State Capitalism and Economic Democracy

A bureaucratic revolution in the late 19th century led to capitalism being organised by states and large corporations. This stage of 'state capitalism' is still with us and it involves the attempt to manage markets and accumulation through national bureaucracies. Its antithesis was called socialism, but after our experience in the 20th century, it may be better to name this 'economic democracy', the attempt of people in general to win back a measure of control over their own economic lives. In anthropology studies of 'the informal economy' have drawn attention to what people do for themselves under modern conditions and there is a tradition of alternative economic arrangements such as attempts to organise independent circuits of money and exchange.

Karl Polanyi wrote The Great Transformation (1944) in a small New England college near the Canadian border at the height of the second world war. He wrote it in the spirit of an Old Testament prophet, but his prophecy turned out to be wrong. The world was coming to the end of a period of unparalleled human disasters – two world wars, the Great Depression, Fascism, Stalinism, a lot of ugly conflicts like the Spanish Civil War. Even after 1945, many people thought civilization would not recover and it took the Korean War to bump start the economic recovery of the 50s and 60s. But the world liberal economy did recover under US leadership and Polanyi argued here that the market was finished as a vehicle for organizing society. Only social planning could meet human needs and repair the disaster of committing society to a market framework.

His historical analysis went as follows. The 19th century, 1815 (the end of the Napoleonic wars) to 1914, was a period of peace and prosperity, at least for the major European nations. It rested on the self-regulating market, the gold standard, the liberal state and balance of power. But the whole exercise was utopian and the 20th century was a case of the chickens coming home to roost. It was utopian to suppose that society could be run for long by the market as its central mechanism. Following Aristotle, Polanyi believed that society was a natural form designed to provide material sustenance for its members. In time various distribution measures evolved to secure this: householding, reciprocity and redistribution, with the market restricted to a peripheral role. The idea of the market’s invisible hand (Smith) was that the economy could be self-regulating as long as everything was bought and sold without restriction. The led to what P called ‘the fictitious commodities’. Nature, Society and Humanity entered the market as land, money and labour and the traditions that ensured material provisioning for everyone were swept aside. Various classes acted as the vehicle of protest, on society’s behalf, but the market was unswayed. The so-called ‘nightwatchman state’ of liberal theory, a minimal state concerned only with regulating property, was a sham. Political power was used to ensure that capital was free to move where it would, but many other freedoms, such as the right to work, were sacrificed in order to achieve this. The gold standard made participation in international trade dependent on abandoning politically managed currencies (of the sort that Keynes reintroduced in order to cope with the 1930s collapse of the market economy). And this economic interdependence underwrote a fragile piece, with only two minor wars fought between the leading players in the whole century.

It couldn’t last and it didn’t. The balance of power broke down into the first world war, the gold standard had to be abandoned, countries turned to authoritarian governments and the market economy was ruined. The ‘freedom’ of liberal theory was false because we had to accept the necessity of society in its natural form before we could exercise any other freedoms. Modern societies should be built on the ancient mechanism evolved for managing distribution in primitive societies and pre-industrial civilizations, with the market relegated to a supplementary and marginal role. Polanyi’s recommendation seemed to be contradicted by the post-war boom which rested on a combination of world markets and political management of the economy in the leading industrial nations. But the last 25 years or so have seen the reintroduction of something like Victorian capitalism, with a much reduced role for the state, at least in the organization of economy. It may be that we are due for another round of disasters such as those P attributed to a utopian reliance on markets for social organization. But first we need to understand the rise of bureaucratic capitalism for the late 19th century.

In my book, The Memory Bank, I called this social form, ‘state capitalism’, but this has been used primarily to describe socialist societies where the state owns the means of production; so I prefer now to call the synthesis of the nation-state and industrial capitalism ‘national capitalism’. This is the institutional attempt to manage markets and accumulation through central bureaucracy and it is linked to the rise of large corporations as the dominant form of capitalist organization. It is in essence Hegel’s recipe for capitalism in The Philosophy of Right (1821), namely that only state power could contain the excesses of capitalism, while markets could in turn limit the excesses of political power. Society would be managed by an educated bureaucratic elite in the national interest. Marx certainly didn’t envisage anything of this sort, but Weber certainly recognized it on the basis of Germany’s historical experience of an alliance between Rhineland capitalism and Prussian militarism, leading to the two great vehicles of rationalisation (bureaucracy and the market) in some sort of stand-off.

In order to sketch out my own version of recent history, I need to talk of the long twentieth century. Its origin was the revolutionary decade of the 1860s and it is by no means over yet, although we can but hope that the 1990s are at least the beginning of the end. All the major powers of the twentieth century took a political form conducive to state capitalism in the decade which began in 1861 with the American civil war, the completion of Italy's risorgimento and the abolition of serfdom in Russia. It ended with German unification, the Franco-Prussian war, the Paris Commune and its successor, the French Third Republic. In between Britain passed the second Reform Act, the cornerstone of Victorian democracy, and Japan's Meiji restoration took place. In all these cases a deal was struck between military landowners, industrial capitalists and the professional middle classes; and a deadly struggle began between this new ruling coalition and the growing mass of urban workers. The latter in turn began to organise: the First International was formed and Marx published Capital.

The transport and communications revolution of the 1860s (steamships, continental railways and the telegraph) laid the basis for a rapid expansion of the world market in subsequent decades. This in turn stimulated imperialist rivalry between the newly formed industrial states. Engels was almost alone at first in recognising that the overwhelming movement of society was towards centralisation. This had its roots in machine production and the concentration of people in cities. He and Marx believed that capitalism was undermining itself by giving working people an unprecedented opportunity to organise themselves in the new centres of mass production and consumption. But there was a corresponding mobilisation at the top of society, based on the resources of capital and machines, which gave the state, an archaic agrarian institution, a new lease of life.

The period from the 1870s to the first world war saw an economic revolution. It had several aspects. Most important was the development of mass production for an expanded mass market of consumers. Mass production entailed standardisation and an increased scale of operations. New forms of corporate enterprise dominated the economic stage, joint stock companies whose directors had limited liability for their firms' losses (i.e. they were no longer ruined when a company they owned went bankrupt). This was the age of the first department stores, concentrating under one roof a wide range of commodities which would previously have been sold in separate shops. It was also the age of the modern office block, when bureaucracy came to dominate both commerce and government. The shift towards more impersonal forms of economic organisation had important consequences for marketing. Bureaucracies limit the personal discretion of employees, hedging their activities around with rules which can only be broken at risk of dismissal. In the new stores, customers dealt face-to-face with assistants who had no power to negotiate. That power rested with owners and managers who were now removed from the point of sale, unlike the small shopkeeper who had retained a personal relationship with his clientele. The main imperative of management was to control subordinates; and this ethos stretched back to the production lines as well as outwards to an anonymous market of consumers whose tastes were manipulated by public advertising.

The remarkable thing is that this bureaucratic revolution passed unnoticed by the economists, who chose the same moment (the end of the 19th century) to reinvent their discipline as the study of individuals making rational decisions in competitive markets. When economics was born two centuries earlier, a new system of ‘natural rights’ linking political citizenship to private property in production protected the interests of the small property owners who made up the new middle classes. Later, the science of political economy addressed the historical struggle between broad classes of economic agent for control of the wealth realised in production. Now the second machine revolution in Western Europe and America launched giant corporations onto the economic stage whose successors dominate the world market today. Through an extraordinary act of legal manipulation, these corporations were granted the privileges won by individual citizens in the 17th and 18th centuries, so that General Motors, for example, is in legal fiction an individual with the same rights as you and me.

At the same time, the concentration of workers in rapidly expanding cities gave impetus to their drive for political recognition; and the heirs of Marx and Engels were not slow to offer that drive a revolutionary content. The period leading up to the outbreak of the first world war was touch-and-go. Fifty million Europeans left for lands of temperate zone new settlement and the same number of Indians and Chinese were shipped to the tropical colonies. The ruling classes did not know how to cope with all the people piling up in the cities. The brilliant moment of modernism lit up the intellectual and artistic firmament. Global humanity was on the move and the scent of revolution was everywhere. The newly organised parties of the working class were wooed by promises of greater security. The middle classes prepared themselves for service in an expanded welfare state, Hegel's recipe for containing the contradictions of capitalism; and in the process they invented the social sciences. But it could have gone either way. In the event, revolution was headed off and a massive counter-revolution reasserted the power of the few to control the behaviour of the many.

The modern era had been ushered in by a series of revolutions of which the French version had by far the greatest impact. Here Napoleon led the movement to restore elite rule against the popular democracy unleashed by the revolution. In England too the monarchy was restored after a period of parliamentary rule in the 17th century. This reaction has been called a counter-revolution, a term I find extremely useful in trying to understand how our 20th century world has maintained the rhetoric of freedom and equality, while instituting societies controlled from the top by state-made elites. How else can one explain a situation in which despotisms more powerful than any known to history are able to persuade their victims that they are the beneficiaries of modern freedom? There have been two moments of general social upheaval which defined the course of the 20th century. Each spawned a major revolution and an even more decisive counter-revolution. We call them the first and second world wars. The carnage of 1914-1918 revealed state powers which no-one before had imagined could exist. Governments raised and killed off huge armies; they organised production; controlled markets and prices; discovered propaganda. The Russian revolution threatened to undermine the transfer of these powers into peacetime control of economy and society; and, for a couple of years after the war, Europe hung on the edge of revolution. Then the 1920s saw such an effective reinstatement of centralised bureaucracy (not least by Stalin) that the political question was no longer whether the people would revolt, but rather which form of state — fascist, communist, welfare state democracy — would prevail universally. The period, 1914-1945, was named by Winston Churchill “the second thirty years war” and he should know. It was an unmitigated disaster for humanity, with economic misery compounded by brutality of an unprecedented kind.

This account of the ground covered by Polanyi in his immensely readable book suggest that ‘the market’ as such is inadequate to explain the social forces that built up in the 19th century. In particular he missed the formation of ‘national capitalism’ from the 1860s onwards. This is still the dominant social form in our world, even if the transnational aspects of neo-liberalism obscure that fact. My book is an attempt to rescue an egalitarian idea of the market from the structures of inequality, governments and corporations, which control capitalism. This means revising the notions of economic democracy that Marx articulated in Capital. There he argued that what matters in our world are people, machines and money, in that order; but under capitalism the order of priority is the other way round. Socialism was intended to be a way of people using the money for common ends through their control of machines. Unfortunately, this recipe threw the baby out with the bathwater, since money and markets are indispensable to the human economy. Much of my economic anthropology is designed to reveal what people do for themselves, as a basis for thinking about concrete steps that might be taken towards greater economic democracy. The concept at the core of this investigation is ‘the informal economy’. (See various posts on this site.)

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