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'In the end the facts kick'

Three centuries of economic change

by Michael Newland

During the last three centuries, there have occurred the greatest and most sustained economic changes in the history of the world.

Much of the world has been transformed in a span of time, which, it is well to remember, is the flick of an eyelid in historical terms. The oldest people, whose lives overlapped my generation, could speak of those they had known, further back, who were born at the end of the 18th century. Dicken's London was the world they grew up in. The changes, often and in many ways, have not however always been for the better.

Books and articles which offer an accessible summary of what has happened in the round are not as abundant as might be expected - perhaps because of a complex interaction between politics and economics - subjects often wrongly treated as separate. Those who do not know what went before them remain children said Cicero. Yet the main facts, and ebb and flow of argument about events over the last 250 years, may be summarised in comparatively short order - but at the cost of some inevitable over-simplification. Nationalists need to have the main points at their fingertips, and that is the purpose of this whirlwind tour.

Before about 1700, the amount of goods and services which a man could produce in a year had increased so slowly in two thousand years that one generation would generally see little difference from the last - their lives albeit punctuated by irregular catastrophic upsets from climate change, famine, and disease. Between 1348 and 1350, for example, one third of the population of Europe perished from the Black Death.

Then, in so far as a precise date can be given, but to fix ideas, a miracle started to happen around 1750 - firstly in Britain during what is known as the Industrial Revolution. Historians recognise early signals of what was to come a century or more before. Industrial output began to grow by about 1.5 per cent a year. Consider what that means. By the time a child had grown to adulthood, industrial wealth would have increased by more than one-half when compared with the time of his birth.

Men wondered at the alchemy of it all, and questioned whether the peculiar events, unknown in the whole of history, would disappear as fast as they had appeared. The banker Rothschild said that there were three sure ways to lose money - women, gambling, and engineers. We take the cost-effectiveness of machines for granted today. It was by no means so obvious in their infancy, when even constant attention could not prevent constant breakdown - and sometimes explosion! Even thirty or forty years ago, cars were surprisingly unreliable, despite most of the basic technology they contained being a century old.

Of course, there had been major but isolated technical innovations long before the eighteenth century, the wheel being almost a cartoon example. What was so different this time was sustained development and innovation without apparent end.

Two distinct phenomena brought about the miracle - technological invention and the increasing specialisation of the workforce which went with it. The heart of the matter was the invention of a new form of power source to drive machinery, which allowed large-scale production for the first time - the steam engine. Water, wind, animal, and human muscle power were insufficient. The harnessing of steam at first appears to explain the Industrial Revolution, but merely begs other questions - why no one had managed to invent it centuries before, and why history should have chosen Britain to be the stage upon which the world would be first transformed. The answer seems uncertain, but has something to do with the giant world markets which Britain dominated.

The vast scale of the new production methods, by historical standards, allowed the tasks involved in making things to be broken down into stages in which one man would concentrate on a tiny part of the whole operation, its acme in the modern car factory pioneered by Henry Ford. This proved to be vastly more efficient, but also, as we shall see, left him critically dependent on the workings of the economy as a whole for his livelihood. The historian Eric Hobsbawm remarked that a Ford would have been viewed as a madman had he lived two centuries or more before, so different were beliefs.

In bad times of economic recession, the new specialist could no longer retreat into making his own work as his forefathers had been able to. In short, the new workman was dependent, as mostly today, on having a job supplied by an employer, in which he would perform nothing but his own narrow skill. It was a staggering change from a world in which a man's working life might be split into, perhaps, growing food on a small holding, doing some woodwork, and helping out in a pub. Eighteenth century domestic servants would often find their time as much employed in the master's trade as in domestic duties.

By the 19th century, world industrial growth doubled to 3 per cent a year. In a mere decade, industrial wealth would grow more than a third! Output multiplied by five in Britain over the century. Of course, not everyone benefited equally. Vast fortunes were made by the successful. One of the perennial questions in economics is how to rate the moral merits of changes which increase wealth as a whole, but leave some worse off - the trade-off between efficiency and equity. One approach is view life as a lottery - inequality of outcome is no more unfair than winners and losers at a game of cards. A century ago this 'fortunes of war' approach held far greater sway than today.

In the new industrial cities like Manchester, during the first half of the 19th century, the conditions of life were appalling. Workers were often little better placed than slaves - subject to instant dismissal from their employment when work was short, but without even the guarantee of subsistence which a slave enjoyed by virtue of the cash investment which had been made in his purchase. My own great-great-grandfather, a brass founder, died suddenly at 50, in 1857, of one of the fevers which swept through the cities - in his case at his home in Brick Lane in East London - now rechristened 'Banglatown' after the Bangladeshi immigrants who have taken over the area.

During the 1830s., in Britain, the old parish relief system was abolished which had guaranteed those unable to support themselves an income, and subsidised low wages - something often known as the 'Speenhamland' system, after the Berkshire village whose magistrates had responded to local poverty by introducing new parish-funded benefits in 1795. The destitute would now be forced to go into the workhouses - the fear and legend of it continued to haunt older people for nearly the next hundred and fifty years.

What was happening during the 1830s was something about which we hear a great deal today - the creation of a 'flexible' and mobile national labour force - the Tebbitesque 'get on your bike' of the 19th. century. Perhaps only social deference contained the overthrow of the political order between 1830 and 1850.

To what extent do welfare benefits really assist those targeted in the long run, if incentives to contribute to the society are eroded, or employers lower wages pound for pound by the amount of state subsidy given to poorer workers? Will diminution of state support lead to more and better paid employment, or simply further pauperisation? During the 1830s, the optimists about reduced support for the poor won the argument - with a good deal of assistance from taxpayers who simply wished to see their burden diminished. The same debate is going on today.

Many people, like the Reverend Malthus, thought that a population which was exploding in numbers would outrun the ability to produce, and that the level of incomes for most people would tend to remain at the bare subsistence levels which had been their lot since time immemorial. This was a very great error, but an understandable one for the time. Technology has proved itself so far well able to win the game, in its abilities to boost output, and environmental limits are today the main source of concern - global warming, for example.

Two hundred years ago, not unnaturally, people related the possibilities of producing goods to the world of agriculture which was the focus of their lives. Only so much could be extracted from a piece of land no matter how much tilling and gathering were intensified, and the extra reward would be smaller and smaller the more effort one put in. The new world of industrial production was quite different. The larger the amount produced the bigger the reward for extra effort - what we now call increasing returns to scale!

The economist Allyn Young, in a most succinct explanation of what industrial production is all about, said that it is only worth making a hammer if you have a lot of nails to drive in. A hammer is far faster than a rock at nail hammering, and output will soar if the scale of production is large enough to warrant investing time in making one. Once the economy is big enough, huge factories will make it worthwhile to use superior methods which in themselves boost wealth.

After the Napoleonic Wars ended in 1815, something as unanticipated as the Industrial Revolution began to make its appearance, whose causes are still the subject of controversy. Massive cycles in the welfare of the economy began to appear. In 1825, the Bank of England was only saved from a terminal run on its reserves by the chance find of a chest full of money in its vaults. During the 19th century, the economy would yo-yo from boom to bust and back about every ten years. People wondered whether the new type of economy had a fundamental flaw which would lead to total collapse.

Marx and his communist contemporaries thought so - expecting the final denouement within their lifetimes. Marx himself developed an economic theory which purported to explain how this would occur, and that history was predetermined to produce such an outcome. Few thinking people, transported to Marx's lifetime, which ended in 1883, would not have had such an idea at the least occur to them. Our ancestors were not fools, but they were able only to reason on the basis of the knowledge available to them.

Marx was wrong about the collapse of capitalism, and his later followers - what we popularly know as 'Marxists' - were wrong about the virtues of the communist society which was supposed to follow the great event, but he was right about much else. Free enterprise industrial society is prone to massive cycles of unemployment and terrible misery - the 'slow breathing' of capitalism.

Marx also rightly observed that the economic system would try to dictate social relationships to suit its own interests, describing economics which did not take account of the social dimension as 'vulgar'. He described the process as 'commodity fetishism' to emphasise how people's personal relationships were manipulated by the pressures of their economic circumstance. 'Anti-racism' campaigns are a modern example. Business wants immigrant labour, and people are to be re-invented accordingly to reject their future existence. Ironically, the communist system in practice was even more dictatorial in the social relations it prescribed than capitalism had been in Marx's time.

Not only were there regular economic cycles of a few years duration during the 19th century, but far more prolonged swings became evident. Europe erupted in short-lived revolutionary movements in 1848 - "The spectre of communism haunts Europe" wrote Marx in the Communist Manifesto. They collapsed in the period of prosperity between 1850 and 1870, only to be followed by a depression in the 1870s., but further prosperity around the turn of the century. During our own century, the Great Depression of the 1930s. dwarfed all previous cycles in its scale. The communists thought for a while that this was the final event foreseen by Marx.

During the 1920s, a Russian, Nikolai Kondratiev, suggested that the prolonged swings between boom to bust and back again which had occurred since the 18th. century at about 60 year intervals were no accident. Perhaps there were cycles of technological advance which spurred industry into investment, gradually petering out before a new phase appeared. The suggestion that capitalist crises might resolve themselves was something of a social faux-pas in Stalin's Russia, and poor Kondratiev died in the Siberian concentration camp.

The Depression was a watershed for economic thought. Apart from the Marxists, who were a separate entity, mainstream economic thought believed that the ups and downs of the economy were very temporary swings around a condition of full employment and prosperity. Political regimes inevitably draw on ideas which support their continuance. Theoretical models in which a market capitalist system is self-righting began to be established by economists during the 1870s, and were quickly seized on by the establishment.

During the early part of the Depression, suggestions that government might act to alleviate the slump by spending were met with the objection that this would be ineffective, merely blocking out private spending pound for pound - the famous 'Treasury view'. The attractions of the 'self- righting' theory had been made even greater by another aspect of the theory - that the rewards given to workers and investors reflected their contributions to output of goods. The distribution of wealth was a fair one. The complaints of socialists about exploitation of workers were unjustified.

The Depression seemed to demand new explanations, and, in 1936, a bombshell hit the world of mainstream economic theory. John Maynard Keynes's book The General Theory of Employment argued that the normal condition of economies was not full employment and output at all. The problem was that when people decided to save their money goods and services would not be sold, and workers would be laid off.

That would not matter if the money were lent to businessmen who invested it, thus making up the shortfall in demand by purchasing machines and other goods to build up the productive capacity of their factories. The problem was that, if the economy slumped, businessmen would lose confidence and refuse to invest, thus prolonging the misery. When this happened, said Keynes, it was the job of government to bypass the waves of optimism and pessimism to which businessmen were addicted, and spend borrowed money until confidence was restored, and business began to invest again.

The impact of Keynes's ideas provoked a revolution. Once the Second World War was over, governments throughout the Western World accepted a responsibility to manage demand, as Keynes had said they must. Never again would there be a slump like that of the 1930s. Confidence that government would take responsibility for preventing economic depression was something of a weapon whose existence, in theory, obviated a need to use it - rather like the claims often made for nuclear weapons. If business is everlastingly confident in the future it will provide the investment which prevents recession in the first place.

The miseries of the workforce, during the 19th century, and then during the 1930s, had provoked a growing sense of revolt among workers. Both communist and fascist movements had become increasingly powerful following the end of the First World War in 1918. Russia had fallen to the communists, and much of Europe to fascist movements, which also offered direct support to workers to ease the condition of their lives.

Capitalism suffered a terrible shock during the 1930s. Its downfall was threatened not just by economic collapse alone, but by political movements which could either entirely destroy it, or at the least reduce it to a poodle. Drastic measures were needed to restore its dominance, and what became known as the welfare state was put up to persuade the workforce that it might again place its confidence in what free enterprise could do for it. It had not escaped notice that countries whose economic affairs were heavily controlled and planned by government seemed to have suffered less during the 1930s than those which still held to the old values of non-interference in the economy. In the Soviet case, a willingness to believe the skilful propaganda offered by Stalin's regime stifled probing into the realities.

Stalin's regime in Russia owned and ran the economy in accordance with communist dogma. One of the great economic controversies of the 1930s became known as the 'socialist calculation debate'. If, as communism claimed, capitalist markets were prone to fatal hitches, then might it not be possible for government to act as free markets would in an imaginary world in which the bugs were removed? All that was necessary was for government to fix all prices at those which the market would set in such a world. One of the snags, as the Austrian economists pointed out, was that free markets stimulate invention and innovation in a manner which government never can.

Hitler's government made sure that industrialists, while remaining owners of their enterprises, did mostly what they were told, under the threat of nationalisation. The industrialist Hugo Junkers found his company taken over by the government when he refused to build aircraft for the Nazis. Government schemes deployed labour into public works projects like a new motorway system.

Clement Attlee's Labour government, which came to power in 1945 in Britain, drew on both sources in its economic policy in a hybrid scheme for a 'planned economy', as well as on Keynes's ideas, nationalising some industries like coal and the railways, on the Soviet model, while continuing to foster for a while the huge wartime bureaucracy which in part directed the remainder on the Nazi model. 20 per cent of the economy was placed in public ownership. As with the Nazi regime, the threat of nationalisation hovered over the uncooperative. Much of Western government adopted the same approach, something distinctly politically incorrect to contemplate!

There followed a sustained period of full employment and dazzling growth from about 1950 to 1970 never seen before even during the best times during the 19th century. The Cambridge economist Joan Robinson christened it 'The Golden Age'. Unemployment in Britain averaged about 2 per cent, and during the 1960s growth reached an all time peak. The low level of unemployment provided an excuse to begin mass immigration into Britain from former colonial countries. As attempts were made to nationalise the workforce by force during the 1830s, so began the current unadmitted policy of internationalising the workforce.

Management of the economy was seen as a precise technical affair which became known as 'fine tuning'. People imagined a sort of power station control room, in the basement of the Treasury, displaying dials showing every tiny movement in key economic variables like unemployment. A nudge on this lever or that would correct any imbalance.

People stopped talking about the problems of economic cycles, and turned to debating how all the new wealth - much of it appropriated by government in taxation - should be spent. The unemployed could always find work with the 'employer of last resort' - the government. The vast increases in taxation alone gave government great leverage over the economy, even after the most severe governmental controls were relaxed during the 1950s.

Massive government schemes demolished large areas of the cities and built the huge tower blocks of flats which were thought by architects to be ideal housing - and which have proved so unsatisfactory as focuses for a portion of society thought due for extinction - but now reborn with renewed vigour as the 'underclass'. Only those who lived through the Golden Age can appreciate the degree to which the future was taken for granted.

The welfare state had the effect not only of assisting the worst off - the moral driving force, quite unlike that of earlier centuries, was also that too wide differences in wealth between rich and poor were unacceptable. The concept of redistributing income, through taxation, replaced a 'fortunes of war' acceptance of extremes of good and poor luck in a lottery. This was seen - contentiously - as also contributing to keeping up the level of demand and employment, since wealth in the hands of those with plenty was more likely to be left unspent. The famous Hell Fire Caves were dug out at West Wycombe partly as a make-work scheme for the poor, by a wealthy knight during the 18th century. The 1950s preferred not to rely on the whims and largesse of the better off!

Then the unforeseen once again burst out of a Pandora's Box of history, as it had during the 1930s. Economic collapse returned during the 1970s. Confidence in society and the social order in general began to decline to a degree not seen since the Depression, and that process is continuing today, and intensifying.

The Marxists gloated at what they perceived to be the long-awaited final crisis - the signs had been there since the late 1960s, with an upsurge in industrial strife and student protests. What they were observing seems more accurately to be identified as a fall into the trough of a Kondratiev cycle.

Keynesian management of the economy was claimed to have been a failure - begging the question as to whether the long boom of 1950 to 1970 really owed much to it. Some economists say that there was a happy coincidence of special factors. The prolonged prosperity would have happened if Keynes had never written a word, and that the vastly increased government control of the economy had stifled enterprise.

During the period up to 1970, there were arguably very good reasons for prosperity which at the least loosely fit the pattern of similar past long-running events. Since the Industrial Revolution, there have been five major innovations in the productive system - water, steam, electricity, Fordism, and the ongoing micro-electronics revolution.

The extreme specialisation of the factory production line, which bears Henry Ford's name, began in 1915 with his first assembly line factory. Two world wars interrupted full exploitation of the method until after the Second World War, when full Fordisation of workers allowed stupendous gains in productivity for a while. Post-war rebuilding also stimulated output. Wages could rise rapidly without profits being affected. Everyone took a creamy slice of the cake and was reasonably satisfied. The vast US economy also helped to sustain demand, lending to other countries when it enjoyed a trade surplus, and accepting imports when it suffered a deficit.

By the end of the 1960s, the scope for gains in output from these sources became thin on the ground, but workers had become accustomed to a large annual pay rise. Profits were squeezed from both ends, and in a second round, once again by the massive oil price hikes after 1974. The massive increases in the oil price of the 1970s. both squeezed demand as the oil rich countries accumulated wealth without spending it, and led to a struggle over wages. Confidence collapsed, inflation and unemployment soared, and the Keynesian concensus, which had become known as 'cooperative capitalism', along with it.

What really happened was a problem which Keynes's ideas were never intended to counter. The amount of wealth available shrunk in the West, both from the exactions of the oil producing countries in the Middle East, and from the reduction in growth. There was a 'supply' shock, as distinct from merely the periodic 'demand' problem which Keynes had addressed.

Waiting in the wings, since the confident 1950s, had been a very different school of economic explanation than Keynes and his followers offered, or indeed the Marxists with whom they had disputed since the 1930s.

Enter Milton Friedman and the Chicago monetarist school.

Perhaps economies were self-righting after all. If substantial unemployment existed, then, as 19th. century economists believed, this was simply because workers made themselves unemployable by demanding more than they produced. Lower wages, and a better and more 'flexible' and productive workforce were the answer, encouraged by unemployment. Inflation was simply the result of too great a growth in the money supply. Government intervention, which Keynes had dictated to be the cure, would simply lead to accelerating inflation. Control the money supply, cut taxes to improve incentives, privatise nationalised industries, let the economy readjust in a very temporary phase of 'cold turkey' as the damaging stimulants were removed, stand well back and watch the results - something of a return to the 'Treasury view' of the 1920s.

The Thatcher government applied the remedy on its election in 1979 - unemployment soared not beginning to fall again until the mid 1980s. The money supply proved to be wayward in its wish to be controlled, and was quietly dropped from the agenda. The Lawson boom of the late 1980s soon collapsed into a second slump from which we are at present emerging.

Government has lived in terror of inflation for twenty years. Some would say that this reflected a priority of financial interests. Full employment has disappeared from the political agenda as supposedly impossible. The more cynical would say that mass joblessness reflects a shift in the balance of power between workers and capital, which is pleased to lay out the position of the workforce in the traditional manner - unhappiness is met with the retort that there are plenty more who would be happy to take the particular job. Monetarism certainly offered a spurious legitimisation for the wasting of much of the workforce. Lord Kaldor ironically described the overall objective as 'strength through misery'.

The official viewpoint is that further freeing up of markets will ensure entry to the promised land. Hopes are pinned on a single European currency, about which the same claims are being put up as those made for the single European market during the 1980s.

Monetarism, and the shift towards the interests of a capital which at present does not feel under threat as during the 1930s, cannot, however, be entirely blamed for mass unemployment since the 1970s.

As the potential for growth in successive major waves of innovation peters out, part of the workforce is freed for new activities. Even without the culpable starvation of resources from the traditional industrial base, the amount of labour employed would have fallen - but to a smaller degree. The appetite for more consumption of some goods is sated, and new demands grow - home computers, videos, and fast food, for example. New industries have grown up which need different skills, like micro-electronics, micro-electronics based services, and existing industries are being revolutionised by their products. Making such massive adjustments is always difficult, as was the transition from the land to factories during the 1830s and after.

The transition from the Fordist style to the micro-electronics style of production is ongoing, and stressful - Joseph Schumpeter called such changes 'creative destruction'. Whole swathes of middle management may be obviated by computers, which can gather and analyse information without the army of paper shufflers who did the job at the height of the Fordist system. Computer-controlled robotisation also obviates many of the shop floor jobs. Problems with far from user-friendly software are the modern counterpart to Rothschild's fears about the efficacy of engineers during the early Industrial Revolution.

If society wishes to see a larger pie created, then changes to the methods of production are unavoidable. That is precisely the explanation for the modern worker's car and television - in so far as we are to rate such things above all else. Paraphrasing Marx and the 'workers in chains', Joan Robinson said that they had nothing to lose but their suburban lifestyles. There are, however, other ways of making the transitions than the present brutality.

The chief global economist of the merchant bank Lehman Bros, John Llewellyn, related on television recently how he had been stricken by doubts as a young man about whether economics was much use in understanding what was happening. Economists so often made wild errors in their predictions about what would happen next. Famously, the American economist Irving Fisher had reassured the US public that there was nothing to worry about on the eve of the Great Depression! The young man asked the great Swedish economist Gunnar Myrdal for advice. The short-term may be unpredictable, said Myrdal, but "in the end the facts kick".

Grasp the workings of the underlying forces in society and events will unfold as they determine. Generalising from economics to the society as a whole, nationalists who doubt that the problems they identify will evidence themselves in radical change in response in the long run may be reassured. The facts of life will kick out eventually however much the media and the regime try to pretend otherwise. That is what happened to communism.

What may we learn about the inner workings of the post-Industrial Revolution economy from our vantage point with the benefit of nearly three hundred years of hindsight? Capitalism continues to be unstable and cyclical - a social as well as an economic system - as Marx rightly taught us more than a century ago, veering between prosperity and depression, but not to the point of being swept away in the manner which the communists supposed was a historical inevitability.

Opinion has divided between three distinct schools of thought - waxing and waning with the successive ups and downs of economic well-being. The spectrum of opinion lies between the declining numbers of communist extreme-pessimists who say that capitalism is doomed, and the monetarist optimists who believe that economies are essentially stable if market forces are left to do their proper work. In between lies the Keynesian school, which accepts instability as an inevitable part of the capitalist process, but contends that it may largely be obviated by government intervention - a 'best of both worlds' outlook in between communism and unfettered capitalism. Hyman Minsky argued that the business cycle was endemic to capitalism not necessarily because of sudden shocks to the system like oil price hikes or wars but because long periods of economic success bred overconfidence and dubious borrowings by both business and individuals. Sooner or later some debts would fail to be paid, bringing down sound organisations in their train and creating a crisis from which it would take some while to recover.

Before the Industrial Revolution, government saw itself as there to intervene in the economy in the broadest sense although without the paraphernalia of state which would have allowed specifics of government action like the 'fine-tuning' of the post-WWII era. A long period of economic liberalism followed, in which minimal intervention was the dominant viewpoint - the high point of its supremacy as a near-religion being the 19th century. Gladstone said that the business of government was saving candle ends - a far cry from 'tax and spend' in the post-war era. The 1930s broke the pattern, with a return to belief in intervention dominating from 1945 to around 1980, and a further intellectual cyclical swing back to non-interference from 1980 onwards.

Communism's dreams of replacing capitalism with a superior system have proved themselves to be a disastrous historical detour. Communist economic systems, often described as 'state capitalism', have economically pauperised too many countries to remain a convincing contender for the prize of offering the superior economic system. As the Soviet joke had it: "We pretend to work, and they pretend to pay us."

The modern contest is between a belief in unfettered free markets, which suffered an almost total eclipse after the Second World War, re-emerging during the 1980s, and a renewed interest in economic management, which is at present pushing up some green shoots. A part of the reason for the latter is increasing economic globalisation, and the decreased power of governments committed to it to deal with their own localised problems. International trade, its effects, unemployment, and the interlocked issue of a single European currency deserve further articles.

The merits and demerits of different types of economic system make themselves known in the end. As Myrdal put it: "In the end the facts kick". One fact has already kicked out beyond dispute - the wonder and miracle of how technology, during the last three centuries, has transformed the output a man may produce in his working life.

Empires and ideologies have come and gone. Prolonged economic growth has been the greatest event in the history of mankind.

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