Probably the most striking feature of capitalism has been its inextricable connection with change—relentless disturbances of once-stable material and cultural forms. More than promote change, it offered proof that the common longings of human beings for improvement could be achieved. It opened up to a significant proportion of men and women in the West the possibility of organizing their energy, attention, and talents to follow through on market projects like forging a new trade link or meeting an old need with a commercial product. And one could do it on one’s own. One didn’t have to be tall, good-looking, young, rich, well connected, or even very smart to form a plan, though all those qualities were helpful. Capitalism sustained popular support by commanding this imaginative field. Newcomers found it hard to attract venture capital, and there were more failures than successes. Even when individual ventures were successful, few foresaw the unintended consequences of all this manipulation of nature and society. Turbulence was written into the system, but capitalism had already become self-sustaining before anyone could clearly see this.
It took a bit of time to realize that the shocks of 1973 marked the end of the “golden age” of capitalist prosperity in its homelands. Rising prices usually accompanied periods of growth, but, this time around, they came in with stagnating production. This introduced a new condition and term, “stagflation,” which in turn promoted an interest in monetary theory. In another disturbing trend, the gap between low and high incomes began its long stretch of stretching in 1969, though concern with this phenomenon rarely moved beyond rhetoric. With mounting studies documenting the neglect of the environment and the safety of workers and consumers in the most advanced societies, we could say that the greatest chapter in the history of capitalism ended with more of a whimper than a bang.
Meanwhile, back in the laboratories of Intel in Palo Alto, California, and Sony in Shinagawa, Tokyo, engineers were mapping out uses for something called a transistor. The transistor—short for “transfer resistor”—is a device that amplifies or switches the flow of electricity. It had been around for a couple of decades but now was being upgraded. Attached to an electronic circuit board, the transistor could do wondrous things because of its smallness and adaptability. Ingenuous people had found a new way to exploit the electromagnetism of our planet. This technological newcomer “creatively destroyed” the vacuum tube that had started off wireless technology. The relentless revolution continued without the benefit of a forward-looking name for the dawning era, though the United States acquired a new place-name, Silicon Valley, where things called start-ups and initial public offerings were creating a new crop of millionaires.
CAPITALISM IN NEW SETTINGS
IN THE EARLY 1970S the unexpected rise in oil prices forced people to give some attention to other negative indicators in the industrial world: the slowing growth rate, intractable inflation, rising unemployment, the plunging dollar, and fluctuating exchange rates. The comfortable understanding among big business, big labor, and big government was coming apart. The unwelcome appearance of stagflation also signaled that national policy makers could no longer depend upon the economic prescriptions of John Maynard Keynes. He had given a central role to government to spend when private investments could no longer achieve full or near-full employment, as in the Great Depression. Most countries in the postwar West followed Keynesian policies to ward off recessions. Alas, few had had the courage to cut off popular spending programs when they no longer were needed to boost the economy. This negligence contributed to inflation, exacerbated by the 1973 spike in oil prices. But now inflation was accompanied by high unemployment. The facts no longer supported the original Keynesian proposition. Government spending, which he had recommended in times of falling demand, had created the “flation” in stagflation, and stagnating sales the “stag.” What had seemed a stable, comprehensible, and predictable economic environment became fluid and puzzling.
When the smooth performance of the advanced industrial countries came to an abrupt end in the early 1970s, it was time to look for help in a new theory. This gave an opening to Milton Friedman, who had some insights appropriate to the time, or so they seemed. A University of Chicago economist, Friedman wrote extensively on consumer behavior and public policy, often in partnership with his wife, Rose. Friedman analyzed the new data and explained why a volatile inflation rate actually contributed to unemployment because it increased uncertainty. Its harm to creditors and those on fixed incomes also put pressure on governments to do something—wise or not. Friedman advised cutting back on government activity in the economy so that the market could do what it does best: communicate simple, unadulterated information through its prices to market participants, who could then make the soundest decisions with their resources.
As an influential writer on monetary theory Friedman recommended that government confine itself to a small increase in the money supply. As a public figure he wrote tirelessly to bring the public back to an appreciation of “economic man,” that rational chooser upon whom Keynes had cast doubt. Friedman reaffirmed economists’ early conviction that the market helped people choose what was in their interest. Competition, he said, worked best for consumers and producers alike. He won a Nobel Prize in economics in 1976. His ideas soon percolated into public policy first in Great Britain with Prime Minister Margaret Thatcher and then in the United States. As President Ronald Reagan announced in 1981, “It is time to check and reverse the growth of government,” though he recognized that the imperative was to make government work better.1 While Thatcher and Reagan were in power, Friedman was showered with awards, prizes, and appointments. In actual practice, monetarism enjoyed Federal Reserve support only for the years between 1979 and 1982. It failed to keep the country from sliding into recession.
Not all government intrusion into the economy had been inspired by Keynesian theory. Much of it was in pursuit of a social goal. In the 1960s legislatures began controlling how factories affected the environment or endangered species. Other laws dealt with worker safety, discrimination in hiring and housing, and the protection of consumers. Without debating their social and moral benefits, Friedman pointed out their adverse effect upon competition.2 His work became the basis of the deregulation movement that liberated credit institutions, telecommunication corporations, and the energy sector. His faith in self-interest’s capacity to trump prejudice led him to predict that employers would not discriminate because it hurt them not to offer jobs to the best applicants, a position contested by many field studies. Perhaps the most interesting of these was the blind auditioning for orchestras that gave a considerable boost to female candidates. The recession in Japan in the 1990s and the meltdown of the Argentine economy in 2000 offered a reprise of the Keynes-Friedman debate over the relative merits of government spending and government restraint. Keynes came out the better in the contest of ideas while the countries themselves suffered from following Friedman’s prescriptions.
Still, Friedman’s ideas exercised a great influence on corporate heads and policy makers alike. Supported by both Democratic and Republican administrations, the first wave of deregulation came in the late 1970s. Laws freed the airlines and trucking companies for competitive pricing. Regulation had been especially heavy in the transportation industry because it was seen as a public service in need of stability and protection. More slowly a broad band of civic-minded men and women worked to deregulate investment banking. This came at the same time that traditional long-term relationships between banks and their corporate customers were breaking up under pressure from newly minted MBAs moving into the banks’ executive suites with new ideas about improving banking profits.3 Two laws in 1980 and 1981 eased accounting rules on savings and loan institutions and reduced minimum down payments on their mortgages. Sailing faster with less ballast, they floated many more loans, and American personal indebtedness began its three-decade climb. Within the next decade over seven hundred S&Ls went under at a cost of over one hundred billion dollars to their insurers, the American
taxpayers, but without slowing the movement for deregulation.
The 1980s also brought wrenching changes to manufacturing in the homelands of capitalism. The worldwide circulation of people, investment, and goods took an unexpected turn when multinational corporations sought out countries with cheap labor to build new plants. The enhancement of global communication made this easier to do. The United States, in particular, lost high-paying factory jobs that had boosted millions of families into a prospering middle class. Soon the steel centers that stretched from Buffalo, New York, to Gary, Indiana, lost out to Mexico, China, South Korea, and Brazil. Cheap imported steel entered the country from Japan and Europe. The land of smokestacks became a Rust Belt. Millions of jobs were opening up in finance, computers, and the service sectors, but Americans were used to their manufacturing might. And the new areas promoted an income split: minimum wage work in fast-food outlets and nursing care facilities and higher wages for the denizens of Wall Street and Silicon Valley.
The novelist Tom Wolfe commented recently that we were witnessing “the end of capitalism as we know it.”4 That’s a statement that could have been made many times in the past two centuries, for capitalism is a system constantly reinventing itself, a set of prescriptions peculiarly open to disruption, a work in progress. It looks the same only if you examine the categories instead of the participants and practices. For instance, people have long insisted that market economies flourish only in open, secular societies where property rights are enforced and individual ambition is cultivated at the knees of mothers. Seven success stories in the second half of the twentieth century suggest that capitalism can take hold in diverse social contexts under government supervision and within communitarian cultures—that it is, in fact, always adapting.
The Formidable Economic Power of Japan
First among the countervailing examples is Japan, which started its economic transformation more than a century ago. Next, the Four Little Tigers—Singapore, Hong Kong, Taiwan, and South Korea—charged out of their traditional cages in the 1960s and 1970s. Sometimes called the East Asian NICs (newly industrialized countries), their takeoffs diverged from that of Japan’s as Japan’s had diverged from those of Western Europe and the United States. India and China, coming along more slowly, portend even greater influence in the global economy, as befits the first and second most populous nations, with 37 percent of the world’s people.
Japan appeared an unlikely candidate for industrialization, much less for rapid industrialization. An East Asian island of thirty million people in the mid-nineteenth century, deliberately cut off from the world, it burst into prominence as a military and economic power at the end of that century. In a report card for worldwide economic development between 1820 and 1970, Japan placed first. Its GDP grew twenty-fivefold, a growth spurt unique in human history.5 Starting at the most advanced level in 1820, Great Britain multiplied per capita income ten times, Germany fifteen, and the United States eighteen. The Western sequence of industrialization went from textile making and mining to metallurgical industries, railroad building, and heavy industry generally, its source of energy from waterpower to steam created with coal fires to electricity powered by generators. Consumer goods slowly diverted investments from the production of capital goods, the whole accomplished in a more or less trial and error fashion, through the decisions of entrepreneurs and investors.
Japan did not reverse the process, but its deviations from the pattern set in the West shows the diverse paths that capitalism can follow. Japan lacked the raw materials that mattered in heavy industry, meaning that it would have to import its iron and coal. The government outlined a program of exporting textiles, shoes, and trinkets that could pay for these essential imports. Hastened by its ability to borrow foreign technology and guided by a very determined elite, it did everything fast. Its traditional industries like cottage silk reeling, food processing, and various handicrafts used waterpower well into the twentieth century, but electrical motors replaced steam engines so quickly in the first decade of the twentieth century that you could almost say that Japan skipped the steam age. It also followed its own traditional path in placing the modernization of production and finance in the hands of a very few families like the Mitsuis, Mitsubishis, and Sumitomos, who in turn launched joint-stock trading companies in different sectors of the economy like steel and automobile-making. These family concerns formed pyramids from the top down, unlike the United States, where managers usually came up from the bottom rungs of business. The great industrial families exercised tight control from the center and cultivated a privileged group of insiders. They also blocked investment opportunities for foreigners.6
Even with military expenditures, government spending in Japan represented only 7 to 11 percent of the total annual investment in the economy, compared with 28 percent in the United States. It played a much larger role in capital formation—probably 30 to 40 percent—until private investments took off during World War I. As would be expected, Japan had its Wedgwoods, Watts, Carnegies, Rockefellers, Thyssens, and Siemenses, who laid the corporate foundation for Japan’s successful industrialization. Sakichi Toyoda, like Thomas Edison, was a natural inventor and an even better business organizer. Born in 1867 into a family of carpenters, he set out single-mindedly to design a better power loom and devoted his life to this goal. In his province almost every farmer had a loom in his cottage for the family to earn extra income weaving cloth, so he was familiar with its construction and operation.
After decades of work Toyoda caught the attention of the British firm Platt Brothers, which dominated the world market in textile machinery. In 1929 he sold it the right to manufacture his G-type automatic loom. The contract rewarded his genius and tenacity and signaled the progress of Japanese technology. For cotton cloth makers his loom looked like a good investment. It cost three times the price of a conventional loom and increased tenfold the output of one operator, but it failed to catch on. The failure of Toyoda’s loom for Platt Brothers uncovered a central weakness in the British textile industry: the strength of organized labor. Few manufacturers bought the Platt-made Toyoda loom because their workers objected to being displaced. By acceding to them for short-run peace, the British industry lost its preeminence in the world market. Between the 1880s and 1930s, Britain’s market share dropped from 82 to 27 percent while Japan’s climbed to 39 percent. The ability of Japan’s association of textile makers to buy cheap raw cotton contributed to this rise in market share. Eventually Japan lost out to countries with cheaper labor but retained the lucrative business of making the textile machinery.7
You probably already realize that the Toyoda Automatic Loom Works would not be getting this attention were it not for its parentage of the Toyota Motor Company. Sakichi Toyoda, on his deathbed in 1930, advised his son Kiichiro, another inventing genius, to find his own passion. Having been astounded by the mass production of Model T Fords when he visited the United States, Toyoda pushed his son in the direction of automobile making with a pot of cash to get started. At that time Ford and General Motors dominated the Japanese automobile market. Kiichiro Toyoda built his early automobiles on the technology developed for the family’s automatic looms. He changed the name of his car from Toyoda to Toyota for reasons pertaining to Japanese calligraphy.
In 1936 the Japanese government, already well advanced in an aggressive colonial policy, used a new licensing law to throw most of the automobile business to Toyota and Nissan. Both became giant holding companies in the 1930s. Their executives were military men who based their market strategies on advanced technology. They used state funds rather than banks for their capital, though Toyoda did extract working money from Toyoda Loom’s accumulated earnings.8 The decision of the Japanese government to go to war in 1894 and 1904 and a generation later in 1937 and 1941 put Japanese industry on a war footing. The country’s industrialists had been the most ardent supporters of the doomed Greater East Asia Co-Prosperity Sphere and Japan’s aggressive prewar foreign policy. American
bombing raids during 1945 destroyed Japan’s war machine, but not the know-how that had built it.
From the point of view of the history of capitalism, Japan’s capitulation to the United States in 1945 was more portentous than its earlier, but short-lived, imperial successes. Having accepted “unconditional” surrender with the one condition of maintaining the emperor, the United States was free to rebuild Japan in its own image. General Douglas MacArthur, the supreme commander for Allied powers in the area, took charge of the occupation. His thoroughness and the absence of atrocities from American troops stunned the Japanese. The country was demilitarized; jails were cleared of dissident liberals, socialists, and Communists; and political parties and labor unions encouraged to participate in the hoped-for establishment of a postwar democracy.
When the Japanese were slow to produce a constitution, General MacArthur’s staff did it for them, investing power in a legislature like that of Great Britain and giving women equal political rights with men. Land reform placed more than two million acres in the hands of nearly five million tenant farmers. The rural economy began to blossom. Turning their attention to the manufacturing sector, the occupiers became intent on breaking up the giant holding companies of the prewar period.9 World politics then intervened.
The relentless revolution: a history of capitalism Page 40