An Economic History of Twentieth-Century Europe: Economic Regimes from Laissez-Faire to Globalization
Cambridge University Press
0521856663 - An Economic History of Twentieth-Century Europe - Economic Regimes from Laissez-Faire to Globalization - by Ivan T. Berend
Looking back over the twentieth century, one may imagine Charles Dickens’s feelings when he reflected on the bloody ending of the eighteenth century. He opened his 1859 A Tale of Two Cities with the words: “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair . . .”
Indeed, as Sir Isaiah Berlin expressed it, the twentieth century was the most horrible century of Western history. Eric Hobsbawm characterizes it as the Age of Extremes, “a sort of triptych or historical sandwich: a quarter of a century of a ‘Golden Age’ between two, equally long periods of catastrophes, decomposition and crisis” (Hobsbawm, 1994: 1, 6). Mark Mazover gave the provocative title Dark Continent to his book on Europe’s twentieth century, which “brought new levels of violence into European life, militarizing society . . . killing millions of people with the help of modern bureaucracies and technologies” (Mazover, 1998:404).
The twentieth century, nevertheless, radically changed Europe and the life of its peoples in a positive way. A person could produce ten times more value in an hour by the year 2000 than a century before. The amount of goods and services, food, clothing, housing, summer vacation and travel, health and educational services available to an average European family in 2000 was five times greater than that available to a similar family in 1900. The monthly consumption spending of an Italian working-class family of four was $180 in the 1890s, but one hundred years later – in comparable dollars – $1,600. Moreover, in the latter period health care and education were free to them. People moved from remote villages to rising cities and changed their lives dramatically (see Figure I.1). “The transformation of the daily life of ordinary European people . . . is the most revolutionary event, to date, in the history of the continent” (Feinstein, Temin, Toniolo, 1997: 5). The death rate decreased drastically (see Figure I.2) and life expectancy at birth, as an average, nearly doubled in twentieth-century Europe (see Figure I.3) – in the advanced part of the continent it was forty-six years in 1900 and seventy-eight years by 2000, while in the poorer parts it increased from thirty-two to sixty-seven years. The population of the continent increased throughout the century (see Figure I.4). An average person spent three times the number of years in school and became incomparably better educated at the end of the century than at the beginning. Progress of this kind – concurrent with new economic policies – was an everyday experience for twentieth-century Europeans. Best of times, worst of times.
Figure I.1 Urbanization, 1913–90
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European people of the twentieth century long believed in their role in promoting human development and social progress. This idea had reigned since the Enlightenment as a kind of secular religion. People longed, as the German philosopher Georg W. F. Hegel opined, for the absolute knowledge of Truth, the earthly realization of the “absolute spirit,” as Jews longed for the coming of the Messiah. People of the age accepted that history had a goal and was advancing toward higher stages, and they wanted to make this goal identical with their own goals and ideals.
Figure I.2 Birth rates, death rates, and population growth in Europe
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Figure I.3 Life expectancy at birth, 1900–2000
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Figure I.4 Population growth of Europe and the world
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They were convinced that understanding history and the requirements of the age, the knowledge of Truth, created an unshakable base for human actions. People believed they could mould history and influence progress through rationally based actions and interventions. Twentieth-century economic thinking and practice were, in a way, the crowning of this idea of Enlightenment. An unbroken chain of economic experiments based on different kinds of interventions attempted to influence human development.
History and experience teach us, according to G. W. F. Hegel, that people and governments have never learned anything from history. Twentieth-century Europe, despite early and repeated signs to the contrary, eventually proved this bitter conclusion at least partially wrong. European countries sought lessons from the past and developed policies, rightly or wrongly, accordingly. Cicero’s description of history as testis temporum, magister vitae – “witness of times, teacher of life” – characterizes the experience of the past century. The unprecedented catastrophes and cataclysms of the “age of extremes” scarred three generations: two bloody wars that killed 50–60 million Europeans and eliminated entire minorities, revolutions and civil wars that turned sons against fathers and brothers against each other. The social fabric was strained by decades of economic chaos, including depression, and hyper-inflation that abolished the value of money and pushed countries back hundreds of years to the barter system. Economic warfare among nations in peacetime, and poverty and suffering in epidemic proportions, cried out for resolution.
These experiences mobilized the masses, educated economic and political thinkers, and influenced governments. People learned from their suffering and thought that they understood the requirements of the age: they knew the Truth and were able to act accordingly. Economists worked out counter-cyclical policy measures to avoid bottomless economic decline. From their war experience, they learned new methods to stabilize international financial markets, create jobs, and achieve specific economic goals which in “normal times” had been out of reach. They changed their attitudes toward colonialism, once considered an essential policy. They gave up their colonies, sometimes reluctantly but mostly peacefully, under the pressure of the post-World War Ⅱ de-colonization drive. The people of twentieth-century Europe became more entrepreneurial, took more risks, and introduced several new economic systems.
Economic growth became the new “golden calf ” or the Zeitgeist of the age. State planners introduced new regulations and interventions aimed at higher economic growth. Though the ideal of growth through market automatism predominated at the beginning of the century, most of the new experiments were based on market corrections with an explicit social goal. Redistributive systems were created to decrease sharp income differences among different layers of society and among various regions.
Less developed countries tried economic measures to generate higher capital accumulation and investment, and to force rapid economic development. The strict regulations and planning of the war economy taught valuable lessons. Regulated markets became the norm in the interwar decades. Authoritarian regimes, mostly Mediterranean dictatorships, went further with economic dirigisme, establishing state sectors and economic targets to be achieved by state planning and assistance. The less developed European periphery, Russia and Central and Eastern Europe, went even further. Regimes in this region eliminated private property and market prices, and introduced a centrally planned, non-market system, because they believed that backwardness could be eliminated by central state policy. Modernization dictatorships subordinated unions, oppressed all kinds of resistance, and, behind the shield of dictatorial regimes, implemented rapid, forced industrialization to catch up with the advanced West.
All of these regimes were isolationist. They equated independence with self-sufficiency. When prohibitive, protectionist policies failed in a national framework, they were supplemented by dictated economic cooperation. The German Nazi leadership created a Grossraumwirtschaft. The Soviet Bloc’s centrally planned economies established the Council for Mutual Economic Aid (CMEA, or Comecon) under Soviet leadership. For a while, these regimes accelerated economic growth, but eventually these planned economies proved too rigid for the requirements of the new technological revolution and gradually globalizing world economy. Moreover, because they imposed isolation and terror, anachronistic to the age, none of them survived the century.
Several promising elements of these regimes, however, were taken over by the post-World War Ⅱ West European governments. New international monetary and trade agreements created a different economic environment, and post-World War Ⅱ economic development avoided dramatic cyclical fluctuations. These regimes used strict regulations and counter-cyclical policy in a mixed welfare-state economy, and preserved or established state-owned sectors in transportation, communication, and industry, often using planning to achieve specific goals.
But most of all they introduced a system of redistribution based on high taxation and built up a strong social safety net made up of free education, health benefits, insurance, maternity leave, guaranteed pensions, and long paid vacations. However, universal welfare services guaranteed as citizen rights did not achieve utopian egalitarian goals; private ownership and income differences were preserved. Social solidarity nonetheless became a leading principle, with a reinterpretation of citizen rights to include the right to employment and social security. These measures, aside from contributing to general welfare, also strengthened domestic markets and increased consumption, which became the engine of prosperity. These regimes also introduced a corporative type of collaboration between employees and employers, which reinstated the unions destroyed by the dictatorial regimes. Instead, the system worked in a democratic and voluntary way, as a Sozialpartnerschaft or social partnership as it was called in Austria, and led to wage and profit moderation.
Furthermore, all of these state interventions were implemented with the market environment basically intact. State-owned companies acted as private ones in a free market. Planning was not based on compulsory state command but used market incentives for the realization of goals. Regulatory state intervention was not combined with protectionism but free trade. Instead of economic confrontation, called economic nationalism between the two wars, European governments introduced a European free market zone, a system of cooperation, on an equal and democratic basis. They created a customs and then an economic union, introducing a common currency, the Euro, and a common central bank. Collaboration began with six countries. The Union gradually expanded to nine, then twelve, then fifteen, and in 2004, to twenty-five countries.
The introduced economic systems influenced economic growth, structural changes, and regional restructuring. The European economy was transfigured from an industrial–agrarian structure to a communication service-led economy. The continent made progress in narrowing the traditional gap between the advanced Western core and the less developed peripheries with less than half the core’s income level. Some of the peripheries caught up with the West. Scandinavia remained outside the main industrialization drive of the West until the late nineteenth century, but gradually industrialized and caught up with the Western income level between the 1870s and 1930s. Mediterranean Europe, Ireland, and Finland achieved a much higher-than-average growth rate and a catching-up process only in the second half of the twentieth century, especially following European Community membership and assistance during the last third of the century. The Central and Eastern European periphery was unable to follow this trend. State socialism led to rapid industrialization but was accompanied by isolation, and the rigid non-market economy reproduced technological backwardness. The gap between East and West grew larger than it had ever been in modern history. This last remaining periphery on the continent, nevertheless, has begun to shrink with the acceptance of eight of the region’s countries into the European Union. Their EU membership heralds the beginning of their catching-up process in the early twenty-first century. Although a European continent without peripheries remains a long way off, so far that it may yet prove to be a utopian dream, the way to full integration is now paved for at least a few countries of the region.
Most of these changes and innovations were introduced during the real “body” of the “short” twentieth century, concentrated into roughly six decades between 1914 and 1973. The last decades of the century and the transition to the twenty-first century saw dramatic political and regime change as well as breathtaking globalization of the world system in which regulations often proved counterproductive, and social welfare expenditures became a burden in an arena of unlimited international competition. At the end of the twentieth century, people lost the comfortable, long-held belief in their ability to change historical processes. Skepticism has arisen from attempts to change history that have been compromised, violent actions in the name of peace, and the degradation of human ideals. A conservative reaction to that century’s ideals totally rejected even the possibility of understanding history and discovering Truth. The laissez-faire ideology re-emerged triumphant.
Human intervention to generate progress and change countries’ destinies spanned the entire century. The results were mixed and setbacks in the transformation of Europe were unavoidable. In the interwar decades the future looked bleak. Post-World War Ⅱ Europe grew euphoric during history’s most striking economic development. After the oil crisis and a dramatic structural crisis in the 1970s and 1980s, adjustment to the requirements of the new technological-communication revolution shocked the people of the continent again. Globalization, especially during the final two decades of the century, created an unprecedented international economic environment. New economic phenomena appeared and remained incomprehensible. A new search for Truth began.
The engine of economic development, which previously moved national economies with the assistance of nation states, shifted. Multinational companies led technological development and established a different kind of division of labor among their subsidiaries all over the world. The unprecedented increase in direct foreign investment, bank loans, and financial transactions of a globalized cutthroat free market facilitated technological explosion and dramatic restructuring of the economy. With the changes came reinterpretation of the nature of competition, of “social burdens,” and of expensive welfare benefits.
Can Europe adjust to these new requirements? Although only the future will tell, Europe has already made impressive progress. The integration process has expanded the size and power of the European Union. Both the modernized division of labor within the Union and the rise of European multinational companies as equal competitors in the world market have repositioned Europe to meet the demands of the twenty-first century. Europe is an economic superpower with potential equal to that of the United States. Reform of the welfare state is on the way. Will these reforms succeed without abolishing the welfare state? Several signs point in this direction, but the answer is not yet clear.
This book looks at the story of Europe as the laboratory of economic regimes, presenting its “development trend,” which is to say, both the failures and the successes in responding to the challenges of a crisis- and tragedy-ridden but highly successful age. This book has a central hypothesis: the leading trend of the twentieth century was the gradual synthesis of diametrically opposing and sharply confronting economic systems. The invented and newly introduced regimes were like day and night – free market system versus centrally planned regime, democratic market economy versus dictatorial economic dirigisme. These opposing regimes that fought each other at the end of the day also learned from one another. Thus, they experienced a kind of synthesis, combining elements of laissez-faire and of regulation, of private and public ownership, and of planned and interventionist systems. Furthermore, though invisible at first glance, the analysis reveals that the vast disparity among European regions, inherited from the entire period of early modern and modern history, gradually began to disappear and although disparity increased in some cases, more and more of the continent’s countries reached a similar economic level.
The process itself was highly controversial. Like counterpoints in music that combine individual melodies, economic transformation was characterized both by broadening and narrowing diversity, diverging and merging economic regimes. Some regimes were “antidotes” or “counterpoints” to others. Some regions exhibited the opposite development trend from others. Several elements of certain economic regimes terminally failed and disappeared. By the end of the century, however, a kind of Hegelian dialectical synthesis was emerging.
Nevertheless, an economic synthesis is far from complete. Will it ever be completed in a more or less homogeneous federal Europe? Will new economic regimes emerge? Will Europe experience another revolt against globalization? Only the twenty-first century will provide the answers to these questions.
Europe’s laissez-faire system and its impact before World War Ⅰ
The rise of Britain and the laissez-faire system
The “long” nineteenth century, from the 1770s–80s to 1914, was the most spectacular period of economic change in Europe. The British Industrial Revolution opened a new chapter of economic history. By the middle of the eighteenth century Britain had achieved the prerequisites for sustained economic growth. More than 1,000 miles of navigable canals and waterways, 300 Newcomen steam engines, a revolutionized agriculture, and dynamic proto-industrial development made Britain the center of world trade. Domestic markets played a dominant role during this period (Flinn, 1966: 62); only 5–9% of British output was exported during the eighteenth century. However, higher profits in foreign markets increased the role of exports to 10–12% (Bairoch, 1976: 196). Export activity, nevertheless, became the driving force of industry: during the first half of the eighteenth century the output of export industries increased by 76%, while output in other industries grew only 7%. The value of British exports doubled between 1700 and 1750, and then more than tripled by 1800. The leading textile industry by then exported half its output. Eric Hobsbawm concludes that the origins of British industrialization were rooted in foreign trade, especially with less developed areas such as India and other colonies (Hobsbawm, 1968: 49).
In the early eighteenth century, Britain defended its domestic market in a traditional mercantilist way. For example, the so-called Calico Law banned the imports of Indian cotton goods. Exports flourished, especially in the leading textile sector. The value of British exports increased thirty-fold during the long nineteenth century to 40% of the national income (Schlote, 1952: 53). The rate of export growth also increased, from 2% to 4%, and then to 6% during the 1860s to 1870s. Already by 1820 the value of British merchandise exports surpassed the value of merchandise exports of France, Switzerland, Austria, the Low Countries, and Italy combined. By 1870, British exports reached 40% of total Western European exports, and by World War Ⅰ still accounted for more than one-third (Maddison, 2001: 361). British industrial development also intensified. During the first four decades of the nineteenth century industrial output grew at rates of 23%, 39%, 47%, and 37%. Britain gradually gave up agricultural self-sufficiency.
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