23 Things They Don't Tell You About Capitalism

From the eighteenth century, the feudal order, whereby people were born into certain ‘stations’ and remained there for the rest of their lives, came under attack from liberals throughout Europe. They argued that people should be rewarded according to their achievements rather than their births (see Thing 20).

Of course, these were liberals of nineteenth-century vintage, so they had views that today’s liberals (least of all American liberals, who would be called ‘left of centre’, rather than liberal, in Europe) would find objectionable. Above all, they were against democracy. They believed that giving votes to poor men – women were not even considered, as they were believed to lack full mental faculty – would destroy capitalism. Why was that?

The nineteenth-century liberals believed that abstinence was the key to wealth accumulation and thus economic development. Having acquired the fruits of their labour, people need to abstain from instant gratification and invest it, if they were to accumulate wealth. In this world view, the poor were poor because they did not have the character to exercise such abstinence. Therefore, if you gave the poor voting rights, they would want to maximize their current consumption, rather than investment, by imposing taxes on the rich and spending them. This might make the poor better off in the short run, but it would make them worse off in the long run by reducing investment and thus growth.

In their anti-poor politics, the liberals were intellectually supported by the Classical economists, with David Ricardo, the nineteenth-century British economist, as the most brilliant of them all. Unlike today’s liberal economists, the Classical economists did not see the capitalist economy as being made up of individuals. They believed that people belonged to different classes – capitalists, workers and landlords – and behaved differently according to their classes. The most important inter-class behavioural difference was considered to be the fact that capitalists invested (virtually) all of their incomes while the other classes – the working class and the landlord class – consumed them. On the landlord class, opinion was split. Some, like Ricardo, saw it as a consuming class that hampered capital accumulation, while others, such as Thomas Malthus, thought that its consumption helped the capitalist class by offering extra demands for their products. However, on the workers, there was a consensus. They spent all of their income, so if the workers got a higher share of the national income, investment and thus economic growth would fall.

This is where ardent free-marketeers like Ricardo meet ultra-left wing communists like Preobrazhensky. Despite their apparent differences, both of them believed that the investible surplus should be concentrated in the hands of the investor, the capitalist class in the case of the former and the planning authority in the case of the latter, in order to maximize economic growth in the long run. This is ultimately what people today have in mind when they say that ‘you first have to create wealth before you can redistribute it’.

The fall and rise of pro-rich policies

Between the late nineteenth and early twentieth centuries, the worst fears of liberals were realized, and most countries in Europe and the so-called ‘Western offshoots’ (the US, Canada, Australia and New Zealand) extended suffrage to the poor (naturally only to the males). However, the dreaded over-taxation of the rich and the resulting destruction of capitalism did not happen. In the decades that followed the introduction of universal male suffrage, taxation on the rich and social spending did not increase by much. So, the poor were not that impatient after all.

Moreover, when the dreaded over-taxation of the rich started in earnest, it did not destroy capitalism. In fact, it made it even stronger. Following the Second World War, there was a rapid growth in progressive taxation and social welfare spending in most of the rich capitalist countries. Despite this (or rather partly because of this – see Thing 21), the period between 1950 and 1973 saw the highest-ever growth rates in these countries – known as the ‘Golden Age of Capitalism’. Before the Golden Age, per capita income in the rich capitalist economies used to grow at 1–1.5 per cent per year. During the Golden Age, it grew at 2–3 per cent in the US and Britain, 4–5 per cent in Western Europe, and 8 per cent in Japan. Since then, these countries have never managed to grow faster than that.

When growth slowed down in the rich capitalist economies from the mid 1970s, however, the free-marketeers dusted off their nineteenth-century rhetoric and managed to convince others that the reduction in the share of the income going to the investing class was the reason for the slowdown.