Like pure democracy, undiluted capitalism is intolerable

                                                                        Wilhelm Ropke

Two pillars in our modern system of democracy emerged from the catastrophes of world war and genocide. These building blocks are social democracy and the legal protection of individual human rights.    

In the period between the American Revolution and the outbreak of the First World War, as societies across Europe were transformed by the Industrial Revolution, Europe’s monarchies refused to adapt. As capitalism changed European societies beyond recognition, the refusal of ruling elites to compromise led to the build up of tensions which erupted with catastrophic consequences in the Russian Revolution and the First World War, much of which was based on clashing imperial-colonial interests between elites within the ‘Great Powers’.

The Great War left Europe in ruins and led to the rise of the United States as a global economic superpower. Throughout the 1920s and 1930s, as new technologies fuelled economic growth as never before, technologies also radically impacted upon people’s lives. In 1914 about one-third of workers in the average industrialised country were farmers; by the beginning of World War II, this proportion had been halved as factory jobs rapidly replaced agricultural jobs[1]. Many of the new technologies, such as cars and aircraft, also required companies on a scale that had not previously existed. These new large-scale corporations squeezed many small firms out of business. As many farmers and small businessmen lost their jobs, disaffection with capitalism grew. By 1935 these two groups, along with white-collar workers, represented two-thirds of the membership of the Nazi party in Germany[2].

photo credit: 1945, Allemagne, Berlin, Des civils passent devant un monument soviétique après la fin de la guerre via photopin (license)

The Great Depression plunged Europe even further into crisis. The Wall Street crash of Black Tuesday, 1929, resulted in spiralling unemployment and a virtual shut-down of the world economy. World trade plummeted and a wave of hyperinflation wiped out the savings and assets of millions. Still paying reparations from the First World War, Germany was particularly badly hit. In the absence of unemployment benefits or other forms of social security, many people were left destitute. Eventually, as the social and political crisis spiralled out of control, Germany turned to Hitler for salvation.

At the height of World War Two, the Nazis controlled most of Western Europe, while large parts of Eastern Europe lay under Soviet occupation. Millions were being deported to their deaths either in Hitler’s concentration camps or to the slave camps of Stalin’s Gulag. Europe’s political system had failed utterly to protect its citizens against the rise of dangerously psychologically disordered groups, and it was paying a horrendous price.

 When the war finally ended, and Nazism had been defeated, the countries of Western Europe sought to draw lessons from the Two World Wars to construct a new social and political order. The wars had clearly shown that capitalism creates losers as well as winners and that the resulting social disintegration provides an opportunity for pathological groups to rise to power. The injustices of capitalism – gross inequality, social divisions and widespread impoverishment – had contributed to the rise of Nazism and the outbreak of war. In the light of this devastating experience, European leaders now viewed unregulated capitalism as dangerous. The lesson that emerged from the ashes of Europe was that a new model of democracy, based on a new accommodation between capitalism and democracy, was needed if European civilisation was to be restored.

This new European model of social democracy had begun to emerge even before Hitler began to terrorise the continent. During the Great Depression, social democrats in Scandinavia had already developed the type of intervention that was needed to make capitalism work for the common good.[3] During the 1930s the Swedish Social Democrats implemented a major programme to reduce unemployment. In neighbouring Denmark, the Danish Social Democrats pioneered widespread social security and free primary education. In Norway, the Labour Party enacted similar measures to protect citizens against capitalism’s excesses. When World War II ended, the principles of social democracy pioneered in Scandinavia were adopted across the continent. In the United States, Roosevelt’s ‘New Deal’ was also in effect a social democratic response to the great depression, inspired and based on John Maynard Keynes’ economic analysis, which stressed the importance of the state regulating the free market and the legitimate role of the state in providing support for citizens.

Social democracy rests upon a contract between capitalism and society which limits inequality and provides a minimum standard of living for all, based on the state regulating the market and protecting society from the negative impacts of an unfettered free market economy. Limits on inequality are maintained through taxation and redistribution and through the provision of services by the state in healthcare, education and social security. In Europe at least, the principle had been established that the state has a vital role to play not only in promoting economic growth, but also in reducing inequality in order to ensure social cohesion and social stability.

Read more about the meaning of democracy here.

[1] Jeffry A. Frieden, Global Capitalism: Its fall and rise in the twentieth century, W.W. Norton and Company Ltd., 2006:167

[2] Jeffry A. Frieden, Global Capitalism: Its fall and rise in the twentieth century, W.W. Norton and Company Ltd., 2006:210

[3] Sheri Berman, The Primacy of Politics: Social democracy and the making of Europe’s twentieth century, Cambridge University Press, 2006