Why Twentieth-Century Capitalism Was a Historical Anomaly (And a Dangerous One, Too)

Adam Smith, the father of capitalism (Creative Commons)

I f you ever need documentary evidence of how quickly technology has transformed modern society, look no further than late 1990s television. So many trends that define our era were getting started then. Reality television. Culture wars. Hyperpartisan politics. The Internet. It can be shocking to watch how these trends once looked to us before they mutated, cross-fertilized, and expanded to envelop our lives. Queue up an episode of Seinfeld or The X-Files or Buffy The Vampire Slayer, where a character (I forget who, and don’t care enough to find out) once informed us, “Did you know last year twice as many emails where send as regular mail?”

Nowadays we probably receive hundreds of times more emails than postal letters. Technological change, at least in the era beginning around the turn of the twentieth century, has seemed to have a kind of magic. It is the magic of exponential growth. Technology has developed and synthesized and compounded, building on past discoveries and applying itself ever more deeply to social structures and individual lives.

Writers like futurist Ray Kurzweil have even gone so far as to argue that the exponential growth of technology is a fundamental feature of human civilization, anchored in human rationality itself. As it continues its, in principle, infinite upward trajectory, humanity can expect to achieve true technological “singularities,” such as strong artificial intelligence, digital, and even biological, immortality, and other godlike potentialities.[1]

The problem with these kinds of predictions is of course that they cannot be interpreted as anything more than mere speculation, at least for any time in the near future. Unlike the case of exponential compound interest, where money operates in huge quantities and at a high level of abstraction, the past century or so is far too small a sample size of human history to feel any justification in applying exponential properties to the technological change we have observed.

The mere fact that the application of exponential growth to technology seems to lead, more or less logically, to an outcome like the notion of technological singularity really just means that the whole idea is more science fiction than rigorous philosophical or historical reflection. Yet, I want to suggest that this logic has fueled the neoliberal economic ideologies that inform our public policy and animate the consensus of our politics.

This logic is not harmless; in fact, I think it is profoundly dangerous. To see why, I’ll need to lay out the case for why we should be highly skeptical of this logic, and of the techno-optimism it leads to. Neoliberal ideology, after more than a century of extraordinary technological change, has achieved immense prestige and in many ways become the common sense of our politics. Thus, the burden of proof is typically on those who challenge it. At some point in the coming decades that burden must shift back to neoliberalism.

The Techno-logic Behind Neoliberalism

B efore discussing the reasons to be more skeptical of neoliberalism, let me first outline this logic I’ve been alluding to. The argument usually resembles something like the following:

  • Capitalism has certain unique properties that make it inherently more dynamic, innovative, and wealth generating that any other known form of economic arrangement. These include properties such as profit motive, competition, decentralized decision making, and individual freedom of choice
  • While the theoretical basis for this claim may be disputed in abstract philosophical discussions, capitalism needs no such conclusive defense because the history of the twentieth century proves its truth. Capitalist countries were far more successful at generating innovation, and as a result, widespread wealth and improvements in living standards.
  • This evidence suggests that the key to further social and economic improvements for everyone is to set free these inherently value-creating capacities of capitalism through deregulation, the elimination of government redistributive practices, and the application of free-market mechanisms to all economic activities within our society.
  • While the resulting economic inequality may annoy us, eventually all of us will benefit from it because the proverbial rising tide lifts all ships.

Given the orthodoxic character of how most elite political and journalistic figures treat the above logic, it’s hard to blame everyday citizens for thinking this outlook is widely shared among economists and other experts. But in fact many serious economists no longer believe this, though they may still think capitalism is the best option for the near future.[2]

Tomes have been written on this topic, but the basic reply to the above logic is simple: the time horizon of the twentieth century is simply too brief to justify the sort of triumphalism neoliberalism has laid claim to.

If we discover that the ostensible successes of capitalism in the twentieth century can be accounted for through explanations other than its supposed inherent properties, a whole other world of political economic possibilities — such as social democracy and green politics — suddenly becomes open for debate once again. And it turns out there are such explanations, and that they are quite powerful.

As we’ll see, capitalism, rather than driving the twentieth century explosion in wealth and living standards, was something more like an effective middle man for other much more fundamental causes, like population growth and a host of epochal technologies. While it may have been the most effective arrangement for that particular era, this no longer clearly remains the case today.

Capitalism — Just the Middleman

L et’s begin with a bit of reframing. It’s common to hear influential people talking about the Modern Era as essentially a more or less monolithic historical period, beginning around the time of the Industrial Revolution and proceeding on an absolute upward trajectory of economic and social development ever since. But most economic historians no longer believe this story. Instead, they see the period since the late eighteenth century as having several different eras that can be broken down in terms of technological change, political development, and economic arrangements.

The current era we live in probably began sometime around one hundred years ago. I would argue, however, that the last hundred years have involved two different eras, one beginning in the first few decades of the twentieth century and a second beginning around the rise to power of Ronald Reagan and modern neoliberal ideology. Let me explain the thinking behind this historical framework.

Scholars are increasingly coming to view the Modern Era as involving not one, but three, industrial revolutions. One of the ways this has been approached is by studying a very specific statistical measure of productivity, what’s called total factor productivity (TFP).

Total factor productivity measures growth in worker productivity after societal gains in education (e.g., worker training and acquisition of other relevant skills) and capital (e.g., manufacturing capacity, designated work spaces, equipment, etc.) are discounted. It is therefore thought to represent the purest measure of the contribution technological advances make to the economic productivity of a given society. It is also a measure that tends to closely track genuine gains in living standards, doing so far better than other measures of economic growth such as gross domestic product or standard worker productivity measures.

When we focus on this measure, a very different version of economic history begins to emerge. I want to focus specifically on Robert J. Gordon’s recent work.[3] Gordon’s work is based on a now fairly mainstream view in academic economic history that breaks down the era of modern capitalism into at least three more or less distinct industrial revolutions, all driven by the development of certain very powerful technologies.

The first industrial revolution (IR #1) followed the invention of the steam engine and other technologies during the period of 1770 to 1820. The second industrial revolution (IR #2) gave birth to an extraordinary set of wealth-expanding technologies that led to a literal fifty-year explosion (1920–1970) of total factor productivity (TFP) growth and improvements in living standards. The third industrial revolution (IR #3), involving the most recent information technology developments, has been significantly briefer and less dynamic.[4]

Gordon studied five distinct periods of TFP growth from 1890–2014. Three of the periods had relatively tepid average annual productivity growth: 1890–1920 (.46%), 1970–1994 (.57%) and 2004–2014 (.4%).[5] However, the periods following IR #2 and IR #3 had substantially higher average annual TFP growth.

Source: Robert J. Gordon, The Rise and Fall of American Growth (2016)

In particular, the period following IR #2 (1920–1970) saw incredible annual productivity growth (1.89%). Gordon argues that this is unsurprising given the types of technology involved, and the vast array of applications they spawned. The electricity grid. The light bulb. Indoor plumbing. Internal combustion engine. The telephone. Air conditioning. Major medical advances. The interstate highway system and commercial air transportation. Industrial agriculture and synthetic fertilizer. The list goes on and on.

According Gordon IR #2 impacted “virtually the entire span of human wants and needs, including food, clothing, housing, transportation, entertainment, communication, information, health, medicine and work conditions.”[6] Given how impoverished the human condition had been, and the vast array of technologies that intervened, it should come as no surprise that productivity skyrocketed and tremendous amounts wealth, economic growth, and improvements in living standards were observed during this period.

On the other hand, the period following IR #3 was less dramatic and its actual consequences for genuine human well-being have been less impressive. The personal computer and internet did offer a comparatively brief period (1994–2004) of markedly higher productivity growth (1.03%) but compared to the longevity and radically changed human circumstances ushered in by IR #2, it has been far less impressive.[7]

The period since has been one of comparatively stagnant productivity gains (.4%), and Gordon predicts even lower productivity growth in the longer term for developed economies.[8] Improvements in living standards very closely tracked these trends in TFP. Through about 1970, the Genuine Progress Indicator — a index that tracks both economic performance along with broader measures of well-being such as poverty, crime, health, environment, and education — fairly closely tracked the explosive growth in GDP of the era of IR #2. However it has since progressively trailed GDP growth — distantly so at this point — peaking around 1980, and stagnating ever since, despite productivity gains in IR #3 that should have led to some improvement in living standards.[9] Understanding the history of the last forty in many ways depends on explaining this fact.

After the Low-Hanging Fruit Get’s Picked

S o what happened? Productivity, and consequently, the economy, has continued to grow, even if less robustly than the era of IR #2; yet, living standards have only moderately improved. How did growth in standards of living become detached from growth in GDP? Essentially, along with the comparatively small gains in TPF, the economy continued to expand by introducing more workers into the economy, by forcing workers to work longer hours for stagnant wages, and by outsourcing for cheap labor outside the country.[10]

While virtually all developed countries sought to increase aggregate work hours through greater inclusion of female and minority workers, and through lenient immigration policies, many European countries have seen declines in annual hours worked per worker by as much 400 hours from 1973 to 2006.[11] The same source estimates that U.S. annual hours declined by only 32 hours through 2000, and has since only seen a drop to 78 hours below earlier levels because of recent economic downturns.

However, Juliet Schor considers these estimates to greatly overstate any real declines in hours worked. When this measure takes into account multiple jobholding and self-employment, it turns out that US workers now work an average of 204 more hours a year than they did 1973. While it is true household income has increased marginally, this is only because of the general rise in workhours and greatly increased female labor market participation.[12] As we’ve seen, median wages have largely stagnated in the decades since 1980.[13]

All this largely explains the substantially higher GDP levels America has had compared to most of the Eurozone countries, despite maintaining lower living standards by comparison. Rather than any supposed dynamism and innovativeness American capitalism is thought to possess, the American business and political establishment has mainly relied on a variety of draconian methods of forcing workers to continue working longer hours for without any substantial rise in wages (e.g., union busting laws and practices, attacking the expansion of public health insurance options).

Yes of course there has been some improvement in quality of life that came with the digital revolution. But relative to the drastic altering of the human condition that earlier generations witnessed, these improvements have been comparatively insignificant, mostly involving improvements in convenience and in greater access to consumer goods.

Where did all the wealth go that presumably was produced during this era? In essence, it all went to the super wealthy and toward cheaper consumer goods.

Real GDP per capita in the U.S. grew from around $28,500 in 1981 to $51,000 in 2011.[14] Yet during the same period, the percentage of U.S. GDP spent on consumer goods rose from 60% to 69%.[15] In 1986, America had more high schools than shopping centers; by 2005, there twice as many shopping centers as high schools. The U.S. spends more on jewelry, shoes, and watches than on higher education.[16] Since the 1970s, the average size of new homes has nearly doubled, from 1,350 ft² to 2,500 ft² (in the fifties, it was 950 ft²), despite the fact that families are smaller.[17] Most of this consumption has been done by the upper middle class and the rich, who have captured virtually all the wealth created during the last forty years.[18]

On the other hand, for the vast majority of Americans there is virtually no evidence whatsoever that their well-being has improved in any meaningful way. Real median household income — which doubled from 1948 to 1973 — has barely budged since 1980, even as the total number of household hours worked per week by husbands and wives have gone up significantly.[19] And as the costs of retirement, housing, healthcare, childcare, and college have skyrocketed, public supports and redistributive policy have continued to be scaled back — even as economic inequality skyrockets.

Broader social trends reflect this stagnation. We may look back on our parents and grandparents as having been deprived of the lifestyle our current circumstances afford us, yet there is no evidence at all we are happier than they were. Self-assessments of subjective wellbeing show that since at least 1972 trends in self-assessed happiness have remained virtually unchanged.[20]

Inevitable Inequality?

T o this point the story I’ve been telling has probably sounded like a Marxist conspiracy theory. The obvious implication of all is that the rich and power have highjacked the American political economy, rendering it profoundly inequitable and unjust. Is it really believable that the members of the upper class have had this much influence — and conspired this much — over the economy?

Well, yes and no. Yes, I do believe the rich and power have had quite a bit of influence over the past forty years’ worth of economic development. On the hand there’s a good chance this was almost inevitable.

That’s because, even beyond Gordon’s analysis of technological development, a number of unique dynamics of the twentieth century’s history allowed the benefits of that century’s economic development to be spread across an abnormally broad swath of population, resulting in an unusual level of economic equality. But when those unique dynamics began to abate, the nature tendencies toward economic inequality that has characterized most of human history began to reassert themselves. To demonstrate this, I’ll need to do a quick skim over Thomas Piketty’s work.

The central analytic tool of Piketty’s Capital in the Twenty-First Century is what he calls the capital/income ratio.[21] This is simply the ratio of a given society’s GDP in a given year to its total wealth. The dynamics of this ratio, across human history, offer several powerful insights about our recent past and future.

The first dynamic Piketty isolates is that when GPD growth is high, economic inequality tends to decrease in a society. There are a number of reasons way this is the case, and often they are unique to the situation. There is greater demand for labor, and the need to invest in new skills for those workers. Typically, as was the case in the twentieth century, higher levels of GPD growth are generated by the introduction of new technologies. These technologies tend to have the effect of creating dramatic changes in social structures, allowing for more social and economic mobility. Finally, these new technologies invariably end up dispersing throughout the society, from top to bottom, eventually improving the lives, health, and productivity of everyone.

Thus, not only did the raft of new technologies that drove twentieth century growth supercharge the economy, but it also drastically expanded the human population. Half of global GDP growth over the last century was due to population growth. Given that global population quintupled during the twentieth century, it should come as no surprise that economic growth also skyrocketed.

Let’s note something about the myth of capitalism’s supposed inherent productivity here. If Piketty and Gordon are right, capitalism did not create the explosion of economic development and equality during the twentieth century. Rather it was the outpouring of what Tyler Cowen calls technological “low-hanging fruit” that drove all of this.

What capitalism provided above all was the liquidity necessary to exploit IR #2’s extraordinary technological potential at a very fast rate, and in that sense, it was likely a more compatible political economic approach for that technological era than, for instance, communism. Whether this is still the case is less clear.

Without the equalizing dynamics that took place after IR #2, economic inequality has skyrocketed, while quality of life standards, real household income, and economic mobility have stagnated. While communism is probably still the wrong option, there is ample reason to suggest that public interests should now be actively pursued through redistribution by government. But it is a perverse reality that the dynamics of the capital/income ratio make this even less likely the more urgently it is needed.

This is because, according to Piketty, as GDP growth slows, the capital/income ratio tends to expand. By itself, this finding is not necessarily regressive, since, like income, capital ownership could conceivably be distributed in a highly egalitarian manner. However, Piketty shows that this is almost never the case. It appears to be a fundamental “regularity” of the human condition that capital ownership is always much more unequally distributed than income.[22] In Piketty’s words, “[W]e find this regularity [of more concentrated capital ownership] in all countries in all periods for which data is available, without exception, and the magnitude of the phenomenon is always quite striking.”[23]

The consequences of this state affairs were predictable. In the years following 1970, those who controlled capital would use their growing economic power, and consequential political influence, to continually shift the application of investment priorities and public policy toward the maintenance of high profit rates, return on investment, and GDP growth, with little regard to the actual quality of that growth in terms of social well-being and sustainability.

Political leaders were largely complicit in project, believing that higher levels of GDP growth were necessary for low unemployment rates and the continuance, in some form, of expanded government services. But as we’ve seen, the result was merely the stagnation of most people’s economic fortunate, while the rich, and to a lesser extent the upper middle class, saw their economic situations continue to improve — in the case of the rich, quite dramatically.

You Can‘t Go Back — And Trying Makes Things Worst

T o be clear, I am not suggesting that market-based political economy should be abandoned. Markets, and their constitutive price mechanisms, are among the most efficient ways to communicate information about economic value, and at the household level, the individualized judgments markets encourage are much more appropriate.

What I am suggesting, however, is that the unique circumstances of the twentieth century has lent this form economic arrangement far more prestige than it deserves. And this has had a number of unfortunate political consequences — consequences that remain with us to this day.

The most obvious consequence has been to lend neoliberal politicians and political thought a powerful moral force. Especially in the context of Cold War superpower competition, the Republican Party has been able to claim that their support for deregulation, supply-side economics, and the application of unfettered free-market competition to all aspects of society is on the right side of history. Fuzzy left wingers who advocate moderate redistribution and an effective social safety net are written off as historically ignorant, their good intentions ultimately leading them to naïvely undermine the long-term benefits that that only unfettered capitalism can provide.

This is not just a matter of political rhetoric. It has underpinned a potent intellectual movement — a movement that underpins the entire movement conservative system — which is now better developed and more compelling than ever before. Libertarian political thought once revolved around individualist property-rights ideals, such as that of Robert Nozick and Ayn Rand, whose deficiencies in terms of the public interest were relatively obvious.

Now, current center-right political thinkers, such as Deirdre McCloskey, Jason Brennen, Peter Thiel, and John Tomasi, have recently begun referring to themselves as bleeding-heart libertarians — the implication being that their support for libertarian political economy is solely due to their belief in its socioeconomic superiority to social-democratic economic arrangements. Indeed, Tomasi’s rather brilliant recent book explicitly utilizes archliberal philosopher John Rawls’s own principles of justice to defend a radically libertarian political economic philosophy.[24]

The result has been that even as modern capitalism has run amok — birthing absurd levels of political economic inequality while forcing workers and the poor to accept, at best, economic and social stagnation, and all the while dependent on unsustainable resource consumption and the destruction of the Earth’s climate and ecosystem — other potentially more equitable and sustainable political economic possibilities have been forced off the agenda of public discourse.

In essence my claim here is not that capitalism does not deserve its place in the public sphere, but rather that its success, it turns out, has not been nearly as phenomenal as is widely believed. The overwhelming prejudice in its favor is simply no longer justified. There should consequently be a far more robust attempt to reevaluate other economic arrangements and policies. I personally have great interest in exploring green, social-democratic, localist, and participatory economic arrangements, but in principle I’m open to whatever works. (Dirty secret: I’m a huge fan of Robert Nozick’s Anarchy, State, and Utopia.)

We now live in a world where, despite having access to near godlike technological capacities, compared with previous eras, the vast majority of human beings have less agency than ever before — if, that is, we mean by agency the capacity to affect our communities and circumstances as expressions of our individual freedom.

Very briefly, perhaps through the 1990s, the globalist political economic order was viewed as the dawn of the final redemption of human freedom. History, Francis Fukuyama claimed, was now at an end. But it is increasingly clear — as the right-wing political movements once thought to be conclusively discredited have begun sweeping across the Western world — that this is simply not the case.

These movements — regardless of their racist, sexist, or theocratic framing — are ultimately motivated by an intuition common to powerless people on the left, right, and center: A lost sense of agency. A feeling that we are powerless to control the world in which we live.

And as this world, at the behest of global capitalism, increasingly heads toward unsustainability and global warming, this loss of control will take us well beyond erosion of agency and living standards. For billions of people it will soon become a matter of survival. If the resurgence of the political Right concerns us now, wait until these billions begin arriving in our communities, en masse, as climate refugees.

For years we have been told capitalism is the goose that laid golden eggs, that it was the engine of freedom, wealth, and development. All we needed was to free it to do its work. We now know that vision to be false — or, at least, deeply misleading.

[1] Raymond Kurzweil, The Singularity Is Near: When Humans Transcend Biology, (New York: Viking Press, 2005).

[2] Robert M. Whaples, “The Economic Future: An Introduction,” Independent Review, 20, no. 3 (Winter, 2016), 325–34: http://www.independent.org/pdf/tir/tir_20_03_01_whaples.pdf.

[3] Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War, (Princeton: Princeton University Press, 2016).

[4] Ibid., 319–320ff, 574ff.

[5] Ibid., 575.

[6] Ibid., 320.

[7] Ibid., 575

[8] Ibid., 579–604, 641ff.

[9] Rob Dietz and Dan O’Neill, Enough is Enough: Building a Sustainable Economy in a World of Finite Resources, (San Francisco: Berrett-Koehler Publishers, Inc., 2013): 119.

[10] Wolfgang Streeck, Buying Time: The Delayed Crisis of Democratic Capitalism, (New York: Verso, 2014).

[11] Juliet Schor, True Wealth: How and Why Millions of Americans Are Creating a Time-Rich, Ecologically Light, Small-Scale, High-Satisfaction Economy, (New York: Penguin Books, 2011): 105, 166–67.

[12] Streeck (2014), 53.

[13] John de Graaf, David Wann, and Thomas H. Naylor, Affluenza: How Overconsumption Is Killing Us — and How to Fight Back, 3rd Ed., (San Francisco: Berrett-Koehler Publishers, Inc., 2014): 38.

[14] Federal Reserve Bank of St. Louis. Source: U.S. Bureau of Economic Analysis. (Accessed: 15 July, 2016): https://fred.stlouisfed.org/graph/?g=hh3.

[15] Federal Reserve Bank of St. Louis. Source: U.S. Bureau of Economic Analysis. (Accessed: 15 July, 2016): https://fred.stlouisfed.org/graph/?g=hh3.

[16] de Graaf, et al (2014), 15.

[17] Ibid, 19.

[18] Matthew Stewart, “The 9.9 Percent Is the New American Aristocracy,” The Atlantic, June, 2018 (Accessed: Sept. 9, 2018): https://www.theatlantic.com/magazine/archive/2018/06/the-birth-of-a-new-american-aristocracy/559130/; Cf. Thomas Piketty, Capital in the Twenty-First Century, (Cambridge, MA: Harvard University Press, 2014).

[19] Martin Ford, Rise of the Robots: Technology and the Threat of a Jobless Future, (New York: Basic Books, 2015): 35.

[20] Whaples (2016), 330.

[21] Piketty, (2014), 1–11.

[22] Ibid., 244.

[23] Ibid., 244.

[24] See, for example, Tomasi’s Free Market Fairness, (Princeton: Princeton University Press, 2012).