The Great Compromise

(Part I of a two part post concerning the future of politics in the industrialized West)

In trying to figure out where politics is going in this era of radical transformation, it’s important to look back at the “Great Compromise,” a societal agreement that has set the framework for stability and prosperity over the last sixty years.   One of the reasons Europe fell into warfare and the “battle of ideologies” in the first half of the 20th century is because of a deep cleavage in European societies between the wealthy “middle class” and the masses — the working class.

The middle class had, with various degrees of success, overcome the conservative “nobility” by the middle of the 19th Century.  This victory was most complete in Great Britain, as the aristocracy faded and the industrial class arose.  But workers in the industrial revolution were very poorly treated.  They often worked 80 hours a week or more, were paid just enough to survive, and their children were forced into labor in order to make enough to feed the family.   Many mark the victory of the middle class over the British aristocracy with the repeal of the corn laws in 1846, allowing cheap food to flow into Britain from the Commonwealth.  This meant a decrease in labor costs as workers could now be fed more cheaply.

Treated little better than animals, subject to what many consider “wage slavery,” the workers resented their condition.   While the industrialists rationalized that workers could choose to leave employment, there really was no choice.  To survive and feed their families they had to work, and no better jobs were out there.  Moreover, children did not develop skills that could be used to do something else, as they were forced into factory work at a young age.   Living in squalor and filth, the disparity between the workers and the wealthy industrial class — and the professionals who serviced them — grew larger.

Just as liberalism emerged as the ideology of the middle class, the working class drifted towards a new ideology, socialism.   (Aside: most Americans associate the term ‘liberal’ with leftist.  That is political jargon.  In political philosophy liberalism is a belief in limited government, often associated with John Locke’s notion of natural human rights – life, liberty and property.) Socialism called for the abolition of private property, with the workers owning the factories and sharing the profits fairly.   Rather than a few elites who owned the factor raking in almost all the profits and paying the workers enough to survive and continue their labor, everyone would get paid the same.

As the industrial revolution spread and expanded, socialism grew in popularity.    In Germany, the conservative government of Otto von Bismarck (under Kaiser Wilhelm I) hit upon a possible solution.   As a conservative, Bismarck did not like the raw capitalism of the liberals and felt socialism was obscene.   What if the state could convince the workers that it had the power to make sure the industrialists were forced to treat workers well, and the state could intervene to make sure that health care, education, and basic living standards were granted to all citizens?  In short, German conservatives designed the first social welfare system in order to undercut the rise of socialism.

In Great Britain, the second half of the 19th century also saw a rise in limits on the industrialists and efforts to protect labor unions and workers rights.  Unrestrained capitalism, they realized, allowed the powerful to exploit and treat the less powerful as if they were simply means to an end — the end being increased wealth and power for the elites.    It was structural violence, dismissed by the industrialists as simply choice (they choose to work here) but seen by most British as being just as destructive and brutal as raw physical force.

As war came to Europe in the 20th century, this battle was continuing.   The liberals were fighting against socialism, often allied with conservative forces.    Business in Germany supported the Nazis not out of a love of their ideology (they preferred an aggressive national liberalism), but out of fear of socialism.   Communism had triumphed in Russia, and the Great Depression had many convinced capitalism was failing.   Socialism seemed a viable option.

After the war capitalism survived, thanks to the work of the United States and the creation of the Bretton Woods system of free trade and stable monetary policies.  More importantly, faced with the prospect of communist dictatorship, workers and owners in the industrialized West made the great compromise.   It wasn’t a signed document, and the political parties often pushed its limits (and was never completely accepted by Communist parties in France and Italy), but it brought social stability and set the framework for a half century of unprecedented prosperity.

The compromise was that the working class would give up demands for ownership of the factories and means of production, and accept the inequalities and difficulties inherent in capitalism.   In exchange for accepting market capitalism, the elites would provide a viable social welfare system (called by the Germans the Sozialmarktwirtschaft or ‘social market economy’) that would assure basic needs were met (education, health care, unemployment insurance, pensions, etc.) and would create conditions whereby the children of the workers could become ‘upwardly mobile.’    This brought labor peace and social stability — two ingredients necessary for economic growth.

The Great Compromise was a great success.   Dedicated revolutionaries and capitalist utopians disliked it, wanting instead to continue the fight for their pure “correct” ideology, but those fights had brought nothing but turmoil and death to Europe.   Within decades even the working classes were living better than most elites had a century earlier, and more importantly, their children could go on to become societal leaders, even starting their own businesses.   Workers realized that equality of outcome was unobtainable and would have disadvantages outweighing the advantages.  Social welfare promised greater equality of opportunity, and that created incentives for everyone in society to produce, learn and work.

As we think about the future, it’s important to remember that we should not put the ‘great compromise’ in jeopardy.  Without it, social fissures grow.   Yet it is being challenged.   If social welfare programs become too expensive or act to inhibit ambition, they could lead to an entrenched “welfare class.”  This is the opposite of what the great compromise was meant to achieve.  If global business and capital get too strong, crossing borders to exploit cheap third world labor, and evading taxes, the working class in the first world could find itself marginalized, lacking opportunity.   It won’t be ‘liberalism vs. socialism,’ but a different kind of social breakdown as first world economies become unable to provide the prosperity and opportunity that sustained the ‘great compromise.’

In my next post I’ll explore how politics might change in the future to meet the challenges of this ‘era of crisis and transformation,’ and rejuvenate the great compromise, thereby avoiding economic catastrophe and political instability.

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  1. #1 by renaissanceguy on January 12, 2011 - 23:15

    But the one system that we have not tried is a laissez-faire system. The government has always had some hand in business.

    To me a laissez-faire economic system is simply freedom.

    You certainly know a whole lot more than I do on this subject, but one thing that I noted as a misconception is the idea that the Depression was caused by capitalism. Many economists point to government intervention as a greater cause.

  2. #2 by Scott Erb on January 13, 2011 - 00:40

    Actually the early industrial revolution in Great Britain had virtually no regulation on factories and business. That was the most laissez-faire era, and it also had sweat shops worse than we now find in the Third World. We moved towards more intervention (or the British did) as a moral response to those conditions. This is called the “libertarian period” in British economic history.

    The depression wasn’t caused by government intervention or capitalism per se. Government intervention was minimal then. It was by most accounts caused by a speculation bubble followed by a credit crunch and a spiraling downward as people lost jobs, thereby reducing total demand, causing more jobs to be lost, repeated over and over. You can probably find a mix of things from government policies to the way markets operate and sometimes fail that explain how this all came together in a perfect storm. John Maynard Keynes figured out that you need to stimulate the economy to get things moving the other way. He proposed counter-cyclical budgeting — deficits when you are in recession to avoid depression, and surpluses when the economy is booming (to pay off any debt, or save to stimulate the economy in the next slow down). Unfortunately, governments did not follow Keynes’ advice, and instead increased debt during booms — the worst periods being the US from 1982-90, and 2002-07.

  3. #3 by classicliberal2 on January 13, 2011 - 05:13

    “The depression wasn’t caused by government intervention or capitalism per se.”

    Nor does ANY reputable economist even suggest that. The notion is one frequently floated in recent years by utter cranks who generally put the blame for the Depression at the feet of the Smoot-Hawley tariff. The tariff was of absolutely no consequence to what actually happened, but it’s one of the only government “interventions” of the era, and so was chosen, by the “laissez faire” cranks, to get the blame.

    “Laissez faire,” as it developed in the 19th century, was, itself, a monstrous doctrine. It didn’t, to be clear, mean no government intervention–it meant government intervention on behalf of the industrial rich, and it consigned those forced to live under it to poverty, squalor, and increasingly short lives of horrendous, backbreaking labor (in factory towns in England, life expectancy for factory laborers was reduced to 17-20 years old). This was the material from which the tiny emergent industrial class built fortunes. People tired of it almost immediately, and began challenging it, but it took decades of violent struggle by the public to beat it back. In the U.S., these struggles continued right into the 20th century, as an “activist” right-wing Supreme Court set itself up as the last hold-out, and fought every effort at public regulation of industry.

    Though it often traveled under the banner of liberalism, “laissez faire” was anti-liberal to its rotten core. Profoundly anti-democratic, and even anti-human. History proved it a fraud over a century ago, and there if time travel were possible today, there still wouldn’t be enough money in the world to pay clowns like George Will, who romanticize those years, to travel back in time and actually have to live through them. No one would. We abandoned “laissez faire,” and the extraordinary prosperity that subsequently developed definitively put the nail in the coffin that is history’s judgment of it.

    I could normally write about this at much greater length, but I’m going through something really terrible, and I’m not in very good shape. It’s probably not a very good idea to write about this or anything in this condition, but I’m trying to at least get my mind off what it’s really on for some brief moment. Hopefully, my spelling and punctuation isn’t too bad.

    • #4 by Scott Erb on January 13, 2011 - 14:16

      Adam Smith’s “Wealth of Nations” is interesting. Smith, a moral philosopher (studied morality) makes clear that he does not consider markets to be magic. Capitalists have to operate under certain ethical standards for capitalism to function. Smith was very critical of the capitalists of his era. Ultimately, Europe was heading for socialist revolution if the state hadn’t intervened and saved capitalism from the business elites. They had the power to circumvent market constraints and structure the game in their favor. The market couldn’t stop that, but the state could.

  4. #5 by renaissanceguy on January 13, 2011 - 08:37

    Classical Liberal, when I say laissez-faire, I mean exactly what it says. You bolster my point that it never actually has been tried. I believe that your take on history is correct–government propped up certain industries and individuals and drowned out competition for prices and wages.

    I am truly sorry for whatever it is you are going through. I hope that things can get better, and that they get better soon.

    • #6 by classicliberal2 on January 13, 2011 - 19:50

      I can’t give this the attention it deserves right now, so I’ll try for a short version.

      Government sets the rules within which a given economy operates. Those rules inherently favor certain groups while disfavoring others; they allow for certain outcomes while disallowing others. The “laissez faire” doctrine doesn’t recognize this, and presumes, instead, the perfection of those rules, because it doesn’t allow them to be changed.

      I’m talking pure theory, there. In the real world, “laissez faire” was a theoretical notion that became so popular because those wealthy few who benefited from it as industrialization proceeded found it a useful ideological weapon–it was made synonymous with “freedom.” A very useful construction. By it, those who ran factories that were murderous death-traps, employed 5-year-olds, poisoned the environment, maintained a murderous 16-hour workday, and paid sub-poverty wages were just entrepreneurs exercising their “freedom,” while those who agitated against such things and tried to legislate were tyrants. The courts struck down reforms, and when people didn’t accept this, the guns were rolled out against them. What else is one to do with tyrants?

      Over time, there was the inevitable consequence of allowing a few to amass unimaginable fortunes on the backs of the many: the state intervention became more overt. The allegedly perfect rules by which the system operated–the ones that served those who made their fortunes from it–became malleable when it came to the Golden Rule–“them what has the gold makes the rules.”

      And that brings full circle the matter of why “laissez faire” neither works nor ever can: No one wants it. The few who benefit from it eventually find it necessary (and more profitable) to change the rules even more overtly in their favor (and the unchecked power they’ve amassed allows them to do so), while the many who are forced to live under it never like it, and fight it at every turn.

  5. #7 by Scott Erb on January 13, 2011 - 13:11

    I suspect early industrial revolution is as close as one can get to laissez-faire in a “pure” form. As an ideal, it is as unrealistic as utopian Marxism. (And when we were close to having it, the exploitation was immense). It can’t be tried because it can’t exist. Without regulation, markets would crumble as the powerful would take control and use their power to prevent true laissez-faire markets from operating. Without some form of regulation and governance, it simply can’t work, history seems proof enough for that. Perhaps if you had a culture that would have other checks against the powerful abusing their advantage one can imagine a society where it would work, but if you had that kind of culture, they’d voluntarily put it in place.

    So I guess I think pure laissez-faire capitalism is a fantasy. If it were tried, we’d likely get intense exploitation as the powerful would quickly subvert the system and replace it with one controlled by them.

  6. #8 by renaissanceguy on January 13, 2011 - 14:27

    Murray Rothbard shows in his book on the Great Depression that it is the inflationary policies of the Federal Reserve that triggered the Depression, and Herbert Hoover’s interventionism made it worse and made it last longer.

    Scott, why would huge masses of people allow themselves to be exploited? That’s counter-intuitive. Besides, if the powerful were running the show, that would not be a laissez-faire system. You don’t seem to know what that means. It means that, in regard to business, nobody is running the show.

    • #9 by Scott Erb on January 13, 2011 - 14:37

      There are lots of books and arguments about the depression. I don’t know that one, but it seems like a bit simplistic of an argument, especially given the scope (global) and depth of the depression. But I’ll check it out. No one book can give a definitive read, to be sure.

      People without power have let themselves be exploited throughout history. Look at slavery, look at the peasant-aristocracy relationship in the middle ages. Human history has a small group exploiting a large group as a norm. Power differentials allow that. But socialism was starting to mobilize the workers to rise up and revolt, and that is one reason why states intervened — without the state, we might have had a serious of massive revolutions if the workers decided not to take it any more. But don’t be naive – history shows a small group with power can dominate large groups, that’s been all too common (and continues in much of the world to this day).

      • #10 by classicliberal2 on January 13, 2011 - 20:19

        You haven’t missed a thing by missing Murray Rothbard. He was a racist crank “economist” of the “Austrian School” that rejects science (and is, in turn, rightly rejected by the entire economics field). As an “historian,” he’s even worse (Adam Smith, in his telling, was the first Marxist). I’m actually sort of surprised you’d use him as some sort of reference, RG. It’s like basing a discussion of the Third Reich on the “expert” view of a Holocaust denier.

  7. #11 by Scott Erb on January 13, 2011 - 20:29

    To be sure, Karl Marx did very much like Adam Smith. He saw his theory as creating conditions in which Adam Smith’s version of capitalism could work. That isn’t enough to call Smith the first Marxist though! I just read up on Rothbard on Wikipedia. He definitely sounds like a fringe economist — someone as extreme as he is usually ends up interpreting reality to fit his theory, even if the fit is forced. That in and of itself doesn’t mean he’s wrong, but it does suggest one need a lot of skepticism before accepting his version.

  8. #12 by renaissanceguy on January 14, 2011 - 23:54

    Rothbard a racist? Bah!

    Since everyone who disagrees with the Left is branded a racist, the claim has practically no meaning.

    In some theories every caucasian person is a ractist, so, again, the claim has no meaning.

    • #13 by Scott Erb on January 15, 2011 - 00:18

      Statements like “everyone who disagrees with the left is branded a racist” are a bit over the top, RG. You also were afraid anyone who disagrees with Obama would be called a racist, but he’s gotten the usual treatment from both left and right, and no one has been hurling charges of racism that I’ve seen. In doing a small bit of on line research, it appears Rothbard wanted to stir up resentment in middle class against the lower class and the state, and that often entailed racially charged language. From what I read, I don’t have much respect for the man’s tactics, and makes it seem like he will say whatever it takes to advance his ideology. That does make me skeptical of his argument.

      That still doesn’t prove his wrong, but like I said, I certainly think a dose of skepticism is in order. Certainly citing his theory is not enough to disprove all the work that’s been done studying and trying to explain the depression. There are still numerous debates about that, and I don’t think there is a simple explanation that fights neatly into any one ideology, left right or other.

    • #14 by classicliberal2 on January 15, 2011 - 07:40

      Interesting that, of all the things I wrote of Rothbard, you chose only this. As for this, his first major involvement in politics was as an enthusiast of Strom Thurmond’s presidential bid–its single issue being “Segregation Forever”–and one of his last was as an enthusiast of Klansman David Duke. And that’s before we get to the colorful descriptions he would offer of what he condescendingly dubbed the “Officially Oppressed” (he also reportedly described the Holocaust as merely propaganda drummed up after the second World War in order to rationalize U.S. involvement in it).

      Not a good fellow.

  9. #15 by renaissanceguy on January 15, 2011 - 14:04

    I’ve read the attacks on Rothbard before. They mean nothing to me. When it came to politics, Rothbard was actually all over the map. Even some of his friend and supporters could not understand some of his political choices. However, to discount his economic theories based on his associations or his presumed bad character is argumentum ad hominem.

    Other economists, such as Milton Friedman, placed some of the blame for the Depression on monetary policy and interventionism by the Hoover administration.

    Scott, yes, I exaggerated. It is hard to come across facetiously on a blog, but I was being somewhat facetious. I personally have been in discussions with some leftists who (1) believed that all white people were inherently racist and (2) believed that all members of the right an all Republicans were particularly racist. I know that not all left-leaning people believe that, but it is something that is espoused among people on the left. I’m sure that you will agree that far.

    Because that is a common idea, I am skeptical of anyone’s argument who tries to defame somebody with the charge of racism. I have been called a racist, but I am not one. (Often the response to my statement is that people who deny that they are racists probably are.)

    • #16 by Scott Erb on January 15, 2011 - 14:08

      Reminds me of Monty Python’s “Life of Brian.” Brian denies that he is the messiah.

      “Only the true messiah would deny his divinity” a woman says.

      “Well, where does that leave me?” Brian asks, perplexed. “OK, then I am the messiah.”

      They of course go on to worship him as the messiah, against his will.

    • #17 by classicliberal2 on January 15, 2011 - 18:41

      “…to discount his economic theories based on his associations or his presumed bad character is argumentum ad hominem.”

      To be blunt, your rejection of personal attacks would have a bit more force if it wasn’t offered in the same thread in which you dismiss, as some sort of empty smear, my pointing out Rothbard’s racism and insinuate I would throw such a charge against anyone who disagrees with me. There’s another interesting element of this thread: Out of everything I said about Rothbard, you pulled out that one item–his racism–to address, then, a few posts down, you’re accusing me of dismissing his economic “theories” based on his racism. That’s dishonest.

      If you want a link between Rothbard’s racism and his “economics”–not mistaken for economics by real economists–he was an enthusiast of “The Bell Curve,” which was old-school (as in Nazi-era) pseudo-scientific racist garbage, with no scientific merit. This fits Rothbard’s “economics,” because it’s pseudo-science, as well. Rothbard is of the Austrian School that rejects the scientific method (and was one of the most forceful among them in rejecting it).

      Milton Friedman is not an ally of Rothbard. Rothbard despised him, and his theory on the contribution of monetary policy and interventionism to the Great Depression is the opposite of Rothbard’s, and was explicitly rejected by Rothbard (and, it should also be said, Friedman’s theory is, itself, most kindly described as eccentric, and is largely rejected by economists).

  10. #18 by renaissanceguy on January 16, 2011 - 13:53

    I am out of my league when it comes to comparing Friedman’s views with Rothbard’s. I am not an economist. I simply wanted to point out that there is more than one view on the causes of the Great Depression.

    • #19 by classicliberal2 on January 17, 2011 - 00:00

      Actually, you were presenting, as the explanation for the Depression, Rothbard’s “theory”–again, he is a fellow who didn’t believe in the scientific method, so even using that word requires qualification. He didn’t “show” anything–he merely asserted things, and there’s no reason to take it seriously (as, indeed, no one does).

      I was trying not to get nerdy in dealing with their views on that subject. The short, simple version is the Rothbard placed most of the blame on inflationary policies by the Fed, while Friedman said the mistake was in failing to sufficiently inflate the money supply. It’s a boring topic, honestly, and while Friedman’s view is marginal, at best, Rothbard’s isn’t taken seriously by anyone.

  11. #20 by renaissanceguy on January 16, 2011 - 13:59

    Classicliberal, I apologize for implying that you would call somebody a racist just because you disagree with them. That was wrong of me. I did not even mean it in regard to you but in regard to the general accusations against Rothbard that have been thrown out by people on the left. It is unfair and stupid for me to assume that you are doing that yourself.

    Even though it is a bit off-topic, can you give reasons for saying that Rothbard was a racist, and not just that he supported politicians who happened to be racist? In addition, what is your definition of the word racist. To me it is quite simply a person who believes that his own race is superior to one or more other races.

    • #21 by classicliberal2 on January 17, 2011 - 01:06

      I’m in pretty bad shape just now, but I’ll give this the old college try. From some old notes of mine, Rothbard derisively described blacks, hispanics, women, etc. as the “officially oppressed.” He said membership in this group “entitles one to share in an endless flow of benefits–in money, status, and prestige–from the hapless oppressors, who are made to feel guilty forevermore, even as they are forced to sustain and expand the endless flow.” More bluntly, he called them a “parasitic burden” on the productive, a “parasitic Underclass” that is “looting and oppressing the bulk of the middle and working classes in America.” The rhetoric is no different than one would find at a Klavern meeting, and it’s no surprise that Rothbard supported politicians like Strom Thurmond and David Duke, whose single “issue” was their virulent racism.

      Rothbard praised “The Bell Curve” to high heaven. The book, to be clear, was nothing more than a pseudo-scientific crank tract on the theme of intelligence being a racial inheritance, the sort of thing that was cranked out by the Third Reich, and nearly all of the “research” its authors used as the basis for their “theory” came from a neo-Nazi outfit called the Pioneer Fund. To Rothbard, it expressed “in massively stupefying scholarly detail what everyone has always known but couldn’t dare to express about race, intelligence, and heritability…” In the process of praising it, he managed to also heap praise on some of the worst of those Pioneer “researchers,” including Richard Lynn, who casually talks about exterminating entire populations in the name of evolutionary progress, and J. Phillippe Rushton, a complete crackpot who argues that penis-size is a product of intelligence (with bigger cocks denoting dumber people). Rothbard calls Rushton “heroic,” and describes him as a martyr to communist repression of academia! At the same time, he trashes actual scholars like Stephen Jay Gould and Richard Lewontin “Marxist hatchmen” whose work had no value.

      • #22 by Scott Erb on January 17, 2011 - 02:42

        Hey, classicliberal, I hope you’re feeling better soon. Take care, and thanks for taking the time to write even when you’re not doing well.

        Also, I don’t know anything about this Rushton fellow, but from what you wrote, I strongly suspect one part of his body was rather tiny.

  12. #23 by renaissanceguy on January 17, 2011 - 07:59

    Classical Liberal, I appreciate your responses, especially in light of your unhappy state. I sure hope that whatever is going on is something that can get better, and I hope that it does get better soon. I mean that. I don’t care what your politics are, I do not like to see anybody suffer.

    Thanks for giving a bit of clarification on the difference between Rothbard and Friedman. It shows that I need to learn a bit more, and, if I can find the time, I will.

    From what you wrote about Rothbard, I would tentatively agree that he was a racist.

    I will say, on the other hand, that he was, as you describe him, technically right about people who are “officially oppressed.” We generally call them “protected classes.” Of course, it’s not about their race, per se, but about societal, political, and economic realities of the past. And I don’t feel the sort of resentment about it that Rothbard, as you describe him, did. Someday I hope that there is no need for dividing people up that way. I hope that there is true equality for everyone.

    I’m not sure that we will ever get there if we perpetually wage a “war on poverty” and perpetually focus on victimhood, but we are probably nowhere near ready to give up those approaches yet. I would like to see us phasing them out, though.

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