Nothing to be proud of

G. C. Harcourt heeds a view of capitalism's malign consequences.

For some, the past 20 to 30 years are seen as a triumph for democracy and free-market capitalism, not only because of the economic performances of societies with these characteristics but also because of the collapse of the USSR and the Eastern European so-called socialist economies. For others, though they never held any brief for those authoritarian, cruel, inefficient and often corrupt regimes, the performance of the economies of the democratic capitalist West has not been anything to write home about either. To have destroyed full employment as a goal or norm; to have greatly increased the inequality of income and wealth; to have created an underclass and destroyed the dignity, self-respect and hope of large numbers of citizens; to have substituted ridiculous rewards for paper asset swapping for just rewards for making real and useful things - none of these is an achievement of which any society should be proud.

In The Economic Horror , Viviane Forrester eloquently articulates the latter view with a sustained, passionate indictment of European societies and the US in particular. She is a novelist and journalist, not an economist, and her sometimes shrill and often ironic prose overstates what is nevertheless a real case. She argues that work as we know it and accompanying job opportunities are becoming things of the past; that high unemployment - to her, a misnomer - is inescapable, indeed likely to become worse, as though goods and services, albeit that they are produced with less and less inputs (it was ever thus), will still be produced even though the wherewithal to buy them is lacking. She may be forgiven her overstatements, first, because her eloquent cry from the heart relates to the modern wretched of the earth, the new underclass, as well as to the exploited toilers of the developing countries; and second, because her arguments echo sound economic arguments. Indeed, it may be argued that Forrester has combined insights that come from Karl Marx, Wassily Leontief and John Maynard Keynes.

From Marx, we get four basic propositions: first, that unless there is unemployment (the reserve army of labour, RAL) the sack is not an effective weapon. The RAL was deliberately recreated in most advanced capitalist economies from the 1970s on, under the guise of restraining inflation but really in order to reverse the shift in economic, political and social power from capital to labour that had occurred during the Golden Age of Capitalism. Monetarism was the incomes policy of Marx, as Thomas Balogh told us. The aim was also to create a cowed and quiescent workforce from which a greater surplus could be extracted for national and international accumulation. Third, Marx alerted us to basic contradictions at work, in this instance, the process of recreating the RAL also blunted the "animal spirits" of business people so that the potential surplus made available failed to be fully realised as accumulation fell away. Finally, when financial capital is not moving in tandem with industrial and commercial capital, we witness instability and crisis.

Forrester is overcome by the spectre of technological unemployment - technical advances drastically reducing the need for labour inputs per unit of output allied with the objective of the business class only to seek profit. But such fears have been expressed over the entire period of industrialisation and, by and large, though there were often specific cruel episodes for particular groups, alternative employment was eventually found for displaced people and resources. Is it different now? Both Forrester and Leontief think it may be. In the 1970s Leontief wrote an extraordinary essay on the disappearance of the cart horse. He pointed out that after vehicles took over the functions of the cart horse, soon cart horses were not there to be technologically unemployed because human beings controlled their breeding. But suppose that the nature of modern technical progress was such that the minimum skills needed to cooperate with the new machines were much higher than the characteristics that classify people as simple? Then unless there was a huge upswing in the demand for personal services (itself not obviously desirable), technological unemployment could emerge. Forrester has identified this possibility, perhaps overstating the orders of magnitude involved.

Finally, her descriptions of the workings of the stock exchange whereby the link between potential profits of the businesses whose shares and bonds are traded and the major determinants of their prices have virtually been cut. Instead, prices become determined by what people think other people think they will be, with speculators way ahead of the rest of us, a process akin to Keynes's famous beauty contest analogy.

While Forrester often goes over the top, she has identified factors at work in the modern interrelated world economic system that are grievously disturbing; the more so because it is neither the market's nor the new hero businessperson's role to cover for the bad social consequences of the trends. Hence we have the creation of the underclass and the blow-out in the unequal distribution of income and wealth against which, with few exceptions, economists have not spoken out. It is to be hoped that Forrester's sustained polemic strikes a responsive chord, for we shall ignore the truth in her message at our peril.

G. C. Harcourt is emeritus reader in history of economic theory, University of Cambridge.