Leviathan or Moloch? A brief history of state intervention in the economy: Part I | Sam Volkers
This article is the first in a three-part series by Sam Volkers, discussing the relationship between government and economic management. The second part will be released next Saturday.
The Covid-19 pandemic and the corresponding global economic recession have set in motion a shift in economic and political thinking that would have been unthinkable only a few years ago. Where the European countries fought the 2008–2009 recession and the Eurocrisis that followed with a mix of bailouts and harsh austerity, the current crisis is fought with a hands-on approach by the state itself. Governments across Europe have re-asserted their control over the economy and decided to spend more instead of less. In France, prime minister Jean Castex announced the return of the Commissariat général du Plan, the country’s famous economic planning commission, while the Spanish government nationalized all private hospitals. In my country (the Netherlands), the government also pledged to take a greater role in the economy, with even the VVD — well known for their small-government and liberal views — now arguing for a stronger role of the state in managing the economy. Now that the state has begun to make its — in my opinion long overdue — return in the economy, the debate between those that view the state as a Leviathan that protects the interests of the people and country and those that view it as a Moloch that demands the sacrifice of freedom and individualism has heated up again. To understand this debate, it is important to understand why the state is needed in the economy and what its role should be.
Before discussing why the state should be involved in the economy and what its role should be, it is important to first give a brief historical overview of the relationship between the economy and the state in capitalist countries (non-capitalist examples such as the Soviet Union are excluded from this brief perspective as they deserve their own article).
Early economics & The Mercantilist Era
For as long as states and economies have existed, the former has influenced the latter. Early examples range from the public lands and mines in relatively laissez-faire ancient Athens, to the proto-mercantilist policies of Hendrik VII of England with which he aimed to break Flanders monopoly in the wool industry and in turn build up England’s own wool industry.
During the 17th and 18th centuries, the role of the state in the early capitalist nations of Europe expanded as the nations adopted mercantilist policies, with Britain and France being especially keen to adopt these policies in an effort to break Dutch hegemony. The mercantilists believed that a favorable balance of trade — exporting more than you import — was necessary for a nation to be wealthy and strong. In order to achieve this favorable balance of trade, states in Europe adopted policies not too different from those supported by Hendrik VII. To name a few: protective import tariffs, investments in infrastructure, state support for local industries, tax reforms and — in some countries — the establishment of overseas colonies (this last aspect is also one of the key differences between mercantilism and other forms of economic nationalism, such as protectionism and developmentalism, which opposed colonialism). Some famous mercantilist thinkers were Jean-Baptist Colbert, who served as France’s First Minister of State between 1661–1683 and after whom French mercantilism was named (Colbertism), and Antoine de Montchrestien, who is often viewed as one of first political economists.
Adam Smith & the Industrial Revolution
This mercantilist status-quo would be shaken up when, on the 9th of March, 1776, Adam Smith’s book An Inquiry into the Nature and Causes of the Wealth of Nations was published. Smith rejected the mercantilist view of trade as a zero-sum game and argued that the invisible hand of the free market would be a better guide for the economy than any government management could be. In Smith’s view, the state’s role should be limited to providing national defense, public goods and ensuring that safety and justice prevail (this is of course an oversimplification of Adam Smith’s ideas, but this had to be done for the sake of brevity). Although Smith’s ideas were never fully implemented, with many nations — including Smith’s own country of Great Britain — combing his ideas with certain aspects of their old mercantilist policies (think of the Hamilton’s system in America), they did help usher in the industrial revolution.
The Social Question & Early managed capitalism
Although the industrial revolution brought a lot of economic growth and innovation, its spoils were not shared equally by all. While industrialists got rich, many of their workers lived and worked in terrible circumstances. These circumstances proved to be fertile ground for all kinds of radical theories, such as Marxism and anarchism. Although governments had already been used to helping stimulate and manage economic growth and commerce, they were not well versed on dealing with this new Social Question. Although hesitant at first, governments in Europe and the America’s slowly started the process of creating welfare states, such as seen in Theodore Roosevelt’s Square Deal or Bismarck’s welfare system.
Another issue that was created by the industrial revolutions was that of monopolization. Governments had trouble keeping up with economic growth and modernizations, and thus lagged behind in law-making and legislation. This allowed for monopolies to consolidate their economic power and use their financial treasures to influence politics in their own favor. Although this problem also existed in Europe, it was worst in the United States. There, during what would later become known as the “Gilded Age” (1870–1900), Robber Barons such as J.P. Morgan and John D. Rockefeller would consolidate their control over entire branches of the economy, and crush and/or extort money from smaller competitors, while using their money and influence to sway politicians to act in their interest. This would come to an end when the president, Theodore Roosevelt, began breaking up these trusts (monopolies), which would gain Roosevelt the nickname “Trustbuster” (Boswijk 2020: 59–61). Roosevelt also passed laws that ensured better working conditions and better quality of food and medication, while also supporting a protective trade policy and policies that ensured the protection and conservation of America’s environmental beauty.
This combination of trust-busting (breaking up monopolies), trade protectionism, labour laws, consumer protection, environmental protections and the creation of an early welfare state would serve as the beginning of a new era of managed capitalism.
The Great Depression, Keynes & the Post-War Consensus
The call for managed capitalism became even louder during the Great Depression of the 1930s. This global economic crisis would serve as another turning point in the relation between the state and the economy. As the economic crisis ravaged countries around the world, the people lost their faith in laissez-faire capitalism and would turn to supporting other ideologies, such as fascism and communism. To stem this radical political tide and fix their economies, leaders around the world realized the capitalist system needed to change.
It was during this period that the economist John Maynard Keynes published his magnum opus The General Theory of Employment, Interest and Money, in which he laid out his views on the economy and the state’s role in it. Unlike Adam Smith, Keynes envisioned an active role for the state in a capitalist market economy. Keynes argued that the state should manage the economy and raise government expenditure while cutting taxes to stimulate demand and pull the economy out of the economic crisis. Although this might create a budget deficit in the short-term, Keynes believed that in the longer-term this deficit could be paid back, because government spending has helped create new investments and stimulated consumption which in turn have led to an increase in production and jobs. This new economic growth means that the state can collect more taxes, which it can use to pay back the deficit (just like with Adam Smith’s ideas, this is an oversimplification of Keynes’ ideas for the sake of brevity).
After World War II — which had seen government management of the economy taken to an even higher level — Keynesian inspired managed capitalism became the norm in most Western nations. During the period (1945 — late 1970s) that became known as the ”post-war consensus”, governments across the West (and later also in Asia and some parts of Africa and Latin-America) would use Keynesian inspired policies such as deficit spending and forms of state planning in key sectors and regulations in the other sectors to keep the economy stable, while also expanding the welfare state on a grand scale. This is the period during which most countries saw the creation of, for example, universal healthcare systems, better labour regulations, pension systems and unemployment benefits. During this period, labour unions also became accepted and empowered as strong actors in economic affairs, often working together with the state and employer’s organizations to create a form of class-cooperation instead of the class conflict caused by laissez-faire capitalism and supported by Marxism.
This era would become known as capitalism’s golden age, because of its high economic growth rates, record low unemployment, rapid income growth and a rise of living standards to levels never seen before. For example, the average yearly GDP per capita growth in the rich and developed countries between 1960–1980 was 3,2% (Chang 2010: 80), while per capita incomes in the West grew with an average rate of 4,1% per year, with some countries — such as West Germany — having even higher yearly income growth (Chang 2014: 79). Living standards in general increased as well. People lived longer and more healthy lives, while also being introduced to new technologies such as washing machines, cars and new medicine, and higher education and healthcare became accessible for all people, not just the rich.
The Neoliberal Shift
The post-war consensus would come to an end in the 1980s. Its sudden decline came after two oil crises during the 1970s caused stagflation, a combination of stagnation and inflation. The post-war consensus was replaced with neoliberalism, first in the United Kingdom under Thatcher and in the United States under Reagan, but later also in the rest of the West and other parts of the developed world. In these countries, the state would shift from the aforementioned Keynesian inspired economic policies to neoliberal policies such as deregulation, tax cuts, cuts to government spending, and a tighter control of the monetary supply. The role of the state would shift from being the protector of public and national interest to the protector and creator of new markets.
Although some of the neoliberal policies had success at first, they failed to recreate the growth rates see during the post-war consensus era, with the average yearly growth rates reaching only 1,4% per year (Chang 2010: 80). The new neoliberal system also caused a lot of economic and social problems, with many of the problems seen during the industrial revolution and Gilded Age — think of monopolization, weak labour unions, rising poverty rates, high economic inequality etc. — returning.
Another negative effect of neoliberalism is that it has caused a sharp increase in economic crises. First the 1997 Asian financial crisis, then the 2007 Great Recession followed by the Eurocrisis. Right now, we are facing another economic crisis, which, combined with the Covid-19 pandemic and the great geopolitical shifts of the last years, forces us to rethink how we view our economy and what kind of role the state should play in it.