In Japan too, as we have seen, the protagonists of modernization believed that since native industrialists were weak the government had to assume their role. The Chinese authorities too tried to modernize in the early 1870s, setting up enterprises called kuan-tu shang-pan (literally, firms under government-supervised management). The reformer Cheng Kuanying (see Chapter 3) advocated some form of protectionism or shang-chan, explaining that, given the strength of the West, it was better to compete using shang-chan than ping-chan (military confrontation).4 However, such attempts failed, hampered by Western encroachments, military intervention, and the exaction of indemnities.5
Japan, but also Russia and Prussia, and even Britain, could not possibly have developed as they did without the vigorous leadership of the state. A truly modern country requires a properly functioning state, an efficient bureaucracy, a set of institutions, preferably some elements of popular control, clearly defined property rights (public or private), an industrial economy, and an educated population. A truly modern country needs to be able to raise its own funds for infrastructural investment or attract them from investors and lenders. Infrastructural projects have had to be further buttressed by an adequate health system as well as a proper educational system and mechanisms to maintain and enforce law and order. A weak state will not be able to raise funds, attract investment, or prevent public spending from ending up in the hands of corrupt politicians. In other words, a strong state is an economic resource. One could almost view the state as an economic enterprise that produces protection and security for its citizens, a kind of legitimate racketeer.6
At the close of the nineteenth century those unable to adapt, such as the Ottoman Empire, suffered a lengthy decay before their inevitable collapse. Others, such as the Chinese Empire, were repeatedly humiliated by arrogant foreigners before collapsing as well. Those who adapted, such as Japan, became major powers.
Traditions might be defended or invented to justify the new – a pretence at which the British and the Japanese excelled. The purpose was not to slow down or impede the march of progress but to reassure all and sundry that change would not be traumatic. And progress could be measured in one way only: the extent to which one had moved away from pre-industrialism into the exciting new world of capitalism; for of all the desirable and defining traits associated with modernity, an industrialized capitalist economy was the most obvious.
Other traits, such as a corresponding legal system and an efficient state, what Marx called the Überbau, ‘the superstructure’ – a term he only used in the few pages of his 1859 Preface to Zur Kritik der Politischen Ökonomie – were key factors that made industrialization possible. It is difficult to imagine sustained industrialization and economic growth without a properly functioning state. Even the neo-liberal programme known as the Washington Consensus, which became so famous in the 1980s, included major political factors such as fiscal discipline, strong property rights, privatization, and competitive exchange rates.7 Neo-liberals too require an efficient state. However, as Adam Przeworski put it, it is naive to assume that once the central elements of the neo-liberal programme are in place, ‘manna will fall from heaven’.8 And, in any case, one kick-starts industrialization, historically speaking, with little democracy and few civil rights. Stalin’s Soviet Union achieved a remarkable degree of industrialization without the whiff of an independent judiciary, or clear property rights, or an independent central bank – let alone democracy – though the eventual outcome was not a success. South Korea and Taiwan grew rapidly in the 1960s, 1970s, and 1980s under the aegis of dictatorships. Chinese economic growth since 1980 owes absolutely nothing to the prescriptions of the International Monetary Fund, the US Treasury, the World Bank (which eventually abandoned its attachment to the ‘consensus’), The Wall Street Journal, The Economist, or any form of ‘shock therapy’ (sudden liberalization) à la Russia.9 In fact, any attraction the so-called Western model may have had has no hold on the Chinese elites.10 The same can be said about the economic success of Japan, or the Four Asian Tigers (Hong Kong, Singapore, Taiwan, and South Korea) in the 1960s and 1970s, which was kick-started by state protectionism. Even the axiom that clearly defined property rights are essential to development does not seem to apply to China, where the successful TVEs (Township and Village Enterprises) in the 1970s and 1980s were a kind of hybrid of municipal enterprises and cooperatives with an unfocused structure and without clear property rights.11 Control here, unlike in the former communist economies of the USSR and eastern Europe, was in the hands of the regional governments. The more the process involved the regions, the more successful was the development process.12 The countries that industrialized in the nineteenth century, and Britain that industrialized in the late eighteenth and early nineteenth centuries, would have failed the Washington Consensus test.13 More recently, countries that followed the Washington Consensus, such as many Latin American ones, did not grow as fast as those that did not, such as China.14
Yet many social scientists cannot resist proposing a universally applicable model. Distinguished economists such as William J. Baumol and his colleagues, for instance, writing in 2007, explained that the main elements required for ‘a well-oiled entrepreneurial economy’ were a well-functioning financial system, flexible labour markets, property rights, and incentives for entrepreneurs – elements that seldom coexisted in the most rapidly developing economies at the time of writing.15 Nor was it clear how to define a ‘well-functioning financial system’, since what seemed to be functioning in 2007, for example, did not look so good on 15 September 2008, when Lehman Brothers collapsed (the largest financial bankruptcy in American history).
In reality, the application of particular formulae depends not only on the will of decision-makers but, far more importantly, on the way a particular country is inserted into the global economy. Thus small countries are more likely to reform their labour markets if they are exposed to international competition, which explains why such labour-market reforms were promulgated far more energetically in smaller countries such as Finland, Denmark, Sweden, New Zealand, and Ireland than in larger economies such as France or Germany.16 In the United Kingdom labour-market rigidities had been far more determined by trade unions than by the legislation, which is why as trade union power decreased, labour markets became more flexible.
The first road to capitalism had been the British one, and this might explain why, at the end of the nineteenth century, most liberals wanted to follow the United Kingdom. This was all the more alluring since Britain was rich and powerful and freer than other countries – the delicious combination of civil rights (for many) and wealth (for some) seemed proof that there are times when one can have one’s cake and eat it. However, on the continent and in the United States, most liberals were vigorous proponents of the strong state. Liberals such as the influential German economist Friedrich List (The National System of Political Economy, 1841) promoted national progress and the advance of capitalism – but not laissez-faire or the ‘free’ markets of the British. What mattered above all was industry. He wrote:
A purely agricultural nation cannot develop to a high degree its home and foreign trade, its communications, its shipping; it cannot increase its prosperity as its population increases; it cannot make sensible progress in its moral intellectual, social and political culture; it cannot acquire great political power; it cannot exercise any important influence over the civilization and progress of less advanced nations; nor can it found colonies …17
And to develop industry, it was necessary, at least initially, to protect one’s economy by stopping foreign competition. The key was the state and not just any state but a strong state:
the activity of individuals is powerless to preserve the commerce, industry, and wealth of a State, if the general conditions of society are not favourable; and if individuals do not owe the greatest part of their productive power to the political organization, and to the power of the country in which they reside.18
List lambasted
what he called ‘the cosmopolitan school’ (i.e. Adam Smith, David Ricardo, Jean-Baptiste Say, and their followers) for three essential errors: firstly, ‘a chimerical cosmopolitanism which does not comprehend nationality and which has no regard for national interests’; secondly, ‘a dead materialism which regards everywhere the exchangeable value of things’; and, thirdly, a ‘disorganizing’ individualism which, ‘disregarding the nature of social labour … depicts individual industry as it would develop itself if unrestrained in society, that is with the whole human family, were it not separated into different nations’.19 Between the individual and mankind, he explained, there is the nation with its particular language and history and origins. It is through the nation that the individual acquires civility. Some nations were barely civilized; the task of political economists was to help them out of their predicament. Adam Smith’s ‘school’, Friedrich List went on:
has admitted as realized a state of things to come. It presupposes the existence of universal association and perpetual peace, and from it infers the great benefits of free trade … History proves that political union always precedes commercial union … In the actual state of the world, free trade would bring forth, instead of a community of nations, the universal subjection of nations to the supremacy of the greater powers in manufactures, commerce, and navigation.20
List overestimated the extent to which the doctrine of laissez-faire was held by the classical economists of the British school. This is not surprising, since Adam Smith, David Ricardo, and others are generally credited with the theoretical ancestry of today’s neo-liberals, even though considerable scholarship has been expended in trying to rescue Adam Smith from their over-enthusiastic embraces. The concept of ‘an invisible hand’ – for which Smith became famous and infamous – is mentioned only three times in his entire oeuvre.21 In The Wealth of Nations, the concept is mentioned once; the context is the unflattering description of the entrepreneur as a self-absorbed and largely unconscious operator able to see only his own narrow interest:
He generally … neither intends to promote the public interest, nor knows how much he is promoting it … and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention … By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.22
As Donald Winch explained, this contrast between ‘the private intentions or the professed aims of individuals’ and ‘the unintended social or public consequences’ of their actions (and not an alleged celebration of individualism, as present-day neo-liberals claim) enabled Smith and his successors (including Karl Marx) to analyse a commercial world, that of capitalism, ‘characterized by impersonal and anonymous relationships’.23 Smith was far from being an unwavering supporter of ‘capitalists’. Nor did he think that individualism was the basis of capitalism. In fact, he regarded capitalism as a cooperative system. This was the main point of his examination of the division of labour in The Wealth of Nations.
Adam Smith, as a good liberal, was particularly alarmed by the possibility of industrialists banding together to fix prices and advocated some form of state regulation. ‘People of the same trade,’ he wrote, ‘seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’ Regulation (what today we would call anti-trust legislation), he admitted, might be difficult but nothing should be done to encourage such practices.24
Smith was unaware that an industrial society was about to erupt and drive the whole of the country. Nor did he think that societies could grow for ever. In fact, he thought China had already reached the end goal: ‘China seems to have been long stationary, and had, probably, long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions.’25 This is not such a surprising view if we consider that China, in 1820, had the highest share of world GDP: 32.9 per cent.26
Adam Smith, however, was a staunch opponent of ‘mercantilism’ or protectionism, a state policy aimed at promoting (and protecting) one’s own state economy at the expense of that of other states – the very same policy Friedrich List would later propound, though for List protectionism was a step to allow one’s economy to grow, not a permanent policy. And List was right to highlight Smith’s ‘cosmopolitanism’, since Smith himself was aware of the potentially cosmopolitan nature of capitalists. The fundamental difference between the owner of land and the owner of stock, in his view, was that the former is a citizen of the country, whereas ‘the proprietor of stock is properly a citizen of the world and is not necessarily attached to any particular country’.27 We can easily recognize today’s financial operators in this characterization of a new cosmopolitan class of rich déracinés who, as the novelist Marina Lewycka put it in her Various Pets Alive and Dead, are a ‘young high-flying free-floating no-baggage global elite, whose title is wealth, whose passport is brains, whose only nation is money’.28
Adam Smith, like many university professors, did not like or admire capitalists – whom he called dealers or manufacturers or merchants. He never used the word ‘capitalist’ (though the term was in use, notably in the works of Jean-Baptiste Say) and preferred the term ‘commercial society’ to ‘capitalism’, just as Marx never used the term kapitalismus in Das Kapital (though he used the term ‘capitalist mode of production’).29 Smith was critical of a state that cravenly complied with the wishes of manufacturers. In Book I of The Nature and Causes of the Wealth of Nations (1776), he wrote that the interests of merchants ‘is always in some respects different from, and even opposite to, that of the public. To widen the market, and narrow the competition, is always in the interest of the dealers.’30 In fact, markets, far from adjusting to change automatically, if unchecked, would lead to monopolies:
The constant view of such companies is always to raise the rate of their own profit as high as they can; to keep the market, both for the goods which they export, and for those which they import, as much under-stocked as they can; which can be done only by restraining the competition, or by discouraging new adventurers from entering into the trade.31
The point of the economy was not profit. Consumption, the goal of the consumer, is the sole end and purpose of all production. As he wrote in The Wealth of Nations:
The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.32
This principle was echoed by John Maynard Keynes, 160 years later, in his General Theory of Employment, Interest, and Money, when, having asserted that ‘All production is for the purpose of ultimately satisfying a consumer’, he added that ‘Consumption – to repeat the obvious – is the sole end and object of all economic activity.’33
The centrality of consumption in Adam Smith was well known even among non-economists. The poet Pushkin in the 1830s writes of his rather shallow anti-hero Yevgeny Onegin that ‘he rated Adam Smith highly’:
Who knew it all: how states exist,
How to transform them, make them wealthy,
And why they have no need of gold
If they have things that can be sold.34
Although an economic liberal, Smith was aware of the circumstances where only government policy could prevent or ameliorate human suffering and situations where government intervention was necessary to protect the most disadvantaged.35 He allowed for numerous exceptions to the rule of non-interference by the state in the economy: public works, such as roads and bridges, were better performed by the state; new domestic industries could be protected from foreign competition, at least until they developed (the so-called infant industry argument, though the term was not use
d by Smith); states should also regulate the currency, and use taxes to modify behaviour, for example levying taxes on harmful alcoholic drinks, such as hard liquor, to encourage the consumption of less damaging ones, such as beer.36 He certainly did not like capitalists, much preferring ‘the small proprietor’ who ‘knows every part of his little territory, views it with all the affection which property, especially small property, naturally inspires, and who … is generally of all improvers the most industrious, the most intelligent, and the most successful’.37
In spite of such views and social concerns, for most of the nineteenth century (and even more now) Adam Smith was regarded as an intransigent supporter of laissez-faire and described by people like Friedrich List as the champion of absolute free markets. But he was not, and nor were other pillars of eighteenth- and nineteenth-century British liberalism, such as David Hume, Jeremy Bentham, David Ricardo, and John Stuart Mill, who today we would call ‘neo-liberals’. Hume, in an essay written in 1752, departed somewhat from the principles of free trade:
All taxes, however, upon foreign commodities, are not so regarded as prejudicial or useless, but those only which are founded on the jealousy above mentioned. A tax on German linen encourages home manufacturers, and thereby multiplies our people and industry. A tax on brandy increases the sale of rum, and supports our southern colonies.38
The Anxious Triumph Page 22
