Almost from the moment that capitalism came to dominate modern economic life, intellectual observers pronounced its imminent demise. Karl Marx, who did so much to develop the concept and trace the history of what he called the “capitalist mode of production,” believed that the day of capitalism was already at dusk, and that the socialist dawn approached. And since the turn of the century the end of capitalism has been regularly predicted by its opponents on both Left and Right, and sometimes by anxious friends as well.
Thus, Werner Sombart, whose book Modern Capitalism (1902) helped spread the term “capitalism” beyond the political Left, divided it into “early,” “high,” and “late” stages, and assumed that he was living in the third. (Sombart himself looked to socialism, and later to National Socialism, to supersede capitalism.) Similarly, the German social-democratic theorist Rudolf Hilferding argued in 1910 that the most recent stage of capitalism, to which he devoted a book entitled Finance Capital, would be its last. Thus too, in The Accumulation of Capital (1913), Rosa Luxemburg wrote: “Though imperialism is the historical method for prolonging the career of capitalism, it is also a sure means of bringing it to a swift conclusion.” From his Swiss exile, Lenin invoked somewhat different arguments to arrive at the same conclusion in Imperialism: The Last Stage of Capitalism (1916).
The period between the two world wars saw a fresh succession of prophetic analysts heralding capitalism’s passing. The worldwide depression which began in 1929 was regarded by Communists as “the general crisis of capitalism”—a crisis which was supposed to create the objective preconditions for Communist revolution. On the other side of the spectrum, Ferdinand Fried, a leading young journalist of the German radical Right, published The End of Capitalism in 1930. In the United States, Howard Scott’s Technocracy movement came into vogue in the early 1930’s, demanding the replacement of the “price system” by government planning based upon engineering expertise. In England, the sociologist Karl Mannheim asserted in Man and Society in an Age of Reconstruction, published in 1940, that democracy could be salvaged only if it cut its links with capitalism.
At the end of World War II, yet another wave of predictions of the end of capitalism flooded the intellectual marketplace. Speaking on the BBC in November 1945, the historian A.J.P. Taylor assured his radio audience: “Nobody in Europe believes in the American way of life—that is, in private enterprise; or rather those who believe in it are a defeated party and a party which seems to have no more future than the Jacobites in England after 1688.” Richard Lowenthal, later a leading figure in the German Social Democratic party, pleaded the case for a federation of European socialist states in his Beyond Capitalism of 1946. Even the economist Joseph Schumpeter, no enemy of capitalism, seemed to be saying in his Capitalism, Socialism, and Democracy that changes brought about by capitalism itself would result in its decline.
That the days of capitalism were numbered was also, of course, an ongoing contention of postwar Communist ideologists. In the 1960’s, the European New Left began to refer to contemporary Western societies as exemplars of “late capitalism”—a revival of Sombart’s term. The West German political theorist Jürgen Habermas followed this usage when he entitled his book of 1973, Problems of Legitimation in Late Capitalism.
Although these interpretations were often rooted in a Marxist philosophy of history beyond the reach of mere events, they were given a certain plausibility by historical facts. In the West, all the liberal democracies had moved in the decades after 1945 toward some form of welfare state, in which governmental transfer payments and fiscal policies intended to maintain full employment became widely accepted. Whether they welcomed or abhorred it, leading analysts on both the Left and the Right often portrayed the welfare state as a temporary way station on the road to socialism (or the “road to serfdom,” as the conservative economist Friedrich Hayek called it).
Meanwhile, the spread of Communism through the Soviet conquest of all of Eastern and much of Central Europe, and through indigenous revolution in China, North Vietnam, and North Korea, appeared to offer even more striking confirmation of the “late capitalism” thesis. As for the newly decolonizing nations of Asia and Africa, there a native leadership, often educated in the anti-capitalist intellectual milieu of interwar Europe, similarly abjured the market, the profit motive, and private property in favor of purported native traditions of solidarity, married to statist models of development.
Yet for all these confident predictions, the 1970’s and 1980’s have seen not the demise of capitalism but the adoption of its central mechanisms in vast areas of the globe where they formerly played a minor role or no role at all. Dramatic instances have occurred in the Pacific rim nations of South Korea, Taiwan, Singapore, and Hong Kong—the so-called “little dragons,” which have had spectacular rates of economic growth. India and Egypt, two of the most populous nations on earth, both formerly governed by leading exponents of Third World socialism (Nehru and Nasser), have also moved in a capitalist direction.
Perhaps even more significant has been the hesitant but unmistakable movement toward a greater reliance on the elements of capitalism in much of the Communist world: first in Hungary, then in China, and now even in the motherland of socialism, the Soviet Union. To be sure, this movement has been gradual and equivocal, and varies radically in pace and extent from country to country. It has also had decidedly mixed results. Yet it has already progressed beyond the early stages, when capitalist measures were adopted in a de-facto and almost surreptitious manner. Today, while maintaining verbal allegiance to the disembodied ideal of socialism, Chinese and Soviet officials are increasingly explicit in their criticisms of its institutional foundations.
At the same time, in the West, the economic stagnation of the 1970’s served to remind many on both Left and Right that the welfare state rested on a capitalist basis, whose ongoing expansion could no longer be taken for granted. In England, West Germany, and the United States—all three governed in the late 1970’s by parties of the moderate Left—simultaneous stagnation and inflation led to electoral shifts which brought to power leaders pledged to expand the role of the market and shrink the role of the state. In the 1980’s the governments of Margaret Thatcher, Ronald Reagan, and (to a more limited extent) Helmut Kohl tried to restimulate economic growth by relying more heavily upon the market and appealing to the profit motive through measures intended to increase corporate profitability and decrease taxation rates. All have had considerable success in restraining inflation and reviving the growth of their economies. Yet despite the ideological predilections and expressed intentions of all three leaders, none has pared back government spending as a proportion of GNP or substantially diminished total expenditures on social welfare in real terms.
The cases of England, the United States, and West Germany thus demonstrate both the possibility of refueling welfare-state capitalism through market-centered, profit-oriented strategies and the limits of any challenge to welfare-state capitalism from the Right. The case of France is illuminating in another way: it demonstrates the utter failure of the most radical attempt to go beyond “late capitalism” that we are likely to see for some time, capped by a remarkable reversal of economic policy.
In France, it was the Center-Right that presided over the economic stagnation of the 1970’s. Then in 1981 a government of the Left came to power for the first time in the history of the Fifth Republic. Unlike many of its counterparts in Western Europe, the French Socialist party under François Mitterrand scorned the purported constraints of welfare-state capitalism. The 1979 party convention was dominated by the theme of “breaking with capitalism”; during the 1981 election campaign, Mitterrand proclaimed his party’s intention to “break with the logic of profitability.”
Once elected, Mitterrand moved quickly in the opposite direction from the Thatcher, Reagan, and Kohl governments. To combat unemployment he enacted a program of redistributive reflation, including large increases in family allowances and old-age pensions, and a 10-percent rise in the minimum wage (to which most other wages were linked). The Mitterrand government lengthened holidays and shortened the work week from 40 to 39 hours (at 40 hours’ pay). It raised taxes on persons with high incomes. Most strikingly of all, the government nationalized major steel, aircraft, electronics, and chemical firms, as well as the 25 percent of French banks still remaining in private hands. Within a very short time the share of the French economy owned by the government went from 15 percent to over 30 percent. Revenues taxed from the private economy were channeled into the nationalized sector.
The effects of these policies were soon felt. The purchasing power injected into the economy by government social spending was used primarily to buy imported goods, and hence made little mark on the level of unemployment. Labor costs, already high compared with France’s major trading partners, went even higher, rendering French exports still less competitive. Profits declined, and so of course did private investment. By the end of 1982, inflation was running at over 14 percent per annum, and the budget deficit had ballooned from 24 billion francs in 1980 to 100 billion, with unemployment where it had been when the Left came to power.
Mitterrand now faced the choice of pursuing socialist policies behind a high tariff wall—this would cut France off from participation in the European market, upon which its prosperity had been built—or revising his policies to make France competitive in the international market. He chose the latter course. Under a slogan of economic “modernization,” the Mitterrand government reversed many of its previous policies and transformed its rhetoric. In March 1983, it enacted an austerity plan that cut back the level of social benefits, increased employee contributions to the national health-insurance system, and curtailed the indexation of wages. The nationalized firms were put under the control of market-oriented managers who were willing to cut costs to compete internationally. In what was referred to only halfjokingly as “supply-side socialism,” corporate taxes were reduced and tax cuts were enacted for the middle class as an incentive to greater economic and entrepreneurial initiative.
A speech by Mitterrand in 1984 conveys the extent of the change: “The French are beginning to understand that it is enterprise that creates wealth, that it is enterprise that creates jobs, and that it is enterprise that determines our standard of living and our place in the world.” And Prime Minister Laurent Fabius observed: “The state has encountered its outer limits; it should not move beyond them.” The moral of what has been called the long learning curve of the French Left is that after late capitalism comes more capitalism.
Since the collapse of the initial French Socialist strategy in 1983, no major Western party of the Left has articulated a principled, detailed alternative to the market-oriented policies ultimately adopted both by governments with a free-market ideology and by those with very different predilections. Indeed, in most Western democracies, parties of the Left are nowadays distinguished from those on the Right (or are split internally) more on questions of defense, foreign policy, and cultural issues than on economic grounds.
This is not to say, of course, that a perfect consensus exists in the West on the virtues and future prospects of capitalism. On the Right, some purist defenders of the “free market” insist that only those societies in which government plays no role in economic life can be regarded as “capitalist.” (By this criterion, capitalism does not now exist and never has.) On the Left, where historically the most potent intellectual weapon against capitalism has been the notion of an ideal alternative system, the failures of what the Communists call “real existing socialism” have often led intellectuals to redefine socialism by its ideal attributes of equality and solidarity, without specifying the organizational mechanisms through which such attributes are to be realized. This strategy of retrenchment through redefinition has served to prevent many left-wing intellectuals from coming to terms with the political and economic arguments in favor of the market. The fundamental premise upon which the capitalist economy rests—that the pursuit of individual self-interest can ultimately serve the collective interest—is also regarded as morally scandalous by many intellectuals, for whom the only legitimate social order would be one based upon universal altruism.
Despite such intellectual demurrals on both Right and Left, capitalism is increasingly the only ballgame in town. What do we know about the rules of this game? What, if anything, can we learn from history and from recent experience about the relationship of capitalism to politics and culture?
Let us begin with capitalism and liberal democracy. Richard Hofstadter described the United States in 1948 as a “democracy in cupidity,” yet the lesson of modern history would seem to be no democracy without cupidity. Or, to put it more neutrally, a capitalist economy appears to be a necessary condition for liberal democracy.
The tensions between democracy and capitalism are real enough. Inequalities of wealth may create unequal opportunities for political influence in a system of government based upon formal equality of participation. The use of government by organized interest groups to distort market competition comes at the expense of overall economic growth, and also at the expense of consumers who are the primary beneficiaries of a well-functioning competitive market.
This problem is as old as capitalism itself, and is a recurring motif in Adam Smith’s The Wealth of Nations. On the one hand, the book is about how the pursuit of self-interest can be channeled through the competitive market to create wealth, or what Smith calls “universal opulence.” “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest,” wrote Smith in one of his most epigrammatic passages. “We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
But on the other hand, Smith’s book is replete with remarks on the tendency of merchants and members of trade guilds to conspire against the market, and of those with political power to do the same through legal privilege and monopoly. “People of the same trade seldom meet together,” he writes, “even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices.”
Smith thus exposed a tension between the market, which depends upon the motive of self-interest, and noncompetitive means of pursuing that same self-interest. For self-interest could only be made to serve the general interest when channeled through the competitive market with its attendant risks. Yet the desire to maximize gain while minimizing risk led individuals and economic groups to pursue their self-interest in ways that circumvented or suppressed the competitive market.
The government of Smith’s day was liberal but not democratic: political participation and influence was limited to relatively few, who, as Smith pointed out, used their political power to benefit their pocketbooks at the cost of their politically impotent countrymen. With the transition to liberal democracy, the temptation to use political power to circumvent market competition did not disappear; instead it was diffused more widely. When numerous groups use their political power to enforce their economic interests, the result is sometimes economic stagnation or decline.
There are, however, worse things than economic stagnation. There can be pernicious political effects as well, particularly in places where political democracy has been accepted only conditionally, as a means to pursue economic goals. There, the frustration of those goals may lead to a withdrawal of support for democratic institutions themselves, and in this way the political expression of economic conflicts within a market economy can lead to the destruction of liberal democracy.
In any event, while capitalism seems to be a necessary condition of political democracy, it is not a sufficient one: historical experience and recent scholarship make it painfully clear that a capitalist economy is compatible with a wide range of polities, many of them neither liberal, nor democratic, nor pacific. Historically, what moved authoritarian rulers—from the “enlightened absolutists” of 18th-century Europe through the Meiji restorationists of 19th-century Japan—to adopt capitalist measures was principally the desire to provide for military defense or expansion. For the market can be used by government to create guns as well as butter; not only guns, but Zyklon-B gas. Indeed, although the old belief that the captains of German industry brought Hitler to power and provided the direction for his expansionist foreign policy has now been put to rest, an important recent book on I. G. Farben by the historian Peter Hayes shows in detail how the Nazis used the profit motive and structured the market to create economic incentives for German industrial managers to assist in carrying out the government’s expansionist and genocidal aims.
Thus liberal democracy appears to require a market economy, but the reverse is not true.
But if capitalism does not inevitably lead to democracy in the political sphere, what of its requirements, and its effects, in the realm of culture?
Max Weber tried to determine why, of all the great world civilizations, it was the Christian West that gave birth to capitalism; he concluded that there was an elective affinity between the psychological needs created by Calvinism and the rationality of modern capitalism. Whether Weber was right or wrong on the question of origins—the logic and evidence of his argument have frequently been called into question—today, the rise of Japan and the “little dragons” of East Asia demonstrates that the development of a capitalist economy is compatible with a much wider range of cultural traditions than many had previously suspected.
The other side of this particular coin is the recurring claim since the 18th century that capitalism erodes traditional cultures and institutions. This is a point on which conservatives and radicals have agreed, though from differing points of view. Eighteenth-century conservatives criticized “luxury” for “confounding ranks” and destroying the firm sense of place hitherto provided by a society in which social status was hereditary and institutionalized in law. By encouraging new patterns of consumption, by creating new possibilities for upward or downward mobility, and by legitimating the pursuit of self-interest, the market loosened older cultural patterns of identity and solidarity. “The age of chivalry is gone,” Burke complained in his Reflections on the Revolution in France, “that of sophisters, economists, and calculators has succeeded, and the glory of Europe is extinguished forever.”
What conservatives lamented, some radicals approved, at least conditionally. As the Communist Manifesto famously has it:
The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. . . . Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. . . . All that is solid melts into air, all that is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life, and his relations with his kind.
A recurrent theme in modern social thought is that capitalism tends to replace small, intimate communities based on custom and shared belief with more anonymous forms of association based upon law and the pursuit of self-interest: status is replaced by contract, Gemeinschaft by Gesellschaft. Thus the late C.B. Macpherson, in an influential book entitled The Political Theory of Possessive Individualism, claimed that a capitalist economy creates “economic man,” a possessive individualist free of “any but self-interested relations with others.” Variations on this theme appear in recent analyses of the “cultural contradictions of capitalism” (Daniel Bell), the “depleting moral legacy” of capitalism (Fred Hirsch), or what Jürgen Habermas calls the “system-induced pathologies of the life-world,” by which he means that standards appropriate to the realm of production and exchange come to undermine other, more intimate realms based on shared understandings.
This once-perennial lament of intellectual conservatives has lately been adopted more and more by thinkers on the Left, such as Habermas or, in the American context, Christopher Lasch. “It is the logic of consumerism,” writes Lasch, “that undermines the values of loyalty and permanence and promotes a different set of values that is destructive of family life—and much else besides.”
Now, a society in which the logic of self-interest and consumerism really did apply to all realms would sooner or later succumb to internal disintegration or external attack. Thus intellectuals sympathetic to capitalism have long argued that a capitalist society depends in part upon the continued existence of institutions which cultivate types of human relations at odds with the self-interested individualism of the market.
Adam Smith, for example, set out to explain in his Theory of Moral Sentiments how individuals endowed with the instinct of self-love so crucial to the functioning of the market could develop into beings capable of sympathy and self-sacrifice. Virtue and conscience, he argued, are developed through belonging to some small group whose members will demonstrate their approval or disapproval of our actions. In The Wealth of Nations, Smith was particularly concerned that the morals of the poor would become corrupted as they moved from the village, where their behavior was closely observed by those around them, into the anonymous city, where “conduct is attended to by no one.” One antidote to the problem, Smith thought, lay in the new varieties of religious community springing up in the cities. Though he regarded the beliefs promulgated by these sects as superstition, and abhorred their fanaticism, Smith judged that they would provide a functional substitute for older forms of character-building institutions being eroded by capitalism.
One institution which most observers of capitalism have regarded as a necessary counter or complement to the market is marriage and the family. “Though marriage begins in contract,” wrote Hegel, “it is precisely a contract to transcend the standpoint of contract.” It was in the family, he thought, that the individual first imbibed the experience of intense altruism on which the diffuse altruism of political citizenship ultimately depends.
A host of contemporary thinkers have similarly insisted on the need within capitalist society for community-like institutions which furnish the individual with a sense of belonging and identity. Thus four decades ago Friedrich Hayek, a conservative liberal, attacked “the false individualism which wants to dissolve all these smaller groups into atoms,” and maintained that “true individualism affirms the value of the family and all the common efforts of the small community and group.” This venerable notion has been reformulated in our day most trenchantly by Peter Berger in his The Capitalist Revolution. “Individual autonomy,” he writes, “depended historically on a subtle balancing act between liberties and responsibilities, between liberation from communal ties and security within communities. . . . Individual autonomy depended upon balancing institutions, whose function it was to provide the individual with a secure ‘base’ to venture out into the turbulent public world created by capitalist modernity.” Using a different vocabulary, Ralf Dahrendorf has called on liberals to balance their traditional concern with increasing human options with an awareness of the importance of “ligatures,” that is, bonds that give meaning to the place which the individual occupies. “Ligatures without options are oppressive,” he writes, “whereas options without bonds are meaningless.”
It is no wonder, then, that the fate of nonmarket institutions in contemporary capitalist societies has reemerged as a central concern of conservatives, liberals, and radicals alike.
However, those who seek to judge the influence of capitalist economic forms upon culture and upon pre-capitalist institutions such as the family or the church need to distinguish the effects of capitalism from concurrent trends such as urbanization, the division of labor, and technological changes—all of which occur in modern noncapitalist economies as well. In this perspective, it is far from clear that the market economy is more antipathetic than its alternatives to traditional culture, the family, or other noneconomic institutions of solidarity.
In fact, after two hundred years of Western capitalism one might properly ask the opposite question: how is it that so much of pre-capitalist culture and so many institutions not governed by the pursuit of individual self-interest have survived? One answer is that old institutions take on new functions, and sometimes new institutions take on old functions. The family was once an agency of production; it has long since lost that function, but it has assumed new ones. The Protestant sects about which Smith wrote surrounded the individual with a small circle of others who helped preserve his morality amid the anonymity of urban life.
In any case (as Hayek argued acutely in The Mirage of Social Justice, and as Michael Novak has emphasized in The Spirit of Democratic Capitalism), to regard capitalist society as populated by utility-maximizers, possessive individualists, and addicts of consumption is to confuse real people with ideological caricatures. Very few who participate in the capitalist market do so because their ultimate purpose in life is the accumulation of money, nor have most forgotten the purposes for which they do seek wealth. For most profit-seekers, profit is a means to some other end.
In sum, just as there is no single polity necessarily associated with a capitalist economy, there is no single culture, either. It is precisely the diversity of ultimate ends to which one can put the wealth generated through the market that makes capitalism so compatible with a wide range of cultural practices. As Voltaire wrote some twoand-one-half centuries ago in his Letters on England:
Come into the London Exchange, a place more respectable than many a court. You will see assembled representatives of every nation for the benefit of mankind. Here the Jew, the Mohametan, and the Christian deal with one another as if they were of the same religion, and reserve the name “infidel” for those who go bankrupt. Here the Presbyterian puts his trust in the Anabaptist, and the Anglican accepts the Quaker’s promissory note. Upon leaving these peaceful and free assemblies, one goes to the synagogue, the other for a drink; yet another goes to have himself baptized in a large tub in the name of the Father, by the Son, to the Holy Ghost; another has his son’s foreskin cut off, and over the infant he has muttered some Hebrew words that he doesn’t understand at all. Some others go to their church to await divine inspiration with their hat on their head. And all are content.
The Exchange also had room for anti-clerical libertine writers like Voltaire himself, a frequent speculator in financial securities.
The multiplicity of ends to which profit is but a means allows for the pursuit of lives which may be devoted to the preservation or rejection of tradition, to altruistic or selfish behavior, to pushpin or to poetry. The market allows a thousand flowers to bloom, and weeds as well. To those, on both the Left and Right, who have longed for an integrated national community of shared values, it may be a cause for lament that the market allows people with diverse ultimate commitments and styles of life to live together in relative peace. To admirers of liberty from Voltaire to Hayek, it has been a cause for celebration, providing the only basis of pluralism.
Diverse motives have led governments East, West, North, and South toward more capitalist policies in the last decade and a half; as in the past, the quest for national power and plenty has usually been the most compelling. The only common stimulus has been the recognition that the incentive of profit and the coordinating mechanism of the market are more likely to spur production than are altruism, collectivism, or encompassing economic planning.
The moral and political evaluation of this global movement toward capitalism has only begun. It may be comforting to believe that good things come in packages and that there is some inevitable link among the economic, political, and cultural forms we consider most desirable, but the historical experience and analyses recounted here teach otherwise. A market economy may be a prerequisite of liberal democracy, yet there are tensions between economic efficiency and democratic government, and capitalism is also compatible with illiberal and anti-democratic polities. The well-being of a capitalist nation depends on the fact that its citizens are both “economic men” and more-than-economic men and women with non-economic goals. The market may erode noneconomic values, yet it also permits their expression, by allowing those with diverse goals to cooperate without agreement on some ultimate common purpose. Depending in part on political and cultural factors outside the economic realm, capitalism may destroy noncapitalist traditions and institutions, yet it is perhaps more compatible with the preservation of traditional institutions than noncapitalist forms of modernization.
But far from being on its death bed, capitalism—with all its problems and with all its promise, and in diverse protean forms—increasingly looks like the wave of the future that socialism was once thought to be.