February 04, 2013

Alternatives to Capitalism: When Dream Turned to Nightmare

Writing about web page http://cpasswarwick.wordpress.com/overview-2/peking-conference/proposed-topics/

On Friday evening I found myself debating "Socialism vs Capitalism: The future of economic systems" at the Peking Conference of the Warwick China Public Affairs and Social Service Society. The organizers also invited my colleagues Sayantan Ghosal, Omer Moav, and Michael McMahon, who spoke eloquently. The element of debate was not too prominent because we all said similar things in different ways. I'm an economic historian and the great advantage of history is that it gives you hindsight. Anyway, here is what I said:

Let’s start from some history. There was a time between the two world wars when the capitalist democracies, like America, Britain, France, and Germany, were in a lot of trouble. In 1929 a huge financial crisis began in the United States and went global. There was a Great Depression. Around the world, many tens of millions of farmers were ruined. Tens of millions of workers lost their jobs.

As today, people asked: What was the cause of the problem? One answer they came up with was: Capitalism is the problem. Lots of people decided: the problem is the free market economy! The government should step in to take over resources and direct them! The government should get us all back to work! The government should get us building new cities, power stations, and motorways!

Another answer many of the same people came up with was: Democracy is the problem. Lots of people decided: the problem is too much politics! We need a strong ruler to stop the squabbling! Someone who can make decisions for the nation! Someone who can organize us to build a common future together!

So there was a search for alternatives to capitalism. Different countries tried different alternatives. The alternatives they tried included national socialism (or fascism) and communism under various dictators, like Hitler and Stalin.

What happened next? On average the dictators’ economies did recover from the Depression faster than the capitalist democracies.

(Here's a chart I made earlier to illustrate the point, but I did not have the opportunity to use it in my talk. Reading from the bottom, the democracies are the USA, France, and the UK; the dictatorships are Italy, Germany, Japan, and the USSR. You can see that Italy does not conform to the rule that the dictators' economies recovered faster. Without Italy, the average economic performance of the dictatorships would have looked even better.)

Seven major economies in the Great Depression

But solving one problem led to another. Before the 1930s were over the dictators’ policies had already caused millions of deaths. A Japanese invasion killed millions in China (I'm not sure how many). An Italian invasion killed 300,000 in North Africa. Soviet economic policies caused 5 to 6 million hunger deaths in their own country and Stalin had a million more executed.

And another problem: As political scientists have shown, democracies don’t go to war (with each other). Dictators go to war with democracies (and the other way round). And dictators go to war with each other. The result of this was that in the 1940s there was World War II. Hitler, Mussolini, Tojo, and Stalin went to war -- with the democracies and with each other. Sixty million more people died.

After the war, capitalism recovered. In fact, far from being a problem, it became the solution. By the 1960s all the lost growth had been made up. Think of the economic losses from two World Wars and the Great Depression. If all you knew about capitalist growth was 1870 to 1914 and 1960 onwards, you’d never know two World Wars and the Great Depression happened in between.

(To illustrate that point, here's another chart I made earlier, but did not use. It averages the economic performance of Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, New Zealand, Norway, Sweden, Switzerland, the UK, and the USA.)


After World War II fascism and national socialism fell into disrepute, but communism carried on. In China, Mao Zedong’s economic policies caused more deaths. In 1958 to 1962, 15 to 40 million people starved. Communist rule led China into thirty years of stagnation and turmoil. After that Deng Xiaoping made the communist party get its act together. And the communists forgave themselves for their past and agreed to forget about it.

Here's the takeaway.

Liberal capitalism isn’t perfect, but it has done far more for human welfare than communism. It has been the solution more often than the problem. Last time capitalism experienced some difficulties, many countries went off on a search for alternatives. That search for alternatives led nowhere. It wasn’t just unproductive. It was a terrible mistake that cost many tens of millions of lives. Lots of people have forgotten this history. Now is a good time to remember it.

Postscript. At one point I thought of calling this blog "Alternatives to capitalism: the search for a red herring" (a "red herring" is something that doesn't exist but people look for it anyway.) But I realized that would have been wrong, because alternatives to capitalism have actually existed. The problem with the alternatives is not that we cannot find them. It is that the people who went searching for them fell into a dream and woke up to a nightmare.

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  1. Matt

    Your argument seems to be “because previous attempts to improve on X have failed, we shouldn’t bother trying anymore”. Isn’t that line of reasoning both pessimistic and fallacious?

    04 Feb 2013, 09:28

  2. Mark Harrison

    Matt: Are you arguing for hope over experience, or for “history is bunk”? The alternative to groundless optimism isn’t pessimism, it’s knowing about stuff that actually happened. What actually happened is that people who thought of themselves as good and motivated by high ideals committed terrible crimes and brought about colossal tragedies. Perhaps it’s worth adding that, whereas most of the victims of fascism were killed more or less by intention, most of the victims of communism died without anybody planning it to happen, because that was how the system worked. The communist system was built by high ideals mixed up with political ambition. The majority of victims were just collateral damage, sacrificed for a brighter future that never arrived. My suggestion is simply that we learn from that.

    05 Feb 2013, 09:36

  3. Matt

    I don’t subscribe to these “end of history” style arguments. I think history shows us that there have been very many innovative political systems which have been, to a greater or lesser extent, improvements on what came before (tribes, city states, feudalist states, monarchies, parliamentary democracies etc). So, to answer your question, I’m arguing for hope because of experience.

    05 Feb 2013, 11:34

  4. Mark Harrison

    That’s a nice way to put it. And, as you say, history is not over yet. So the future will have more lessons for us. My point: Let them not be what we should have known already.

    05 Feb 2013, 11:39

  5. Matt

    I agree. Incidentally, as an irrelevant sign-off: I think the Anglo-Icelandic Cod Wars are a counterexample to your “democracies don’t go to war” suggestion. The second cod war featured prisoners of war (well, one prisoner of war), and all three wars involved deployments of warships, multiple rammings and the firing of ammunition.

    If only we could develop a political system which didn’t resort to warfare when its fish supply was threatened!

    05 Feb 2013, 12:53

  6. Waqas

    An interesting read. There is, however, one matter that I would like to point out.
    I believe that this article tries to correlate the effects of two separate forces i.e. democracy/dictatorship and capitalism/alternatives. As I understand, the reason behind the deaths and the misfortune related to the World War was primarily the dictatorial nature of the states involved. The questions that must be addressed are a) Would the same amount of damage/deaths have occurred if the communist societies had some form of democracy? b) Could the wars/deaths be prevented if the main culprit countries were communist dictatorship?
    In current context, can this historical trend be applied to predict the performance/possible global repercussions of a socialist democracy?

    27 Feb 2013, 13:13

  7. Mark Harrison

    I agree that the link between economic system and political order is not deterministic or one-way. However, there are some things we should be able to agree on. First, all the democracies (free association, competitive parties, secret voting) that we know about have developed in capitalist market economies. Second, all the socialist economies (where private interests have been suppressed in favour of what the political leaders say is the public interest) have been dictatorships where political competition has also been suppressed. Historically, therefore, the main scope for variation seems to consist of those cases of market economies that succumbed to dictatorships of one kind or another.

    What that means is that if you think of the box of facts labelled “communist economics/democratic politics,” it’s empty. There are no historical cases of it. So we have no historical knowledge that would allow us to speculate about what difference democratic communism might have made before or during World War II, let alone in the world today.

    I realize you may not find that answer very satisfying, and I realize that history does not have all the answers. At least it’s a start.

    27 Feb 2013, 17:11

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I am a professor in the Department of Economics at the University of Warwick. I am also a research associate of Warwick’s Centre on Competitive Advantage in the Global Economy, and of the Centre for Russian, European, and Eurasian Studies at the University of Birmingham. My research is on Russian and international economic history; I am interested in economic aspects of bureaucracy, dictatorship, defence, and warfare. My most recent book is One Day We Will Live Without Fear: Everyday Lives Under the Soviet Police State (Hoover Institution Press, 2016).

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