The Rush to Capitalism(1)

John Kenneth Galbraith

That the past months have been marked by the greatest changes of our times is a matter on which I need not dwell. What has been only moderately less evident is the flow of economic advice which has crossed national frontiers in these months. In the common reference communism having failed, capitalism is triumphant. And from this the conclusion: from the high priesthood of capitalism must now come the guidance, indeed the writ, on what the previously afflicted countries should do and have. Who could be qualified better to offer advice and guidance than the most relentless exponents of the successful system?

Much of this advice has flowed from our own country. We, not surprisingly, harbor and give voice to a considerable number of the archexponents of free enterprise. It has helped that this advice emanating from our shores is wonderfully inexpensive as compared with the more substantive help that many of us have urged as a way of easing this great transition.

In my view, some, and perhaps much, of the advice now being offered the Central and Eastern European states proceeds from a view of the so-called capitalist or free-enterprise economies that bears no relation to their reality. Nor would these economies have survived if it had. What is offered is an ideological construct that exists all but entirely in the minds and notably in the hopes of the donor. It bears no relation to reality; it is what I have elsewhere called the primitive ideology.

This advice has two features. Some comes from people who have long regretted the concessions that Western economies have accorded to social action to the welfare state and public support to the impoverished; to the essential and growing role of the public services; to trade unions; to measures designed to achieve greater equality in income distribution; and to the larger post-Keynesian responsibility for the effective performance of the economic system as a whole. They don't like what they see at home, so it naturally forms no part of their recommendations for countries now emerging from communism. And, it is clear, they are not without audience there: in economics and politics, as in religion, the new convert is often the most ardent in belief.

The second and related feature of the flow of advice currently reaching the countries that are now in transition is its casual acceptance of even commitment to human deprivation, to unemployment, inflation, and disastrously reduced living standards. This is even seen as essential therapy: out of the experience of unemployment and hunger will come a new and revitalized work ethic, a working force eager for the discipline of free enterprise. To each according to his ability, from each according to his need. In one ardently expressed view, which I heard just a few days ago from a business adviser recently returned from Poland, such deprivation unemployment, low wages will cause foreign investors and entrepreneurs in years ahead to come in for the rescue. Only a few years of suffering and all will then be well. This, I choose my words carefully, is insanity. Nothing over the centuries has more often been urged than the social reward of hardship by those who will not have to suffer it. The biblical poor were told that unlike the rich they would have easy access to heaven. In the simplest form much of this counsel consists in urging the replacement of a poorly functioning economic system with none at all.

The economic system which Central and Eastern European countries see in the West and in Japan is not capitalism in its pristine and primitive form. It is a system deeply modified by ameliorating social services, by supported incomes, and by public controls. It is by these that the system has survived. In Britain Mrs. Thatcher, and until lately in the United States Mr. Reagan and his acolytes, have indeed pictured themselves as archexponents of unfettered capitalism. In fact they owe, or have owed, their eminence to earlier generations of socially minded leaders who made their citizens economically and socially more comfortable and secure and now, in their voting, conservative. Mr. Reagan and Mrs. Thatcher were, or are, preserved in office because, in practice, their free-enterprise rhetoric was mostly unmodified by action. Had Mr. Reagan during his first term mounted a major assault on the welfare system pensions for the old, compensation for the unemployed, health care for the unfortunate, income support for farmers his presidency would have come abruptly to an end in January of 1985.

Nor, indeed, are the social tasks of capitalism yet complete. Many of our people still live outside the system: they hear much of democracy but do not find it worth their while to vote. It is a grim but wholly unshakable fact, as I've elsewhere said, that no one in search of a better life would wisely move from East Berlin to the South Bronx. Not even in search of liberty, for nothing so represses freedom as an effective absence of money, food, and a place to live. The administration of Mr. Bush, according to recent reports, is considering sending experts to the Soviet Union to advise on creating the various institutions of capitalism, and included would-be experts on the construction of "private housing." Presumably they will tell of how this industry has failed in virtually all capitalist countries to create adequate shelter for the poor, and has left millions homeless in the United States. With all else the politics of our time has its own grim humor.

I return to my main point: what is being seen in the West from east of the one-time Wall is not traditional capitalism. It is a still imperfect social democracy. In a very real sense, both East and West, our task is the same: it is to seek and find the system that combines the best in market-motivated and socially motivated actions.

There are in this search no overarching rules by which to be guided. In the nations now in transition I would, of course, urge the return of less essential consumer goods and services to the market. Here, it is all too evident, the planning and command system of past experience did not work. Consumer demand is diverse, unstable, and only the market conveys its message from producer to consumers. Action here need not be abrupt; it should occur when plausible entrepreneurs and managers become available and public financial institutions are created to finance the transfer of ownership or the creation of new firms. Like all change it should come from thought, not formula. . . .

For food and housing I would see a longer continuing role for the state. Any large and sudden movement in the price of essential nutrients and in housing rents is certain to create distress and stir resentment, as has already been made evident in the case of food in Poland and the USSR. Public subsidy here is not an unusual thing. It is normal. The United States, all the EEC countries, and Japan subsidize their food supply at large public cost and, as I've noted, capitalism nowhere provides adequate and affordable shelter for lower-income citizens.

I would also urge any practical steps to return agriculture and notably the marketing of most farm products to the price system. It is a matter of worldwide observation and experience that agriculture works best when under the self-motivated and often self-exploitative command of the individual farmer. I do not doubt the difficulty in moving from the more comfortable world of the collectives and state farms. I would not doubt, however, that this is necessary. But moderation, not ideology, must again be the rule. More than civilized caution is involved here. Farmers work well and invest well only when they have assurance about eventual price and income. Agriculture in the United States over the last half century has had huge gains in productivity, far exceeding those in industry. This has been so partly because farmers have been able to invest for a publicly assured return.

As to the large industrial or commercial enterprise that is the centerpiece of the modern capitalist or socialist economy, the question of ultimate ownership is not so important. In the Western countries and Japan there are well-functioning firms under both private and public ownership. In Switzerland where I live some part of my life we travel on a publicly owned railroad, talk over a publicly owned telephone. Our apartment is insured by the commune. Our neighboring farmers are accorded income in keeping with their needs. A good house is a human right. The exceptionally fine store that supplies our food and much else is a cooperative. Our bank account is with a publicly owned bank. We cannot, in fact, cut down a tree, possibly even plant one, without public permission. The lovely Alpine meadows are preserved by farmers who are subsidized by the state to pasture them. The Swiss, nonetheless, are celebrated for their diligent adherence to free enterprise.

In the United States our railroads failed under private operation and have been partly redeemed under public management. Private failure in our financial institutions is now being redeemed at a cost of hundreds of billions of dollars by the state. The phrase "taken over by government" appears daily on our financial pages. Apart from the exceptional and much criticized case of the corporate raider, stockholders owners in the great firms of modern capitalism are dispersed and mostly unknown. They have no power over the professional management that appoints the directors who are presumed to control their operations. This, in the phrase of the late James Burnham, a notable conservative, was the Managerial Revolution. In modern capitalism managers, not capitalists, are the decisive power. And in the modern mature capitalist economy. I note with emphasis, it is not about power that we should worry, it is about incompetence.

What is important my urging at this point goes back to early observation and experience in India is to give the enterprise authority over, and the rewards of, its own performance. It must not be united with or controlled by a ministry of the state; there must not be what in India I called "post-office socialism." No normal person performs well when another has the full authority for his actions. So equally the corporate or business enterprise. If larger enterprises are given freedom from the disaster of ministerial, i.e. bureaucratic, control and they are thus accorded the right to set their own prices, produce their own materials, and make their own subcontracts, the location of actual ownership is not a matter of prime importance. I would urge that ownership be widely distributed, and I am attracted by the proposed action in Poland, which is strongly supported by my colleague Professor Jeffrey Sachs, to distribute the shares widely to the citizenry, with a special advantage for employees of the particular enterprise. The equity of such an arrangement has an obvious appeal, as also the resulting sense of participation.

It is assuredly acceptable as compared with one alternative now being comprehensively discussed. That is for foreigners to come in large numbers to invest and manage. I am not opposed to joint enterprises; they can in a marginal way, like McDonald's and Pepsi-Cola, be useful. But any large-scale alienation of ownership and management to foreigners would surely ensure an adverse response. As Americans would not (and do not) look forward to working for the Japanese, efficient as they may be, Poles, Czechs, and Hungarians can hardly look forward to working for Americans, Germans or Japanese.

It should not be a criticism of this transition that it is done gradually and with thought. The return to normal productive activity in Western Europe after World War II, a task less complex than that faced by Eastern Europe and the USSR, took the better part of a decade. In Britain it took some seven years before sterling was fully convertible, and food rationing and associated price controls were similarly continued. Sudden action, once again, is for those who do not themselves suffer, do not think before acting, who proceed by formula, not fact. Only if time is allowed can there be time for thought the thought that is attuned to pragmatic result and not to primitive ideology.