well-focused mixed economies, that they must underperform, and that what
they offer is not what we want. It is worse yet. Laissez faire is leading us down a
well-trodden path to decline and even disaster.
Decline
Western history has witnessed a sequence of transitions of economic (and
most of the time, military and political) hegemony: in the ancient
Mediterranean, from Assyria to Egypt to Persia to Greece to Rome; centuries
later, from Italy to Spain to Holland and France to England to the U.S. In most of
these cases, at least in the last millennium, the dominant country was
supplanted not by a mortal enemy but by a country that had previously been
allied or neutral, or even by a former colony. The transfer of power occurred, not
as a result of an invasion or series of battles, but as a result of economic
exhaustion.
Even the greatest empire, Rome, did not escape the consequences of
economic exhaustion.
But the Empire, alas, was ruined. Its exhausted finances no longer enabled
it to maintain on its frontiers the compact armies which might have contained
at any point the thrust of the Germans driven back by Attila, whose hordes
were still triumphantly advancing towards the West, overthrowing, as they
came, people after people. Stilicho saved Italy only by leaving undefended all
the Transalpine provinces. The result could not be long delayed. (Pirenne, A
History of Europe, p. 27.)
In light of this history (and in light of the fact that hegemonic powers have
always had the arrogance to believe their hegemony would last forever) we may
wonder who will supplant us and what will be the cause of our decline to a
second- or third-rate power? Historical precedent suggests that the cause of our
decline is more likely to be our economic lassitude than the aggression of other
countries. So what is it that determines whether a country’s economy will be
vibrant or stagnant, whether the country will thrive or falter? What are the early
warning signs of secular economic decline?
It is characteristic of European history that the prosperity and even
dominance of a country can be linked to a large middle class, reflecting a broad
dispersion of wealth. One can point to seventeenth century Holland or
nineteenth century England or the U.S. in the middle of the twentieth century.
During the golden age of Amsterdam, it was “‘commonly said that this city
is very much like Venice. For my part I believe Amsterdam to be very much
superior in riches.’ At the upper levels of society, this observation of a
seventeenth-century English traveller could not be verified: patricians of
Amsterdam, at the end of the century, had, on average, little more than half the
assets of their Venetian counterparts. The Englishman, however, was more
impressed by the diffused prosperity which put peasants with £10,000 in his
way.” (Fernandez-Armesto, Millennium, p. 309.)
As a burgher complained: “‘Our peasants are obliged to pay such high
wages to their workers and farmhands that [the latter] carry off a large share of
the profits and live more comfortably than their masters.’” (Braudel, The
Perspective of the World, p. 179-80.)
Two hundred years later, the second half of the nineteenth century was
characterized by the economic, political and military hegemony of England,
which enjoyed a broad dissemination of wealth. “[A]s a French correspondent
writes, for ‘the poor man’s fortune [in the mass] in England is greater than the
rich man’s fortune in more than one kingdom.’” (Ibid., p. 607.) In addition to —
and perhaps because of — its broad dispersion of wealth, England had the
highest GNP per capita in the world, and by a wide margin.
Inversely, “By the end of the (twentieth) century Britain was probably the
least egalitarian of the core states — the bottom half of the population owned
less than 7 per cent of all the wealth.” (Ponting, The Twentieth Century, p. 151.)
Corresponding to this, by 1994 the U.K. had a lower GNP per capita than
Austria, Belgium, Denmark, France, Germany, Holland, Italy, Norway, Sweden,
or Switzerland. (Maddison, Monitoring the World’s Economy 1820-1992, p. 195, 197.)
A large and prosperous middle class has characterized our own era of
world economic dominance. Even in the nineteenth century our robust
economic growth was accompanied by a chronic shortage of labor. That led to a
wage scale higher than Europe’s and insured an increase in real wages every
decade. High wages moderated our wealth disparity and contributed to the
development of a middle class. (They also increased the incentive for industry to
invest in productivity-improving capital equipment.)
But our middle class is now under increasing pressure. Gains in the 1980s
and 1990s were limited to the wealthiest. To the extent that our middle class has
been able to maintain itself, it is because of a large increase in the number of twoincome
households. This is unlikely to continue, as 60% of married women are
employed.
Some of the pressure on our middle class is due to a development that
characterized European powers in early stages of their declines: the Italian citystates
of the late Renaissance, late sixteenth century Spain, eighteenth century
Holland, and late nineteenth century England. These all witnessed the growth of
multi-national banking and investment as a service sector producing enormous
profits for those with ready access to capital. Funding foreign enterprises that
would successfully compete with domestic industry resulted in an increasing
concentration of wealth in the hands of a few rich investors at the expense of the
working middle class.
“If one seeks the causes or the motives for Amsterdam’s decline, in the last
analysis one is likely to fall back on those general truths which hold for Genoa at
the beginning of the seventeenth century as much as for Amsterdam in the
eighteenth, and perhaps for the United States today, which is also handling
paper money and credit to a dangerous degree.” (Braudel, The Perspective of the
World, p. 267) A similar, contemporary, moral is drawn by Arrighi and Silver in
Chaos and Governance in the Modern World.
Carried in the wrong direction by our prevailing economic theory, we
appear to be sailing the same course. Could it be that our misguided insistence
that laissez faire is the only acceptable economic theory will contribute to our
secular decline? George Santayana (The Life of Reason) observed: “Those who
cannot remember the past are condemned to repeat it.”
As a culture, we seem to better reflect the wisdom of Henry Ford: “History
is bunk.”
Read More : HISTORY: THE EFFECTS OF ECONOMIC INEQUALITY
