Quote of the Day 2010-3-14

Many patients want to be excused for their current predicament because of events that occurred in their childhood. That’s what psychiatry has become in America. Visit any shopping mall or ethnic pride parade, and witness the results.

-Dr. Krakower, The Sopranos, “Second Opinion”

Economic History XVII: Social Democracy Exhausted

We’re hurtling towards the modern age. When we left, the Cold War had settled into detente and the First World experienced economic growth that had never been seen before, largely leaving the rest of the world behind. Once you get into the 1980s, led by Ronald Reagan and Margaret Thatcher, you get a very curious change. After thirty years of government-led growth, suddenly government became very bad.

A large portion had to the in the 1970s. The US government made what seemed to be a lot of errors under Johnson, Nixon, and Carter. You have Vietnam, the oil crisis, all the stupid shit in the 70s (which really was America’s worst decade), Nixon getting the boot, Iran, and worst of all, economic stagnation.

Reagan embraced neoliberalism and rode the wave of minimalist government to office. He was backed by economists like Milton Friedman, who were extremely persuasive that government intervention often did more harm than good. Neoliberal philosophy was also about embracing technological change, incorporating Japan. It introduced the idea of export-led growth and easing capital mobility so that the economy could focus on developing technology to improve productivity. It was about government planting the seeds and letting the market do the work, rather than considering the government to be shepherd of the people.

However, Reagan took neoliberalism to an extreme. He reaped his anti-government stance to a new level, that all government development was bad. He successfully railed his anti-communism into anti-social change in the US too, exciting Republicans that abortion was bad, gays were bad, and anything the government did to help the poor or disadvantaged was bad. He really is the father of the current GOP, despite all the jokes about Republicans worshiping him.

Part of the appeal was that Reagan’s economic team saw numerous structural problems created by the government in the previous thirty years. Friedman was the first to point out that Social Security was designed for an extremely small group, but it had been expanded by political interests and was going to cause fiscal instability with the Baby Boomers. Stagflation of the 70s also poked a lot of holes in Keynesian thought and the government’s ability to control or eliminate recessions, and the situation became critical when unemployment shot up under Carter. A theme in the modern age is that people will trust the government so long as it can provide low unemployment, low inflation, and somewhat equal growth. When it fails to deliver or things go wrong, the government can expect a lot of unrest and in a democracy, to get the boot.

The 70s was also a time when liberals became anti-American and anti-West. The hippies railed at problems like pollution, inequality, preventable diseases, the havoc of modern war, etc., and they laid it all at the feet of the white man. They blamed Europe but mostly America, saying that they caused these problems and more importantly, owed it to the rest of the world to fix it. Reagan was successful at leading the charge against this sentiment, striking a nationalist chord that the troops deserved respect, modernization was unequivocally good, and America is the best country in the world and more importantly, it doesn’t owe a goddamn thing to the world when we offer them freedom and prosperity. And voters ate it up – after all, who wants to listen to a rant that it might be a bad thing that America won World War II?

Undoubtedly, Reagan is the face of the 1980s. He birthed the modern conservative age and he’s one of the most influential presidents ever, successfully turning America into a center-right nation as the rest of the First World took a turn for the left. He has big accomplishments, such as pushing over the Soviet Union, deregulating government control of the economy, and ushering in an era of monetary policy. Whether that’s a good thing is a whole other question, because Reagan also unhooked barriers to high deficits and high national debt, brought the church into questions of social policy, and told bankers that greed is good.

Economic History XVI: Japan Stands Up

The 70s sees the beginning of an era where countries stand up and decide they want to succeed. The first great nation to stand up from the ruins of the early 20th century is Japan. Eventually we’ll see China and India stand up too, as do smaller countries in East Asia and traditionally weak European countries like Ireland.

First for a little context. Japan in the 16th century was a country that was ripped but magnificently proud of its 500 year history of war without end. The leader to emerge victorious as shogun is Tokugawa Ieyasu, who showed brilliance at musket strategy and political maneuvering. He took advantage of Japan’s weakness following a disastrous invasion of Korea, which the Koreans won by exploiting Japan’s weakness at sea. An ironic aside of history is that Korea disregarded land warfare despite its proximity to China and the Mongols, while the island Japanese had never bothered to develop naval tactics. Tokugawa successfully exploited the gun in a mountainous country where fighting with swords was inconvenient to say the least, but he remained terrified that someone else would figure it out, particularly the Christian missionaries advising opposing daimyo. So to remain in power and not be overthrown, Tokugawa gave up the gun and then crucified all Christians. He played it off as a win-win: Christians went to heaven and foreign influence was gone. He extended samurai culture to the extremes we know today – as an aristocracy that had a monopoly on weapons that could itself be controlled through absolute loyalty or suicide.

It’s great for controlling the country but not so great for development. Japan stagnated at the same level of technology until the 1850s, with inventions being closely kept secrets. This created a problem when Europeans came back with 200 years of military history and invention under their belt. The samurai were terrified and amazed, then they did the most magnificent thing. Rather than be pushed out of power, they decided to leap forward and embrace the West. The motto became European technology with Japanese spirit. It’s the Meiji Restoration, which threw out the Tokugawa shogunate and rationalized a new system of taxes.

Emperor Meiji was a little confused by the system and accidentally made the country better by taxing feudalism out of existence. By 1900, Japan has no landed aristocracy living off of rents but instead has an entire nation of workers, with the samurai’s sole advantage being education and leadership. It created a remarkably even distribution of income and an effective meritocracy. Industrialization comes at just the right pace, so peasants go directly from the farm to the factory as they are replaced by machines, with amazingly little friction. This is Latin America’s wet dream that never comes true.

At the dawn of the 20th century, understandably proud of their accomplishments, Japan looks outward and sees an Asia in tatters. The Japanese are astonished at the stupidity of the Koreans and the stubbornness of the Chinese, that they have been reduced to pawns. They also want to be a Great Power, but they are humiliated to find that the West lumps Japan as just another Asian country, and Teddy Roosevelt rubs it in by bragging about how he got the Japs to give back most of their conquests from the Russo-Japanese war. That he wins the Nobel Peace Prize for it doesn’t do the world any favors as the Japanese seethe. It’s the greatest folly of the Nobel committee until they give the prize to Woodrow Wilson for the Treaty of Versailles and the League of Nations, for which the Germans seethe. (Let’s hope Barack Obama has better luck, lolol)

The US compounds its error in the interwar period by making an agreement with Britain about the size of their naval fleets. The US considers itself and Britain to be the only two countries with great fleets, so they just backhandedly tell the Japanese that they can have 3/5. As observant students of US history, the 3/5 clause does not go unnoticed in Japan as the same unfair proportion tossed at freed slaves. The Japanese never obey the clause, but they don’t advertise it until Hitler does. The Great Depression is much more mild and painless in Japan than the rest of the world. They don’t have any particular attachment to the gold standard or to non-Keynesian policies, so they manage to solve the problem rather quickly. But it knocks Japanese politics wildly askew.

In the 1930s, Japanese generals decide that it isn’t Parliament who should guide Japan’s fate; the bureaucrats had only succeeded in driving Japan to humiliation and a depression. The generals tell the bureaucrats to build for war, and they mistakenly believe that the industrial complex is powerful enough for a successful invasion of China and that as long as the US and Britain have to worry about Hitler, they can fight the US and Britain too.

It is one of the worst miscalculations in a century filled with bad miscalculations, and it costs Japan everything. World War II leads to the Japanese being bombed so mercilessly that they decide that their 5000 year warrior tradition was a huge mistake. Japan ends the war without a single building taller than two stories, 3 million citizens killed, and no will to fight. Emperor Hirohito considers himself lucky that the United States didn’t turn Japan into a giant concentration camp and that he doesn’t share the fate of Hitler and Mussolini.

Afterward, Douglas MacArthur is appointed proconsul and the rural bureaucrats come to power; all of the industrial bureaucrats were killed by bombing and all of the generals were killed by hanging. MacArthur wanted a fresh two-party system and a vibrant democracy like the US, but can’t find anyone competent who doesn’t want to form a single giant coalition. They form the Liberal Democratic Party, which would stay in power until 2009. It rules in the interest of stability, economic growth, a relatively equal distribution of income, and a meritocratic bureaucracy that delivers pork to constituents. It’s really just a process of elimination – as long as the US won’t allow them to build an army or go abroad, why not just build a good government at home?

The Japanese also decide that if the US is going to break up their zaibatsu holding corporations because they are led by families at the top, they’ll just group together in keiretsu with professional managers at the top. The zaibatsu stayed in power by holding a controlling interest in their own stock, while the keiretsu keep each other in check by buying a controlling interest in each others’ stock. They agree to vote each other as managers for not dumping the stock. It’s a system that economics tells us should lead to extremely slow growth – it’s a pure incentive system to collude and hoard profits, sort of like the US car industry in the 2000s. What doesn’t change is the Ministry of Munitions, which guided Japanese war production. It is converted to the Ministry of International Trade and Industry, and it still guides large investment and production projects, which economics also tells us is suboptimal to a free exchange stock market which allocates funds (it should create bubbles)

Japan defies history again because the system works. MITI scours American history for its sequence of industrialization, and they do it faster and better. They have discretion to provide special funds or pull the plug, and they manage to choose wisely. Japan from 1945-1980 grows faster than anybody had ever seen, although it is eventually passed by Korea, Taiwan, Singapore, Hong Kong, and today China. It was a miracle in its own right though.

The Japanese government stumbled onto a lot of these things, inadvertently creating a pro-market environment. First, they allowed a lot of monopolies outside of MITI purview, which created higher prices and unfriendly industries everywhere outside of manufacturing and exports. It caused a very pro-investment attitude, with the externalities associated with that, from increased tax revenue to higher wages.

But for rumblings of trouble, it creates a dual economy. You have a very sophisticated manufacturing and export economy, where in the 1980s, Japanese workers have productivity that is at least 100% of US workers. Even accounting for the undevalued yen, it is clear that Toyota and Honda are doing well because their workers can make better cars in greater quantity than US auto workers. But you have a darker underbelly, the monopoly workers who have little incentive to gain skills and have been guaranteed lifetime employment, and they become adept at lobbying bureaucrats to avoid foreign competition.

Japan seems to have trouble after 1980 when a new transition comes in: respect. The US suddenly changes its view and points to Japan as a model country, of how the US rewards its allies. But with respect comes resentment, and Reagan starts complaining about Japan’s trade surplus while the Japanese start scoffing about stupid American consumers who spend more than they save. The Japanese also run out of US history to study and realize they’re part of the future. They stumble hard making these transitions and the bureaucrats at MITI start making some poor decisions, especially under pressure from other Asian tigers with very smart bureaucrats.

In the end, Japan is a marvel. While everyone says they have a savings-oriented economy guided by prudent bureaucrats who create an evenly divided society of meritocratic workers, Japan means it, and they influence the rest of East Asia to mean it too.

Economic History XV: 11-Dimensional Chess

The last time I touched the subject, we left the Korean War and Communists in Russia and China determined to cleanse themselves by bringing their countries close to ruin. So what we want to examine is the Cold War mentality and why it never turned hot.

Global politics turned into a giant game of 11-dimensional chess:

-The Chinese had learned their lesson about American air superiority and now hoped to bait other communist countries into drawing out the Americans so that they or the Soviets would destroy the air threat for them. This strategy persists to this day, hence Chinese support for regimes like North Korea, Serbia, Iraq, and Iran – they have little in common in terms of goals or politics, but the Chinese are encouraged when the Serbs shoot down a F-117A Stealth Fighter and not so happy when the US destroys Iraq’s tank army in 52 hours. China wants the US to bleed itself to death fighting everyone but them.

-The Americans had also learned some hard lessons from Korea and took MacArthur’s parting advice to avoid land wars in Asia. The US decided that its best doctrine was the nuclear one, a message to say “it’s okay if we lose everything, we’ll just nuke the enemy so they lose too”. It gave total initiative to the US to operate with impunity around the world, knowing that nobody else could win against us. The USSR or China would never dare invade Japan or Europe knowing the US wasn’t afraid to nuke Beijing, Moscow, or even Tokyo and Berlin, but the US could gamble on invading Soviet and Chinese satellites because they wouldn’t launch for fear of total reprisal. Of course, notice that this also creates the dangerous flaw that the US could never afford an invasion of the mainland. Nuking Tokyo and Berlin is one thing, nuking San Francisco or New York an entirely different one.

-Stalin and the USSR watched the Korean War with some consternation. The United States was not nearly as weak as its indecisive politics showed. Despite the fact that the war was unpopular, the US had castrated itself after WWII, and Truman unceremoniously threw out one of his best generals, the US had still managed to slaughter two million Chinese and North Korean soldiers. The nuclear threat was also considerable and the Soviets decided to copy the doctrine, but with a twist. Rather than threaten to nuke allies if he lost, Stalin made it clear he wasn’t afraid to nuke anybody, even Russians. Oh, he would destroy the US no matter what, but he wasn’t afraid to eliminate US forces by nuking them wherever they were. Rather than the arbitrage of US doctrine, it’s the madness of total speculation. Would Stalin really nuke Berlin with Russians still there just to kill American soldiers, crossing the line that America dare not cross?

Two events turned these strategies on their head: the 1961 Berlin crisis and the Cuban Missile Crisis. Both events made political leaders (Khrushchev and JFK) realize that their real battles were with their own militaries and not with each other. The Soviet and US armies had generals that wanted to fight without realizing the full ramifications of what that meant. JFK was not going to say “hey we just lost Cuba, nuke it” and Khrushchev was not going to nuke Russia’s borders to kill a million Russians and three CIA agents. So what emerges is a de facto peace as both powers play the power game with minor countries and doing everything to avoid a direct confrontation, although the CIA and KGB certainly flirted with the idea. From 1963 onwards, the Cold War was going to stay frozen as long as both sides just jostled over spheres of influence, swallowing 7% of US GDP and 20% of USSR GDP per year in military spending.

Both sides settled into a rather darkly humorous bet that the other would grow more like it. The US believed Soviet citizens would grow weary of purges and overthrow their leaders in fits of democracy, and was encouraged by countries like Yugoslavia and the Philippines. The USSR believed that American and allied workers would see the folly and greed of their capitalist overlords and throw them out in the true communist revolution, and was encouraged by the growth of the European welfare state and US discontent in the 60s.

Economic History XIVb: What Happened to China’s Shoes?

In response to my write-up on China, Tyson asked me to do an extra bit on Taiwan and Hong Kong. These backwoods island stops somehow turned themselves into economic tigers, in a rather remarkable story.

Taiwan is a pretty typical study of a successful Asian tiger. The only interesting question is why the Nationalists managed to succeed so well in Taiwan when they had failed so spectacularly in China.

The answer comes in two simple reasons: stability guaranteed by the US government and effective control of the bureaucracy. The US plays a pivotal role in Taiwan’s growth. The main source comes from the simple fact that having the US as an ally guaranteed that the Chinese would not invade. Although the US had no stomach for another war with China after the Korean War, Mao and his generals had also learned some hard lessons about tangling with the US. In particular, they were very frightened of US air superiority. But it also comes economically from allowing Taiwan to have an undervalued peg to the dollar. This allowed Taiwan to take a long-term view of their development and invest in policies for future growth, the ones I laid out before: health care, education, manufacturing, trade. In China, the Nationalists had struggled with economic turmoil, especially the fact that their currency was backed by silver (because a century of unequal treaties with Europe had drained them of gold – incidentally a reason the West became so enamored with gold is that they gave all their silver to China, even the opium trade couldn’t balance it out).

The other simple fact is that long-term policies that work for a country of 20 million people are not so simple in a country with 1.6 billion. The sheer weight of the bureaucracy almost guaranteed failure, on top of endemic problems like corruption and incompetent management. It took a generation for the Taiwanese to cleanse corruption from eating away the heart of their system. Their governance was not always good, it was almost never magnanimous or kind, but it worked.

Hong Kong is basically the same story but with a white face. Chinese residents in Hong Kong were much happier with British rule because they had a front seat view watching India screw itself over and seeing how badly the Communists could muck up China. The vicious Japanese occupation had also proved that maybe enlightened British rule was not the worst thing that could happen to them. For their part, the British took a far less imperious view of their place in Hong Kong after the world wars, working to develop HK as a financial center to maintain their influence in Asia.

Economic History XIV: China Shoots its Other Foot

So far in the story China has been the biggest tale of woe and fail. That doesn’t change after World War II, other than the fact that Mao finally manages to unite the Chinese people under a single banner and enforce his rule with an iron fist, with which he repeatedly punches China in the face.

How did Mao manage to persuade the peasants to join him and not the modern-oriented Nationalists? He offered them the Communist promise of the one thing that man has always fought for: ownership of the land. An interesting contrast is that the rest of the world had long since stopped fighting for land and money and were killing each other over ideology about economic redistribution. Stalin saw communism as locked in a death struggle with capitalism and feudalism. Enemies of the state were shot because their very existence objectively increased the strength of capitalism, which stood in the way of achieving utopia. Mao didn’t do any of that crap, he simply told people that if they killed Nationalist mandarins, he would give the peasants their land.

But what Mao cleverly did was maintain China’s Confucian tradition of a hierarchical society, so that even in communism where everyone is ostensibly equal, the Communist Party could replace the status of emperor and the people would bow. Using Lenin, Mao quickly built a bureaucracy that extended power directly from Beijing down to the smallest villages through a chain of command.

We don’t have any reliable statistics on Chinese agriculture or industrial production, but it seems that China was heavily dependent on Soviet aid and that it got whatever it needed until their split in 1960, when Stalin finally said no when Mao asked for nuclear weapons. Chinese politics gets really crazy after that, all we know is that somehow Mao and his proteges thought it would be a good idea to implement the Hundred Flowers, an attempt to allow direct consumer complaints. Chinese offices were promptly flooded with complaints about EVERYTHING – not enough food, not enough electricity, not enough water, service isn’t good, quality isn’t good, managers aren’t good, etc. etc. etc. It was a pretty good idea but nobody expected the level of fury and scale of complaints that Chinese had been bottling up for fear of being purged. Then the Great Leap Forward, Mao’s attempt to industrialize without the USSR and without such useless trivialities like engineers or factories.

What’s fortunate for China is that Mao was overthrown in a brief coup in 1958, after the Great Leap Forward. When Mao arranged his counterstroke in 1964, he struck first by imprisoning the coup’s right-hand man and its shrewdest leader, a guy named Deng Xiaoping. Mao ended up shooting the rest of the coup but somehow forgot about Deng. Mao then purged his own leadership to prevent another coup. He then decided to purge the entire country with the Cultural Revolution. Deng wasn’t spared (his son was thrown out of a four-story building), but he managed to lay low and not die during this time.

The Cultural Revolution is probably the stupidest event of the 20th century, which is amazing because I’ve already covered a lot of pretty stupid events. Nobody is sure what the human cost was, but it numbers in the tens of millions of people who were killed. What we can say with certainty is that China emerged from the Cultural Revolution as one of the poorest nations on Earth, with a GDP per capita that was half of India’s and on par with Tanzania and Mali.

Economic History XIII: Hot Economy, Cold War

I’ve written about why communism fell in broad terms, but it’s time to look at some specifics of how the political strategy of the Cold War ruined the USSR and bolstered NATO. Specifically, the Marshall Plan worked but it was always a temporary and medium-run plan, nobody wanted to make Europe a welfare state dependent on US aid. So while it kicked off reconstruction and forced trade, Europe still needed a consistent and reliable source of demand for sustained growth. In the Rubik’s cube of life, how little they knew that it would come in a godawful war in East Asia, in a country that most Europeans and Americans did not even know existed until 1950. The Korean War is, in terms of how much was gained and how much was lost, the bloodiest and most expensive war in history after the two world wars.

The Korean War had big implications for US relations with Europe. Not only had the US drawn a line in the sand and affirmed that it would no longer allow Soviet tanks to just roll over impoverished states, it created a long-term terror that Stalin and his successors were hell-bent on invading Europe. Conquering western Europe would be tremendously expensive and probably unsuccessful (and not worth the trouble if it required nuclear weapons), but nobody in the West believed that would stop Stalin.

After all, this is the same Stalin who thought the best way to deal with Hitler was to ally with him and watch him grind the West into dust. He had also encouraged Kim Il Sung to invade South Korea and encouraged Mao to double down, then he let them learn the hard way that US air superiority meant constantly marching through walls of fire and steel. Even his successors frightened US leaders – Stalin had massacred three generations of proteges and they constantly fought amongst themselves after he died, using many of the same brutal tactics. Nobody honestly believed Khrushchev was any more sane.

So the US maintained a standing army in Germany, waiting for the Soviets. The US spent .75% of its GNP on military expenditures in outflows that it would never see again – soldiers’ wages, equipment, weapons, etc. What this did to nobody’s realization is that it offset the winding down of the Marshall Plan and replaced it with a strong source of demand. GI demand for all consumer goods stimulated the European economy to production, which enriched citizens who then furthered demand into the big boom.

Economic History XII: Thirty Glorious Years

We covered the social changes of the postwar world, so we’ve laid the groundwork for which the economic pie turns out to be much bigger than anyone anticipated.

First and foremost, realize that supergrowth was far from an inevitable or even likely outcome in 1945. You see a desire for more government, as people looked back fondly at how well FDR marshaled American resources for the war and returned the country to prosperity. It seemed unlikely that government could ever do worse than the market when hippies could slap any pro-market advocates with the Great Depression. Europe in particular still wished for strong government, and it was only the Marshall Plan that guaranteed a return to free-market capitalism and democracy.

No matter what people say, the Marshall Plan at bare bones was a hard currency exchange for Europe to clear up trade bottlenecks during reconstruction when governments were scarce on cash. It helped Europe avoid the Argentine trap of economic nationalism, militant urban class desires, and financial instability. Its heart was a neoliberal, market-driven solution of halting inflation, keeping economies flush with cash, and stabilizing the financial system. This demanded political concessions, denying workers higher (“fair”) wages, forcing higher taxes for a smaller social net, and in the short term, a less than equal distribution of wealth. It worked brilliantly but that’s not to say governments were happy with it; on the contrary, France would complain for the next thirty years about America butting into their affairs. It was America and Marshall Plan administrators who would begin to wed Europe into a trading bloc with a unified currency, thinking that forming them into an imperfect union would minimize the chances of another world war.

What emerges from this is unheard of inequality. By 1990, the difference between the First World and everyone else is mind-boggling. For instance, South Korea’s GDP per capita was ten times the size of North Korea’s, Taiwan’s was twenty times China’s, Philippines’ was five times the size of Vietnam’s, Austria’s was six times the size of Hungary’s, and Mexico’s was nine times the size of Cuba’s. Everywhere capitalism made people wildly richer and more productive than communism, even in countries that were worse off in 1950.

So the question is why? Why was the Eastern bloc so poor?

The answer is incentives. The Soviet Union and its satellites consistently maintained more factories than the First World, but their planning commissions were exponentially larger and less efficient. The United States today has something like 17 billion different products that it manufactures, distributes, and serves to the American people – you can only imagine what a nightmare it would be to plan directives that guide US businesses. In the case of contradictions, lower level managers would make decisions, but they were guided solely by production goals, not by performance incentives. So there was a tremendous amount of waste, as factories produced tractor components that didn’t fit with other parts or houses that didn’t have space for utilities. Intervention was often hasty and made things worse, as planners almost never had accurate information to work with. It worked with specialized programs, like the military-industrial complex or the space program, where planners could clearly identify a fault and send any underperformers to Siberia. But it singularly failed when it came to consumer goods.

So then what are the advantages of the market?

-it imposes a reality check on organizations – produce well and at sufficient quantity, or brace for the loss
-it imposes the reality check on every line of business – is this what consumers want?
-flexibility – business face changes with consumer or production trends
-politics – consumers can voice complaints (for example, pollution, which got much cleaner in the US but remained infamously filthy in the USSR and China)

What marks a market-oriented country and what policies work best?

-more developed financial system (i.e. Hong Kong v India)
-high savings rate (i.e. Korea)
-low tariff on foreign capital goods (i.e. Taiwan v China)
-“realistic” exchange rate (i.e. Japan/Germany getting lucky, Korea’s managed float)
-government subsidies to export manufacturers (i.e. East Asia)
-health care (i.e. Asia v Islam)

How you know a country is doing well:

-profits from a well-educated and skilled labor force
-non-corrupt and honest government (for example, Bush’s smooth transition to Obama)

Taken as groups, you can easily see trends that differentiate rich from poor. The conclusion is one that Adam Smith and Karl Marx would have agreed: market economies grow prosperous when built in favor of the business class. When governments intervene to shift resources and profits away from entrepreneurial and productive groups and shift it to others (i.e. consumers, bureaucrats, poor rice farmers), then economic development and growth will suffer. A government that takes a long-term view of its citizens’ best interests and invests to make them healthier and educated will do better than one that tries to buy or force prosperity on them.

A good example of a poor country is JFK when he visited Indonesia in 1960. He had Congressional approval to help the country invest in schools, factories, hospitals, and a large regional bank for development. Indonesia’s president Sukarno politely refused, telling JFK that development took too long but that his country would prosper if the United States would kindly conquer and transfer some of their troublesome island neighbors to them. Indonesia today remains among the poorest nations in Southeast Asia.

Economic History XI: Social Democracy is Born

When we left history, we had World War II and the demise of imperialism. Nobody thought capitalism was a good idea any more, but everyone realized government could do far worse than the free market – or in the case of Russia, China, and India, they were about to get a rude and brutal education. But in the West, guided by social reorganization and a newfound willingness to follow one leader, economies were about to grow beyond the imagination of the prewar period.

So what happened? For one, far more moderate and consistent growth. The interwar period was characterized by wild fluctuations in energy demand and coal/steel production, affected by the US recession, the French occupation of the Ruhr, the British abandonment of the gold standard, and coal strikes around the world just prior to the Depression. After World War II, Europe falls to shit for the first three years as economies have no money to rebuild, until the US passes the Marshall Plan and provides Europe with the best bailout ever. Coal production never returns to full prewar levels, but it’s okay because economies have switched to gasoline as their main source of energy.

What makes this era interesting is that you don’t see purely economic fighting over resources any more, but the situation becomes more complicated with social and political groups fighting over pieces of the pie. In the 19th century, nobles fought amongst themselves and had no unifying interests; in the 20th century, social groups such as women, minorities, unions, the military, farmers, etc. are beginning to unite to fight as collectives.

You also see bargaining on issues – people are too sophisticated for a zero-sum, winner-take-all fight, but stick to long-term wars of attrition on social values and politics to prove that they’re tough. You continue to see this trend through today – black rights, feminists on abortion, gay rights activists, these are all groups that have been gnawing at the social fabric for decades, fighting for every inch. Their strategy amounts to hoping their pain tolerance and toughness is greater than the other side and claiming that their struggle makes them stronger.

The initial social battles are highly successful, as poor groups claim the burden of the awful 1910-1940 suffering as their own. The elite classes drove millions of poor young people to the slaughter, so demands like universal suffrage and the liberal bill of rights (i.e. housing, Social Security, college education) can’t be denied. The other big factor is that many of these young people have gained skills on the battlefield that used to be reserved for the elite- qualities of leadership, managerial skill, and performance under pressure were forged from the trenches. In World War II, many young people ended the war with technical skills – women worked in factories, for example. In the postwar free market, they become important contributors and many have the ability to become rich on their new merits. It creates a sense of meritocratic fairness – people who work hard and play by the rules should be rewarded.

Meritocracy begets progressive thought, as the meritocratic nouveau riche begets a sense of social justice. Talent and hard work is rewarded with wealth, but society shouldn’t punish the foolish and lazy – the new rich reject social darwinism and pass the seeds of egalitarianism to their children (the Baby Boomers). You see activists willing to see government disrupt the free market for the sake of high employment and social insurance, and a newfound struggle to balance meritocracy and egalitarianism. Even fascism and communism are various permutations of government-enforced merit and equality. But in the 1950s, people want a softer, nicer, more accountable government that enforces these qualities but doesn’t beat them with a rifle butt. Ultimately, what people want is a government that doesn’t allow them to make bad decisions, rewards merit, makes everyone equal, and favors their social group.