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Capitalism is not the Opposite of the State
by Ulrike Herrmann
Monday Sep 30th, 2013 2:44 AM
Without the permanent intervention of the state, there would be no functioning capitalism. No economic branch depends on the state like the financial branch. The deregulation since the early 1980s was based on the trick of slandering state regulations as strait-jackets that could strangle the free development of the financial markets and the economy. Capitalism is an extremely volatile system that tends to periodic crises.

By Ulrike Herrmann

[This article published on 9/17/2013 is translated abridged from the German on the Internet, Ulrike Herrmann is the economics editor for Die Tageszeitung. In her new book “Der Sieg des Kapital: How Wealth Came into the World” The History of Growth, Money and Crises” Ulrike Herrmann emphasizes we live in capitalism, not in a market economy and that the two are not the same. Capitalism is very dynamic and cannot survive without the state. However voters, businesspersons and politicians always misunderstand this connection which leads to dramatic mistakes affecting all of us. Therefore only the one who knows how the “triumph of capital” developed and develops can unmask the lies of lobbyists.]

The state is all-pervasive in capitalism. This connection is so obvious the question is raised why market liberals stubbornly ignore this.

Neoliberals always imply the economy could be gagged by the state and has to be liberated from this political dictatorship. Historically this is a completely distorted picture. Capitalists had the say politically in the early forms of capitalism…

The money-aristocracy governed in the Italian city-states Venice, Florence and Genoa… After America’s occupation in 1492, trade shifted to the West but merchants ruled the cities of Antwerp and Amsterdam. “Capitalism only triumphed when it6 was identified with the state and when it was the state.” So the French historian Ferdinand Braudel summarized this phenomenon.

Though small in surface area, commercial centers were regional and sometimes even global superpowers. Both Venice and Genoa had many colonies in the Mediterranean area. Amsterdam merchants extended their influence to Indonesia in that the Dutch East India Company was founded and vested with state authority.

Up to the 17th century the great commercial centers dominated world trade but were like little capitalist islands in a vast ocean of feudal states. This changed in the 18th century. For the first time, a whole nation was governed by capital interests. The “Glorious Revolution” of 1688/89 was the symbol for this change. The “Bill of Rights” guaranteed extensive rights to the parliament which whittled down the power of the king. Formally England was a constitutional monarchy but the right to vote was coupled to having a minimal wealth.

A small elite consisting of the landed gentry and merchants dominated the English parliament and ensured that British politics served their economic interests. Not accidentally they selected the right king for that…

The English merchants did not suffer under their monarchs. Promoting the economy was part of the program of the English kings since the 16th century, as Adam Smith explained in 1776:

“Since the rule of Elisabeth, English legislation helped the interests of trade and manufacturers. In reality, there is no country in Europe except for Holland where the law is so well-disposed towards this kind of industry.

The English example soon set a precedent. That they had to promote their economy if they wanted to survive the permanent wars in Europe was clear to the other European sovereigns. Armies were expensive and could only be financed by a prospering economy. Therefore the so-called “mercantilism” spread all over Europe from the 17th century. This led the rulers in nearly all countries to build manufacturing plants and increase the exports of their countries. Mercantilism was never a self-contained theoretical concept. Cooperation between state and economy was close. Most kings had middle-class advisors who explained to them how commercial life functioned. The Russian tsar Peter the Great even traveled to Holland under a false name in 1697 to work on a dock and study the economy of this rich trading nation.

The birth of modern capitalism was also owed to state assistance.

This brief historical sketch showed that capitalism always enjoyed state aid and did not arise against the state. The role of the state fundamentally changed in the 19th century when the industrialization of modern capitalism began. Mercantilism struggled with producing growth in a largely stagnating economy. With industrialization, the problem was reversed. Then there was growth but the rapid technical development had unexpected social consequences that only the state could manage.

For capitalism to develop, the population had to be better educated, universities founded and research financed. The exploding cities had to be planned and managed; streets and railroads had to be built. Potentially dangerous products had to be monitored, the safety of factories controlled and environmental damages avoided. The state was suddenly sought everywhere. Central technical developments would not have occurred if the state had not helped. As one example, entering the electricity business was only profitable for the German Edison Company because the city of Berlin was a reliable customer and signed a franchise contract with the firm in 1884.

The state had to ensure that the population would bear up under the technical change. “Prosperity for everyone” sounds good but the constant advance in productivity is also an imposition. Knowledge becomes outdated, once secure jobs disappear and everyone cannot win in the conflict around the best jobs. The sociologist Karl Otto Hondrich described the dialectic of progress very beautifully:

“Competition generates inequality. Even when everyone increases their output, some are condemned to fail. The success of one is the failure of the other. Improved performance leads – sooner or later, here or there – to performance-breakdown. This performance-breakdown law is the fundamental paradox of the competition society, a progress-trap from which there is no escape… Every improved individual performance in competition is based on a collective pre-achievement. Society must say yes to performance-breakdown!”

The result is well-known. All western countries have introduced a state unemployment insurance and income support to cushion the greatest hardships of capitalism. The growing importance of the state is reflected in the so-called state share, the portion of public spending measured by the annual economic output. This state share has increased rapidly. If it was five to seven percent in the Hapsburg Empire, it reached 15 to 20 percent in the Weimar Republic – and amounted to 45.3 percent in 2011.

On first view this could imply that state spending will constantly climb steeply. However state spending actually remained at a nearly unchanged level for almost 40 years. In Germany the state share in 1975 came to 48.8 percent. Since then the reunification had to be financed. Thus the worry that a Moloch called the state could crush the supposedly tender plant named capitalism is completely unjustified.

The basic neoliberal assumption is false that growth is only possible when the state is kept out of the economy as much as possible. Although Austria has a state share of 50.5 percent, it6 has grown more intensely than Germany in the last years. Between 2001 and 2010, the Austrian economy grew annually at an average 1.6 percent while Germany only posted 0.9 percent. Switzerland seems to represent the opposite case since it realized an average growth of 1.7 percent even though its state share is only 34.5 percent.

Comparing absolute growth rates is somewhat misleading. The question how many persons share the economic output is crucial. Remarkable differences exist between the three states. In Germany, the number of citizens has declined slightly and is now 80.2 million while Switzerland gained 800,000 people in the last decade and now has eight million inhabitants with the ten percent increase. In the same time, 400,000 persons migrated to Austria so the number of citizens rose five percent to 8.4 million. More people mean more consumption. That an economy grows by supplying additional immigrants is completely logical…

How did the Swiss successfully force down their state rate to an astonishing 34.5%. This share fluctuates between 45 and 55 percent in nearly all other western European countries. The answer is privatization. Swiss health insurance and part of old age provisions are covered by private businesses – and thus not included in the state share. From the view of a Swiss employee, this is nothing but a card trick because he/she has to pay insurance. The Swiss business association has calculated how high the Swiss state share would be if the privatized social security were considered. That share would be far above the German level.

Being fixated on the state share and forcing this share down as much as possible was a popular Europe-wide neoliberal sport in the last years. However this sport only succeeded with statistical tricks. The “genuine” state share is high in all western countries, whether social democrats or conservatives govern. This is not a surprising diagnosis. The state must be an essential part of capitalism. Otherwise this capitalism must collapse at once.

The supposedly free markets are markets on which the state centrally determines prices.

The “financial markets” would not even exist if the state did not intervene in a supporting and regulating way. The history of the first banks made this clear. These banks arose in Italy in the 14th century to manage the public debts, not to take private deposits. This close cooperation was very obvious from the view of Italian traders. Since they ruled the cities, there was no separation for them between state and private. Even stock corporations were not originally private enterprises. The first worldwide stock corporation was the Dutch East India Company of 1602 which made its profits by having a state guaranteed monopoly on foreign trade with Asia.

The stock exchanges also had little to do with private enterprise although they are regarded as the incarnation of the free market. In 1611 the first worldwide securities exchange arose in Amsterdam. At first this only had the goal of increasing the “liquidity” or sales of government securities…

Since then transactions on the financial markets have been strongly diversified. Many investors would be at a loss today if they could not speculate with government securities. The return on government bonds is astronomic… In one year, every bond is bought and sold more than five times.

Foreign exchange trading with a daily worldwide volume of four trillion euro is more popular. Economically this big casino is entirely superfluous. Currencies have no value in themselves thought his is gladly forgotten. Money only keeps its purchasing power because it is monitored by the government. In all countries, central banks set the interest-level to ensure the money supply does not explode. Interest is nothing but a price – for credits that still constitute the core business of the financial markets. Thus the supposedly so free financial markets are markets on which the state centrally determines prices. A person from Mars would probably think financial markets could be classified as socialism.

This Mars person would not be wrong since the big banks and funds enjoy a unique privilege. The state almost always bails them out when bankruptcy threatens. The real economy would suffer immediately and the financial markets collapse with the bankruptcy of an important bank. Thus the state has to intervene to avert a crash. This implicit state guarantee is enormously lucrative for investment banks since they live in a world that can be described as a perverse mixture of socialism and capitalism. Losses are socialized and profits privatized.

Without the permanent intervention of the state, there would be no functioning capitalism.

No economic branch depends on the state like the financial branch. Ingenious marketing enables that branch to represent itself as far from the state. The deregulation since the early 1980s was based on the trick of slandering state regulations as strait-jackets that could strangle the free development of the “financial markets” and the economy. In her first great address after the “Big Bang,” British Prime Minister Margaret Thatcher condensed this neoliberal worldview into a single sentence: “The controls that get in the way of success are gone.”

As the word “success” implies, failures were not included which was astonishingly unrealistic. Capitalism is an extremely volatile system that tends to periodic crises. Often they are only normal economic depressions but severe depressions can also be triggered by the herd-conduct of financial investors. The state is sought again as soon as growth comes to a standstill. Then neoliberal entrepreneurs gladly claim government assistance. The latest example was the “clunker premium” that should drag the automobile industry through the financial crisis in 2009 at a cost of five billion euro to German taxpayers.

Firms also profit indirectly in addition to these direct subsidies. Public expenditures stabilize the economy in crisis times although market actors like to criticize the allegedly excessive state share. Pensions continue running, the unemployed are supported and health insurances do not restrict their benefits. These “automatic stabilizers” guarantee a base income that ensures for consumption, sales and jobs while firms scale down their investments and capacities.

If the German economy only consisted of private businesses, it would largely collapse in every crisis. The 19th century is a frightening example when there was no social security and the state did not intervene. In the German iron industry, 40 percent of all workers were dismissed after the 1873 industrial expansion crash.

The state is all-pervasive in capitalism because no functioning capitalism would exist without its permanent intervention. This connection is obvious. Why do market liberals stubbornly ignore this?

One answer may be that the idea of the market is infinitely comforting. Only the individual counts who depends on his/her own work and does not have to constantly worry about the great whole. There everyone is the creator of his/her own happiness and only assumes responsibility for his or herself and his/her family. This fairy tale is simply too beautiful to be abandoned.

The self-esteem of the privileged is greatly flattered when they can ennoble themselves as achievers instead of having to question the social condition s of their wealth.

Whoever sees videos today with Margaret Thatcher is amazed how stiff she was. Her speeches seemed as though she learned them by heart. Nevertheless they developed a suction because the British Prime Minister could tell the fairy tale of the free market and the free individual perfectly. In 1986, for example, she justified the selling-off of the public water supply with these words:

“All politicians have dreams. My dream is that I will return power and responsibility to the people and give people and their families the feeling of independence again. The great reform of the last century was to make more and more citizens into voters. People’s capitalism is a faith campaign: a crusade that liberates and enables many to share in Great Britain’s economic life. People need incentives; they need responsibility; they need freedom and dignity that moves them to call something their own… The strength of our politics is that it rests on the sound instinct of our people – an instinct for property, frugality, honest work and fair pay.”

Everyone would like to live in this world of intellectual property but unfortunately it is only a beautiful fairy tale. In reality a few financial investors pocket monopoly profits while the British railroads and waterworks go to ruin.

However the state is not only put in question because it supposedly exercises too much power and whittles down the freedom of its citizens. The state is reproached for the exact opposite. The nation state is seen as powerless – as an historical relic that is anachronistic in times of globalization. To many of its citizens, the state appears as out-of-touch and old fashioned since it squats on its clod of earth while goods and finance capital stream freely around the world. The word “globalization” appeared in the 1990s. Many people think the phenomenon must be as young as the word. That is an error. Globalization is old, perhaps as old as the hills. When the state loses influence and wages fall, the reason cannot be globalization.