Social insurance had an impact in many dimensions. It hedged individuals against critical risks, thus ensuring economic security for households. It also contributed to steadier consumer demand at the macroeconomic level because in the presence of such programs, households consume no matter what—even when people are injured, sick, unemployed, or simply too old to work.
At the dawn of the Fordist economy, widespread instability on large consumer markets had led firms to renounce investment, which in turn had fueled unemployment, which in turn had depressed consumer demand, and so on and so forth down to the Great Depression. Social insurance proved the most adequate remedy to such instability, a non-distortive way to provide economic security to individuals. Unlike mechanisms such as price controls or prohibiting layoffs, social insurance was a market-friendly solution that protected households and lifted up businesses at the same time—thus supporting what Will Wilkinson, of the libertarian Niskanen Center, calls “the freedom lover’s case for the welfare state”[65].
But social insurance, however wide, was not enough to deliver economic security in a customized and sustainable way over the long term. The Great Safety Net wouldn’t have been as effective without a second pillar, the financial system.
The idea that finance complemented social insurance may sound odd in today’s context. But you shouldn’t underestimate the power of finance when it comes to mitigating the risks to which households and businesses are exposed in their respective spheres.
For instance, with a little help from the US government (through organizations such as Fannie Mae and Freddie Mac, which provided government backing for mortgages), financial markets made it possible for American households to buy houses, which under certain conditions contributes to strengthening economic security. The financial system also played a role in making pension plans more sustainable over the long term (though poor stewardship could obviously produce the opposite result). Additionally, it provided individuals with the cash they needed to consume durable and expensive goods such as cars and appliances, and it occasionally covered daily consumption thanks to consumer credit.
Mobilizing the financial system to serve the masses was good for corporations in many ways. It wasn’t only that consumer finance consistently fueled demand at the macroeconomic level. Inviting households into the financial system also made it possible to harness their savings to finance the mounting capital needs of ever-larger companies tackling ever-more capital-intensive industrial challenges. To finance the heavier industries that arose from the age of steel and heavy engineering onward, financial capital had to be organized beyond the small-scale merchant banking deals of the past. And households joining as capital providers in the corporate game was yet more proof that hedging individuals against critical risks was ultimately a good thing for the corporations themselves.
Far from being exclusive or independent of one another, social insurance and the new financial system ultimately came to be seen as two sides of the same coin. Because social insurance contributed to stabilizing household income even in the presence of critical risks, it became a key argument to prove solvency and reassure lenders. Thanks to social insurance, households borrowing money to buy a house or a car would always be able to pay off their debts whatever the ups and downs of the income derived from their labor. Conversely, the constant growth of consumer credit made it possible to sustain mass consumption at an ever larger scale, contributing to higher tax revenues and an improved capacity to bankroll broader social insurance systems.
Yet the two pillars of social insurance and the financial system, although complementary, were still not enough to ensure economic security and prosperity in the fast-growing Fordist economy of the time. The Great Safety Net also needed a dynamic force to grow from being simple to being comprehensive and adaptative. This force—the third pillar—was found in the trade unions. With collective bargaining, unions established a balance of power with employers. And with assistance from the government, they were able to gain the advantage and eventually obtain a larger part of the added value for workers.
It’s true that union leaders, especially in Europe, used Marxism to bring industrial workers together. As a result, most people, including terrified politicians and business owners, saw unions as active agents of the destruction of capitalism. But in the nascent age of the automobile and mass production, there were two pressing problems with capitalism that only trade unions could address.
First, unions contributed to solving the problem of underconsumption by imposing higher wages in exchange for productivity gains. Complementing new legislation enacted by the governments around the world, they helped put a floor on wages and prices as well as a ceiling on hours and efforts, industry by industry. For that, collective bargaining at the company and industry levels was critical. As explained by Nelson Lichtenstein, “labor’s voice was essential to... industry self-regulation, because only the trade unions possessed an intimate, internal knowledge of business conditions. Only they could ‘enforce’ government-mandated minimum-wage standards and maximum-hour regulation”[66].
Second, unions contributed to promoting the idea of “industrial democracy”[67]. Empowering workers meant promoting a higher standard of living, which included both economic security for the workers, and social security for the others (the old, the sick, the families). Thanks to industrial democracy, workers had their say in company matters, which led to a less rebellious workforce.
All in all, much like social insurance, collective bargaining benefited both households (under the form of higher wages and industrial democracy) and businesses (under the form of increased consumer demand and a more diligent workforce). Henry Ford dreaded unions, but he also famously understood the virtuous circle that linked consumption and production in the age of the automobile and mass production: “One’s own employees ought to be one’s own best customers”[68]. (Still, above all he wanted to reduce the huge employee turnover in his factories.[69])
Germany, France and the UK were among the first to enact new rules designed to protect and empower industrial workers. The US resisted assisting unions longer, probably because universal (white male) suffrage preceded industrialization, thus alleviating the pressure from the working masses. But from 1935 onward, it caught up with what has been called the Second New Deal, which included the National Labor Relations Act of 1935 (also known as the Wagner Act). Widespread assistance of unions by the US government lasted for over a decade, until Congress enacted the Taft-Hartley Act in 1948.
With the US catching up (even for a mere 12-year period), the principle of empowering workers came to be widely accepted in Western countries as necessary for providing economic security and prosperity. It prevented unrest in the workplace, sustained higher productivity gains, and contributed to redistributing wealth. Thanks to state-assisted unions, increasing wages finally caught up to productivity. The Great Safety Net was finally bringing the “Great Decoupling” to an end.
State assistance for unions proved to be the ideal complement to deploying social insurance and upgrading the financial system for the new age. With stronger unions, workers were now able to voice their demands for better working conditions. Meanwhile, thanks to the social insurance regimes and a more effective financial system which combined to make them less dependent on their employers, they could also exit when their unions couldn’t reach an agreement with management. If the company went bankrupt because of the resulting strike, unemployment insurance was there as the safety net that workers needed to rebound. Likewise, if what they earned in exchange for their labor was not enough to purchase expensive goods, they could rely on the banking system to access additional capital.
This grip of voice and exit, explained in Albert O. Hirschman’s famous framework[70], proved particularly powerful. Workers’ bargaining power led to higher wages which, in turn, led to more tax revenue to bankroll social insurance regimes and a more widespread access to capital on financial markets—all of which improved the workers
’ bargaining power even more. These three pillars were stitching together the Great Safety Net that delivered economic security and prosperity in the age of the automobile and mass production.
Building the Great Safety Net differed a great deal from one country to another, even though national systems performed largely the same functions. In the US, it was a long process from the end of the nineteenth century to cementing Roosevelt’s legacy during the post-war boom. There were many setbacks and shortcomings, and attacks against the Great Safety Net were never far away. One with the most long-term impact was the Taft-Hartley Act of 1948 that dramatically weakened state assistance to trade unions. And of course the US never achieved the goal of providing universal healthcare insurance, coming closest with the fragile (and incomplete) achievement that was Obamacare[71].
Our European versions of the Great Safety Net were more ambitious and eventually more comprehensive. Indeed the trauma of World War II was significantly greater in Europe than it was in the US. But the war also provided a blank slate on which to build new institutions, and we knew that we had quite a lot to catch up on in terms of economic development and security at a large scale.
The German Great Safety Net was designed in line with the legacy of Bismarck’s “state socialism”. Despite what the term “state” suggests, the German macro mechanism is organized industry by industry, mostly operated by employers and trade unions. Its explicit goal from 1945 onward was to hedge German households and businesses against the widespread instability and economic insecurity that had once paved the way for the rise of the NSDAP.
The UK took a different path. Following the conclusions of the landmark Beveridge Report of 1942, it opted for a more universal approach than the German corporatist system. The deeper involvement of the state culminated with the establishment of the National Health Service immediately after the war.
And as for my home country of France, we picked a little bit from both worlds, as is our way. Our national Great Safety Net was initially organized at the industry level, like in Germany; but over time the state became more and more involved, like in the UK, so as to take a more universal approach to economic security and prosperity.
All in all, the West’s economic history since the 1908 Model T can be read as the long struggle to shape and improve this ‘Great Safety Net 1.0’. At first, it had to be imagined. It took the sheer will of the labor movement and a great deal of help from governments (as well as the Great Depression and two world wars) to succeed. Then it bore fruits with the post-war boom.
As explained by Carlota Perez, each techno-economic paradigm involves a new understanding of the current means of production and consumption. In turn, it imposes a new way of life and thus calls for new institutions. Only with a new “socio-institutional framework”[72] in line with the new age can society enter a period marked by the redistribution of wealth to the many, the massive creation of jobs, and widespread prosperity. No technological revolution can deliver both economic security and prosperity if it doesn’t trigger Karl Polanyi’s concept of a “double movement”[73].
This is exactly what happened after World War II. In a society traumatized by global conflict, Western governments had to counter market instability by providing businesses as well as households with increased economic security. For a few decades in the twentieth century, a new set institutions was effectively shaped in the interest of both households and businesses. Thanks to the Great Safety Net 1.0, individuals were empowered and protected against critical risks. Meanwhile, corporations could count on sustained and growing consumer demand that made it possible for them to serenely invest in their businesses and make more profits. Indeed, what was there not to like? And, above all, can we once again rise to such a challenge?
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Key takeaways
● We’re currently going through the fifth great surge of development since the Industrial Revolution, one that is leading us into the age of ubiquitous computing and networks.
● During the previous great surge, that of the automobile and mass production, the installation period culminated in problems similar to those we’re experiencing today.
● Those problems were solved by deploying the ‘Great Safety Net 1.0’, a macro mechanism designed to deliver economic security and prosperity to both households and businesses.
Chapter 3
Stuck in the Dark Ages
“A country approaching the fascist phase showed [common] symptoms, among [them] the spread of irrationalistic philosophies, racialist aesthetics, anticapitalistic demagogy, heterodox currency views, criticism of the party system, widespread disparagement of the “regime,” or whatever was the name given to the existing democratic setup… Fascism was an ever-given political possibility, an almost instantaneous emotional reaction in every industrial community since the 1930s.”
—Karl Polanyi[74]
The Western middle class’s never-ending crisis
I’ve always felt part of the middle class. My parents had good, stable jobs. My siblings and I had the opportunity to go to good schools and attend events such as art exhibitions and jazz concerts. I learned musical instruments (clarinet, saxophone, piano, and then bass guitar) and played a few sports, including fencing and tennis. At the same time, we didn’t often go to restaurants and we never traveled much. But life felt relatively rewarding and we were imbued with a solid sense of economic security.
Today the vast majority of people in the West still identify as middle class. But the very concept of the middle class has evolved through time. When I grew up in the 1970s and ’80s, the cardinal value of the middle class was stability. Most people had a fixed place in the world and defined themselves through what they were doing in life. As for today, being part of the middle class looks more like the main character in Steven Soderbergh’s Magic Mike: laboring during the day as a construction worker, making money as a stripper in night-clubs and private parties, and steadily describing himself as an “entrepreneur”.
As in the case of Magic Mike, gone is the sense of economic security that provided middle class workers with a clear identity. Now we live in a world where job situations are unclear. People are no longer certain about what the future holds or even what their occupation is. Is Magic Mike a construction worker, a stripper, or an entrepreneur? Nobody knows, and so he is forced to decide for himself—in what the Financial Times columnist Simon Kuper calls the "great middle class identity crisis"[75].
What defines the middle class today is less stability than the dream of climbing up the economic ladder and, simultaneously, the nightmare of potentially falling down it. Values such as risk-taking and self-reliance rather than stability and solidarity become more central in the day-to-day experience of most households. Instability is creeping in to nourish the feeling of a looming and perpetual crisis. The middle class is now less about status and more about aspirations and fears.
And yet middle class workers didn’t wait for computers and the Internet to identify threats to their status. In reality, their identity and economic problems have been in the making since at least the 1970s. Before that time, the middle class, buoyed by economic security, was enjoying the fruits of post-war peace and prosperity. Then everything changed.
The macroeconomic context of the time was transformed by many factors. Less developed countries started to catch up on the US, imposing an unprecedented level of competition on Western businesses. The Nixon administration abandoned the Bretton Woods system and let the dollar float, which led to more volatile exchange rates. The oil shocks of the ‘70s and the sharp increase in the price of oil resulted in a widespread energy crisis.
These changes took place atop a cultural and political crisis, revealed in many countries by the turmoil of 1968-69 and made even worse by degrading economic conditions. Every Western country went through the same feeling of decline, with the youth voicing demands for emancipation, workers fomenting unrest at the workplace, unemployment rising again after three decades of pr
osperity, and the simultaneous rise of inflation (an unprecedented phenomenon known as ‘stagflation’). There were also occasional conflicts in every region of the globe, the intensification of violence in the Middle East, and even frequent terrorist attacks in Western countries such as Germany and Italy. Viewed from the Western middle class, the 1970s were the beginning of a long, grim period of crisis. Again, all this was long before the Internet was a thing.
That decade of crisis triggered an institutional response in the form of neoliberalism. This new set of ideas, inspired by the likes of Friedrich Hayek and Milton Friedman[76], sought to draw lessons from the failures of state intervention in the 1970s. The stagflation of the time motivated an outright rejection of Keynesianism[77] and established the triumph of the rational expectations hypothesis[78]—an attempt at rejuvenating the concept of nineteenth-century laissez-faire at the macroeconomic level. In the US, it culminated with Fed chairman Paul Volcker battling inflation with higher interest rates from 1979 onwards. A series of tax and fiscal reforms was also designed to boost investment while trying to contain rising deficits[79]. In Europe, Germany led the way in promoting stable currencies and low deficits, using the (long) path to forming the Eurozone to impose its macroeconomic discipline across the continent[80].
In the end, the world economy decidedly pulled out of stagflation and entered a new phase of both stability at the macroeconomic levels (a phenomenon known as the “Great Moderation”[81]) and accelerated institutional change[82]. Neoliberalism, the ideology encompassing the new economic thinking of the day, was championed by prominent conservatives such as Margaret Thatcher and Ronald Reagan. It also changed center-left politics, with the French Socialist Party taking charge of deregulating the domestic financial system in 1985 and Chancellor Gerhard Schröder orchestrating the famous “Hartz reforms” to render the German labor market more flexible from 2003 onward.
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