Compassionate capitalism

Making Capitalism Work was written by the late New York economic columnist, Leonard Silk, whose life ended tragically before the manuscript could be completed. His son Mark finished off the text with the aid of contributions by Robert Heilbroner, Jonas Pontusson and Bernard Wasow. The book addresses the challenge posed for world capitalism by the ending of the cold war. Although the collapse of communism might be seen as the "final triumph of capitalism", new challenges have emerged to take the place of the old.

In the authors' view, the major concern at a global level is how to sustain economic growth now that military spending can no longer be relied upon to ensure sufficient demand. They see the problem as compounded by two other factors. First, since the 1970s there have been signs that productivity is now growing at a permanently slower rate in the United States and the other industrial countries. This they see as due to a decline in the level of savings and investment. Second, the build-up of private and public indebtedness has undermined the ability of governments to use fiscal policy to create additional demand. The latest recession resulted from the "asset deflation" of the 1990s in countries such as the UK and Japan in the wake of a boom in property and stock market prices.

The authors see the solution as residing in a mixture of demand- and supply-side measures. First, the US and other industrial countries need to adopt measures that increase private savings and productive investment, while acting to eliminate national fiscal deficits. Second, there is a need for coordinated fiscal and monetary policies to ensure adequate demand at the global not just the national level.

A major theme of this book is that the world capitalist system is not a unitary system but a patchwork of different models each of which has been shaped by the history and culture of different regions of the world. Although integration has increased the degree of interdependency between these systems, the specific challenge facing each needs to be separately examined.

One of the fallacies of the Republican right in the US is seen to be the contention that only laisser-faire capitalism combines economic efficiency with freedom. The success of China's thriving market-based economy imposed on the back of a repressive one-party state demonstrates that markets and freedom need not always go together. On the other hand, the attempts to impose a western model of free-market capitalism on the former communist states of Eastern Europe has threatened economic disaster.

With regard to the latter case, the authors argue persuasively that it is not sufficient merely to replace the old centrally planned economy with one based on private ownership and market-determined prices. Alongside privatisation, there has to be some elements of "socialisation". The transition from a centrally planned to a market-based economy necessarily resulted in the closure of many firms which were no longer viable. However, if workers are not to become disillusioned with the new capitalism, measures are required by governments to create new employment for the workers so affected. The authors see a parallel here with the public-works programmes of the 1930s. Failing this, dying firms will be kept in business by ever-higher government subsidies which will add to the existing high levels of public borrowing and make the task of reducing inflation more difficult.

Another consideration is the need to provide public goods and services such as education, health, child care, etc, which were previously made available to workers through the state-owned firms which employed them. With the closure of many firms, millions of workers have found themselves deprived of these services. Unless governments act to protect the weak and vulnerable, popular support for capitalism is bound to be undermined. Indeed, a swing back to the former Communists has been a feature of the political scene in all of these countries. In Russia, a frequent joke is that the attempt to naively impose a western model of capitalism on the former Communist states has succeeded in doing overnight what the Kremlin failed to do in 70 years - make communism look good.

Next, the authors turn their attention to Japan. They see the Japanese model as having been based on a triangular alliance of government bureaucrats, elected politicians and businessmen. The system favoured producers over consumers while relying on export expansion for economic growth. This system served the Japanese well for several decades but its future can no longer be assured. The economy is in crisis with exports no longer able to sustain domestic economic growth. International pressure is forcing Japan to open its markets to increased competition. At the same time, the old triangular alliance is breaking down. Consumers are demanding a greater share of the fruits of prosperity and the business community has become more resistant to government direction and control. Japan, the authors conclude, will have to become more like her western trading partners.

The chapter on Northern Europe is written from the viewpoint of the American observer. It sees in the North European emphasis on high levels of social protection financed out of taxation the negation of the laisser-faire case for unfettered markets. The authors argue that, contrary to what defenders of the free-market model often claim, these economies have performed relatively well. Although this may be true, it should, however, be noted that most Europeans take a less sanguine view. In particular, the failure of the European model to deliver levels of employment comparable to those achieved in the US is widely regarded as justifying some retreat from the past emphasis on state intervention in the labour market and high taxes.

The authors see this retreat as reflecting a rightward shift in the political mood within Europe. This is not convincing. The recent victories of left-of-centre parties in Britain and France suggest the opposite. Moreover, there is now strong support for measures for a more flexible labour market in Europe from all sides of the political spectrum. High levels of unemployment and the commitment to full economic and monetary union make this an imperative.

I found this is an immensely moral and humanitarian book. It rejects the argument that government intervention is always harmful. It appeals for governments to play a part in standing up for the weak and disadvantaged. The advocacy of unfettered markets combined with minimal government intervention and reliance on private charity to protect the poor is rightly rejected as morally unacceptable. Nor do the authors see any support for the view that the exercise of social responsibility by the state results in impaired economic performance. It is, however, perhaps disappointing that the authors do not sufficiently address the matter of how large a public sector is compatible with stable prices and a high level of economic growth. This is surely the major issue which western governments are seeking to resolve as increasing claims on the public purse threaten to push up the level of taxes and public sector borrowing.

The book concludes with a look into the future. It examines two scenarios, one in which the world withdraws into hostile forms of nationalism and protectionism leading to a global economic collapse, the other in which world economic integration combines with vigorous economic development enhanced by strong international cooperation and protection of the environment. A more probable outcome is between these two extremes. A weakness is that the authors fail to discuss adequately the potential conflict between, on the one hand, increased government intervention and, on the other hand, the desirability of maintaining a high level of global economic integration. The more involved governments become in the economy (which the authors appear to favour), the more difficult it becomes to prevent policy-making from being captured by interest groups for protectionist purposes.

Although written from a Marxist standpoint, Capitalism from Above and Capitalism from Below makes similar use of the theme of capitalist diversity. However, the concern of this book is with the earliest origins of capitalist development as they manifested themselves in the countryside. The so-called "agrarian question" was a subject to which early Marxist writers (Engels, Lenin, Kautsky) paid considerable attention. The book involves a comparative study of the agrarian transition in two countries, Prussia before 1871 and the United States in the late 19th and early 20th centuries. These two experiences were used by Lenin to distinguish between what he called "capitalism from above" and "capitalism from below". Whereas in Prussia the feudal landlord class was effectively transformed into the new capitalist class, in America it was the peasant class which assumed this role.

Lenin dismissed the Prussian path as a reactionary one because it resulted in an agrarian system which for too long retained many of its feudalist features while becoming capitalist. This meant that the development of the productive forces was retarded. The American path was infinitely preferable because it allowed a freer and fuller development of the peasant economy.

Byres broadly agrees with Lenin's analysis of the Prussian experience but departs from him in his treatment of the American case. Instead, he concludes that there was no single American path. In the South, the transition took place from slavery through sharecropping to capitalism in a manner which lacked the freedom or progressiveness suggested by Lenin. However, in the North and West, there was a transformation from below achieved through the development of "petty commodity production" but without the dominance of wage labour argued by Lenin.

History shows that capitalist agrarian transition can take many different forms. We must avoid over-simplifying a complex process which exhibits a rich diversity of experience. In some countries, this may take the form of a revolutionary struggle initiated from below in which the emerging peasant class wrestles power from resistant landlords. As an unapologetic Marxist, Byers (like Lenin) clearly regards this as the most virtuous. However, in countries where there exists a large and powerful landlord class (the author suggests Latin America), a "landlord path" may be the more probable outcome. The lessons of history, however, warn against any presumption that this will repeat in any precise way the form of the Prussian experience.

This book contains some extremely thorough and careful historical research, for which the author should be applauded. Applying a comparative approach to the study of history, the book greatly adds to our understanding of the process of agrarian transition in developing countries today. Economic historians, political economists and development economists alike will benefit from a reading of this book regardless of whether or not they share the author's Marxist predilections. However, in its warnings against over-reliance on any one model of agrarian transition and its emphasis instead on the diversity of experience, the unconverted are perhaps entitled to wonder whether anything remains of the Marxist faith in inexorable laws of historical development.

Nigel Grimwade is principal lecturer in economics, Business School, South Bank University.