy first in Great Britain with Prime Minister Margaret Thatcher and then in the United States. As President Ronald Reagan announced in 1981, “It is time to check and reverse the growth of government,” though he recognized that the imperative was to make government work better.
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While Thatcher and Reagan were in power, Friedman was showered with awards, prizes, and appointments. In actual practice, monetarism enjoyed Federal Reserve support only for the years between 1979 and 1982. It failed to keep the country from sliding into recession.

Not all government intrusion into the economy had been inspired by Keynesian theory. Much of it was in pursuit of a social goal. In the 1960s legislatures began controlling how factories affected the environment or endangered species. Other laws dealt with worker safety, discrimination in hiring and housing, and the protection of consumers. Without debating their social and moral benefits, Friedman pointed out their adverse effect upon competition.
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His work became the basis of the deregulation movement that liberated credit institutions, telecommunication corporations, and the energy sector. His faith in self-interest’s capacity to trump prejudice led him to predict that employers would not discriminate because it hurt them not to offer jobs to the best applicants, a position contested by many field studies. Perhaps the most interesting of these was the blind auditioning for orchestras that gave a considerable boost to female candidates. The recession in Japan in the 1990s and the meltdown of the Argentine economy in 2000 offered a reprise of the Keynes-Friedman debate over the relative merits of government spending and government restraint. Keynes came out the better in the contest of ideas while the countries themselves suffered from following Friedman’s prescriptions.

Still, Friedman’s ideas exercised a great influence on corporate heads and policy makers alike. Supported by both Democratic and Republican administrations, the first wave of deregulation came in the late 1970s. Laws freed the airlines and trucking companies for competitive pricing. Regulation had been especially heavy in the transportation industry because it was seen as a public service in need of stability and protection. More slowly a broad band of civic-minded men and women worked to deregulate investment banking. This came at the same time that traditional long-term relationships between banks and their corporate customers were breaking up under pressure from newly minted MBAs moving into the banks’ executive suites with new ideas about improving banking profits.
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Two laws in 1980 and 1981 eased accounting rules on savings and loan institutions and reduced minimum down payments on their mortgages. Sailing faster with less ballast, they floated many more loans, and American personal indebtedness began its three-decade climb. Within the next decade over seven hundred S&Ls went under at a cost of over one hundred billion dollars to their insurers, the American taxpayers, but without slowing the movement for deregulation.