DESPITE the First World War ending the previous November, the year 1919 was a very bad one. For example, the UK entered what was by far its deepest ever economic recession.

Output fell some 25 per cent between 1919 and 1921 as the economy attempted to adapt to peacetime conditions. The troops had been promised “homes for heroes”, but many of them received the dole instead.

Globally, the influenza virus which killed between 50m and 100m people in the years from 1918 to 1920 was in full swing. Scaling this up to the present day would give a figure of between 200m and 400m deaths.

Given the nature of much of the comment in the mainstream media, we might easily think that similar disasters were affecting us in 2019.

On the contrary, there is a great deal to celebrate.

In the UK, real GDP per head is now some five times higher than it was a hundred years ago. Even poor people today are comfortably off by the standards of 1919.

Life expectancy in 1919 was 55 years for men and 59 for women. Now, a new baby can expect to live at least 25 years longer.

Across the world, we see inequalities in living standards between countries being eroded. Then, only a small handful of western countries could be described as rich by the standards of the time.

Now, more and more nations are joining the club. Literally billions of people have escaped lives of unremitting drudgery, at income levels close to starvation.

All this has been brought about by the institutional structure of capitalism, of companies motivated, at least in part, by profit, operating in a market-oriented system.

Yet, incredibly, capitalism is under attack, often by those who are some of its most conspicuous beneficiaries. According to a 2018 YouGov poll, only 30 per cent of Americans aged under 30 had a favourable view of capitalism.

This is precisely the group which lives and breathes capitalism, not just through its material consumption, but through popular culture.

Last week, I was in New York and visited the Whitney Museum to see a stunning exhibition of Andy Warhol’s work.

It was Warhol who said: “in the future, everyone will be famous for 15 minutes”. He describes, prophetically, the world of the internet, in which self-styled anti-capitalist young people blog, tweet, and work their apps furiously to try to get their own 15 minutes’ worth.

The difference between capitalism and socialism is neatly captured in a video of the group Boney M currently available on YouTube. In the years around 1980, the band was massive, selling some 80m records with hits such as Rivers of Babylon and Daddy Cool.

In the video, the group is playing at the Sopot Festival of Culture in the then Communist-controlled Poland in 1979. The artistic audience gaze open mouthed at their exotic performance.

Socialism offered the Red Army choir and “Song of the Partisans”. Capitalism had Boney M.

A real effort is needed to re-educate people. Capitalism offers not just material wealth, but exciting popular culture as well.

As published in City AM Wednesday 16th January 2019

Image: In the future… by Brian Solis under CC BY 2.0

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Image: Berlin Wall by Flickr is licensed under CC BY-SA 2.0

 

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Image: Car Factory by Jens Mahnke is licensed under CC0.0

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Image: Tightrope by Tom A La Rue is licensed under CC by 2.0

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The great Harvard economist Joseph Schumpeter, writing in the 1940s, predicted the eventual demise of capitalism. He did not want this to happen. But he envisaged that the “intellectual class” would eventually develop values which were hostile to free markets and private property.

Schumpeter’s definition of “intellectuals” was very wide. He meant people in a position to develop critiques of the economy and society, but who were themselves not responsible for running them.

The social science and humanities departments of almost all British and American universities fit this description perfectly. Even though capitalism offers them a standard of living far superior to that of any alternative system, they appear only too keen to undermine it.

The idea pervades these departments, for example, that the prosperity of the West depends upon slavery. It is this which underpins the current fashion for wanting to pull down statues of historical figures, including Britain’s greatest naval hero, Admiral Nelson.

One of the things on which the success of the West actually does depend is what we might call the empirical mode of thought. Put more simply, a theory is only any good if it is tested successfully against real life evidence.

Slavery still exists even today. In Mauretania, slavery was not abolished until 1981. Today, 1 in 25 of the entire population are estimated to be slaves. Yet Mauretania is not rich. Indeed, it is one of the poorest countries of the world.

For thousands of years, slavery has been widespread. The economy of the Roman Empire was essentially based upon stupendously large estates, all worked by slaves.

Yet none of these societies ever became rich. It is only under capitalism that this has happened. So the idea that slavery makes a society prosperous is rejected very decisively by the evidence. But this does not stop it from being almost an article of faith amongst many British academics.

Ludicrously, many of these people describe themselves as “socialists”.

The point simply cannot be made too frequently that we have seen several major natural experiments, which contrast the empirical performances of economies based upon market oriented principles with those based upon the planned economy principles of socialism.

The United States and the Soviet Union, West and East Germany, South and North Korea, India and China under different forms of socialism until the 1980s and India and China under different forms of capitalism since then. Venezuela is but the latest example. Capitalism wins decisively in every single case.

Countries such as South Korea which were very poor in the mid-20^th century and which have adopted the principles of market oriented economics have since flourished.

Economists enjoy arguing amongst themselves. But the profession in general believes in private property and markets as the basis for prosperity. Empirical studies, rather than pure theory, have become much more important within economics in the past 20 to 30 years.

Economists need to take a bit of time out to confront their common enemy. Namely, the unscientific output of many social science departments in British universities.

Image: Berlin Wall by US Dept of Defense is licensed under CC by 2.0

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Ten years ago, the financial crisis began to grip the Western economies. During the course of 2007, GDP growth slowed markedly everywhere. By the end of 2008, output was in free fall.

A key theme in economic commentary is the sluggishness of the subsequent recovery of the developed economies.

The picture is not quite as bad as it is usually painted. True, last week the Office for National Statistics announced a dip in UK growth in the first quarter of this year. But from 2009, the trough of the recession, to 2016, GDP growth averaged 2.0 per cent a year.  Not exactly a stellar performance. But from 1973, the year prior to the major oil price shock, to 2007, the British economy expanded by just 2.3 per cent a year on average. The contrast between the two periods in the US is slightly greater. From 1973 to 2007, growth averaged 3.0 per cent a year, and since 2009 it has been 2.1 per cent.

There is a very stark contrast with the experience of the 1930s, the last time there was a global financial crisis. This time is different, things have only got better. The recovery may be slower than desirable, but it has been much more widespread than in the years following the Great Depression of the 1930s.

A decisive indicator is the length of time it took not just for growth to resume, but for the previous peak level of GDP to be regained.  So in the UK, for example, the economy started to grow again in 2010. But it was not until 2013 that there had been enough growth for the economy to get back to its 2007 size.

Looking at a group of 18 developed economies, which includes all the main and medium sized ones, GDP had regained its previous peak within 3 years in no fewer than 8 of them. By 2016, everyone in the group except Finland, Italy and Spain had a GDP which exceeded its previous peak.

Three years after output began to fall in 1930, not a single economy had managed to regain its 1929 level of output. Even by 1938, output was below its 1929 level in Austria, Canada, France, the Netherlands, Switzerland and Spain.

Perhaps Keynes’ most powerful insight was why the slump was so prolonged. He developed the concept of “animal spirits”, which are not a mathematically based prediction of the future, but the sentiment of the narratives which companies form about the future. He wrote: “the essence of the situation is to be found in the collapse of animal spirits…. this may be so complete that no practicable reduction in the rate of interest will be enough.”

Zero interest rates and low growth! Keynes got there before us.

Still, capitalism has performed much better in the aftermath of the financial crisis of the late 2000s than it did in the crisis of the early 1930s. Animal spirits may not be buoyant, but they are in much better shape than in the 1930s.

As published in City AM Wednesday 2nd May 2017

Image: Day 20 Occupy Wall Street by David Shankbone is licensed under CC by 2.0

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