Saturday, June 24, 2006

Capitalism and the Centre-Left

The economist Joseph Schumpter described capitalism as a process of Creative Destruction, whereby new businesses create competitive pressures that destroy old businesses, thereby freeing up the capital in them to be deployed in other new businesses, in an endless cycle.

Unfortunately those on the receiving end of creative destruction - workers laid off, businessmen forced into bankruptcy - find it very painful indeed, and if the process is left unchecked, rebellion arises which threatens to destabalise the whole system. The paradox of capitalism is that though it is a process of creative destruction, the system as a whole needs peace and social stability to thrive.

The first person to get an insight into this was the original Iron Chancellor, Otto von Bismarck, who was chancellor of Germany from 1862 to 1890, the period when the second industrial revolution and the first age of globalisation came together. Europe in the mid-18th century had repeated attempts at revolutions, as well as the Long Depression, which lasted from 1873-1896 and affected much of the world. Bismarck, who was not a liberal man (he tried to control the press and fobade union meetings) , was deeply worried about the outcome of the depression and it's affect on the poor. His solution was to enact Europe's first labour laws. In 1883, he passed the Health Insurance Act, Accident Insurance was provided in 1884 and old age pensions and disability insurance was passed in 1889.

In doing so, this very conservative man laid the foundations of the welfare-state, the basis of centre-left policy everywhere. The right hates the welfare state and would seek to dismantle it. However it provides a crucial safety net for those on the receiving end of creative destruction, without which you would get social disorder and the end of capitalism. Not long after Bismarck died, the Russian revolution erupted into the world - a direct consequence of the Tsar ignoring the plight of the poor. And Germany herself in the 1930's, experiencing her second severe recession after the end of WW1, cracked and succumbed to fascism/national socialism. Countries as far away as China and India have understood the lesson and are starting to set up basic welfare provision from pensions to the minimum wage to alieviate social distress and unrest.

The conclusion is that the party who maintains the welfare state acts as the facilitator and protector of the capitalist system. At the moment in Britain (David Cameron's fine words notwithstanding) that party is New Labour.

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