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Illustration by Eva Bee
Illustration by Eva Bee
Illustration by Eva Bee

People want homes, jobs, a future: no wonder they distrust capitalism now

This article is more than 5 years old
Larry Elliott
Post-cold war politics shifted to the right, and ordinary people suffered. Mainstream parties need to know what went wrong

It’s just like old times. Donald Trump has picked a fight with China over trade and he is at odds with Russia over Syria. Relations between Beijing and Moscow are getting closer as the former communist superpowers confront the old American enemy. A regional conflict in the Middle East is a means by which the United States and Russia can engage without actually coming to blows – until now at least. Welcome to the new cold war. The clock has been turned back to the days before the Berlin Wall came down.

History tells us that the first cold war lasted from 1945 until 1990, and was won by the west. Capitalism triumphed over communism, freedom over tyranny. The early 1990s witnessed a victory roll for markets: economic shock treatment was administered to the former Soviet Union and its satellites; a global free trade deal was wrapped up; and parties of the left got with the programme. They stopped talking about socialism and embraced the need for greater competition, efficiency and labour market flexibility.

The centre of gravity of politics shifted. Before the collapse of the Soviet Union, the middle ground in the west was halfway between full-blown communism at one extreme and full-blown capitalism at the other. From the late 19th century onwards, the fear that the working classes would be seduced by Marxism prompted parties of both left and right to introduce reforms intended to knock some of the rough edges off capitalism. Bismarck was won over to the idea of old age pensions; the welfare state in Britain was started by the Liberal government of 1906; Roosevelt came down hard on Wall Street during the Great Depression.

There were plenty more concessions after the second world war. With the Red Army occupying eastern Europe and strong communist parties in France and Italy, the generosity of America’s Marshall plan was not just philanthropy. It was also the result of fear of communism and a feeling that if capitalism couldn’t deliver for ordinary people, they had somewhere else to go.

This anxiety dwindled over the decades as it became clear that the Soviet Union’s economy worked a lot better when the need was to provide tanks and aircraft for total war than it did to produce consumer goods in peacetime. The end of the cold war removed the threat of an alternative ideology altogether. So the new middle ground – the third way – moved closer to an undiluted form of capitalism.

To take just one obvious example, the economic strategy being proposed at present by John McDonnell, the shadow chancellor – higher personal and corporate taxes, state ownership of the public utilities and the railways, a national investment bank – would have been firmly in the social democratic mainstream when the cold war was at its height. Now it is seen as so extreme that Labour dissidents are – in another echo of the past – toying with the idea of forming a new centrist party.

In the new post-cold war politics, parties that once believed their job was to make capitalism work for voters now believed their task was to make voters fit for capitalism. State intervention did not cease, it merely took a different form. Governments might have believed they could do nothing to prevent communities wiped out by deindustrialisation and were no longer to guarantee full employment as they once had, so instead they used welfare reform to get the unemployed to take low-paid jobs and tell the poor that they needed to smoke less, drink less and eat more healthily. State control over the people replaced state control over the economy as the focus of policy, and it didn’t really matter whether the voters liked the tough love or not, because there was nowhere else to go.

The austerity policies of the past decade saw the full flowering of the new politics. Those who were responsible for the biggest financial crisis since the second world war went unpunished; those who were innocent felt the full force of deficit-reduction programmes. There was nothing like Marshall aid for Greece when it was experiencing a 30% fall in GDP, no writing off of the country’s debts as there was for West Germany in 1953.

It is now almost three decades since the cold war ended, and few hanker for a return to the days when the iron curtain divided Europe. Yet the promises made in the early 1990s have not been fulfilled. Liberalising markets did not lead to economic nirvana; instead the orgy of speculation unleashed led to the financial crisis of 2008. Living standards have continued to rise in the west, but more slowly than they once did. Productivity growth has stalled. In the UK, personal debt levels are not much lower than they were before the crash.

The country that has done best in the post-cold war era – China – has done so with a version of the old middle way. Strong growth has meant a stupendous fall in poverty rates over the past four decades but movements of capital have been carefully regulated, trade barriers have remained higher than in the US or Europe and the state has maintained ownership of large chunks of industry. China has become more market friendly but only up to a point.

The decision to embrace the discipline of the global marketplace has proved disastrous for parties of the centre left. They did well enough during the late 1990s and early 2000s, when cheap imported goods flooded in from China, but were bereft of ideas when the global economy hit the wall in 2008. Where there would once have been a plan to re-regulate capitalism there was instead an intellectual vacuum.

There are some obvious lessons to be drawn from this. The first is that the mainstream parties need to come up with policies that do things for people rather than do things to people. The record shows that the managed capitalism of the cold war delivered better results than the unmanaged capitalism since.

The second lesson is that voters don’t buy the idea that global capitalism is a force of nature – the economic equivalent of the “beast from the east” – that cannot be tamed. That’s why Trump’s proposed tariffs on Chinese imports and McDonnell’s plan to nationalise the utility companies are proving popular. People want now what they have always wanted: a job, decent pay, a pension, a roof over their heads and a sense that their children will be better off than they are. They can’t understand why the global economy can’t deliver today what nation states could deliver half a century ago.

There is one final lesson. If mainstream parties don’t come up with the answers, the evidence is that voters will look elsewhere for solutions. The rise of populism explodes the myth that they have nowhere else to go.

Larry Elliott is the Guardian’s economics editor

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