Capitalism Restored

What Volcker and Reagan wrought now seems ancient history: an isolated episode with little relevance to our present condition. This is utterly wrong. For every nation, there are crucial demarcation points that fundamentally alter society. The greatest of these for the United States was the Civil War. Before, slavery was legal and the sovereignty of individual states (their right to secede) was an open question. After, both issues were settled. The Great Depression and World War II created another massive chasm. Before, Americans contented themselves with a small national government that had a tiny army and whose budget was barely 3 percent of national in come. After, the United States had become the worlds major power, and government was a colossus—with a huge army and enormous spending—that had a budget equal to a fifth of national income. In our era, the fall of double-digit inflation is one of those separation points, though on a smaller scale. It s a gorge, not a canyon. But ordinary life was much different on each side of the gorge.1

Something profound and pervasive occurred: what I call the restoration of capitalism. Much of what we now take for granted— what we consider routine and normal—originated in the tumultuous transition from high to low inflation. The very viciousness of the Volcker-Reagan recession, which transcended what most Americans expected or considered politically tolerable, forced people to reconsider what was realistic and desirable. It set in motion events and forces that altered attitudes and behavior. On the one side of the gorge, Americans imagined—despite all the setbacks of the 1970s— a new society that would fuse the best features of enlightened business and benevolent government. Their magical alliance would create a universal affluence that would gradually purge poverty and social injustice. This was the great post-World War II progressive project.* On the other side of the gorge was a starker society that

* I first called this the great "liberal" project. But that word suggests that only Democrats embraced it. Although an extension of the New Deal, the vision also reflected the social consensus that emerged from World War II—that government and business should work together for the common good, just as in the war. By the 1960s, this view commanded wide support. President Nixon embraced it. "Progressive" seemed a better term.

had reverted to the rough-and-tumble existence of a more market-driven economy with greater inequalities and individual insecurities. On the whole, this remade economy was more stable and productive than its predecessor. But it also bred a new set of discontents, because it seemed—to many—more crass and cruel. Americans felt less protected by corporate and governmental goodwill and more exposed to assaults from intense competition, advancing globalization and aggressive finance. At every turn in this history, inflation's aftermath played a central role. Disinflation promoted competition, globalization and finance. In turn, these developments altered common assumptions, norms and expectations, including how companies behaved toward their workers and shareholders.

To say that capitalism was "restored" does not mean that it reverted to what it had been in the 1920s or 1930s. "Capitalism" is a term of art. There's no precise definition, though there are some basic requirements. A capitalist system must permit private property, must tolerate relatively free markets and must endorse the social value of economic risk taking—meaning that people who take greater risks or who work harder can earn greater rewards. Up to a point, inequality is accepted as a necessary and desirable incentive for talent, effort and innovation. Although the United States has always met these broad criteria, capitalism is also a spirit, and after World War II, the spirit waned. The Great Depression had discredited capitalism, which was blamed for the collapse. Almost everyone— political leaders, corporate managers, union bosses, ordinary workers— wanted a fairer and more stable system. American business leaders were especially loath to return to the bitter politics of the 1930s.

The prodigious wartime production of tanks, planes and ships had partly refurbished their reputation, and they wanted the rehabilitation to continue.

So capitalism was not celebrated in the early postwar decades. Indeed, the very term fell into disuse, supplanted by the less inflammatory phrase "mixed economy." This signified a sharing of power between government (which would provide a social safety net, regulate business and prevent depressions) and large corporations (which would improve technology, produce goods and services and provide stable employment for their workers). People did not glorify "profit maximization" or "risk taking" but praised "modern management." The predominant image was not of economic entrepreneurs or "robber barons" but of organized masses of skilled specialists— engineers, marketers, accountants. It was this model of progress that, if not entirely destroyed, was badly damaged in the 1980s, because it presupposed that major corporations are far stronger than they actually are. That notion, understandable in the 1950s when U.S. companies dominated the world, could not survive in the 1980s.

The overconfidence inspired the false faith that large companies are immortal and can protect themselves and their workers from harm. The faith faded as competition intensified from all directions: domestic rivals, foreign rivals, new technologies and altered business models. One telling statistic: In 1980, the typical large U.S. firm in the top fifty of its industry by sales had a one-in-ten chance of falling from that position within five years; by 1998, the odds were one in four. Companies that once dominated their industries (IBM, Sears Roebuck, United Airlines)—and whose dominance was taken for granted—lost ground. In 1970, it was unimaginable that corporate giants such as American Telephone and Telegraph, Bethlehem Steel and Digital Equipment Corporation would cease to exist. They were invincible, the nations major phone company and the second largest steel and computer firms, respectively. But all are gone, weakened until they were merged out of existence.*2

Our economic vocabulary reflects these changes. We now talk routinely of corporate "downsizing," "restructuring" and "outsourcing"— all words and phrases that barely existed before 1980.+ These euphemisms for shutting, selling or streamlining business operations— and, in the process, firing workers, relocating them or pushing them brusquely into early retirement—depict a new managerial sensibility. Of course, people were fired before 1980. But among large corporations, the ideal was lifetime employment. Some firms like IBM achieved it. At many companies, career workers could expect to remain for decades. When business was bad, big companies

* The name American Telephone and Telegraph—AT&T—remains. But the corporation that had the name was effectively taken over by SBC Communications, Inc., the former Southwestern Bell, in 2005 with the surviving company retaining the AT&T name.

t A LexisNexis search of The NewYork Times finds that "downsizing" was hardly used in the early 1980s—an average of only seven times annually from 1980 to 1984. From 1995 to 1999, the annual average was 284, or nearly once a day. "Restructuring" was more common—probably because it referred to all manner of corporate reorganizations—but its count has also doubled. The annual average in the 1980-84 period was 512; for 1995-99 it was 1,101.

sometimes placed workers on temporary layoff, to be recalled when the economy recovered. Many firms permanently dismissed workers only as a last resort. That is no longer the case.

No one planned this new economic order. It mainly evolved from events and trends. Of course, it differs fundamentally from the celebrated "new economy" of the late 1990s. That was mostly a state of mind. It seemed to promise through its signature technologies— personal computers, the Internet, cell phones—endless economic growth and rises in living standards. To anyone with a sense of history, this was always a mirage. The "new economy" recalled the "new era" of the 1920s and the "new economics" of the 1960s, when fresh ideas and business practices also promised to eliminate business cycles and guarantee ever-improving prosperity. Oversold, all were fated to disappoint. In early 2000, the stock market reached its peak. From giddy highs, many tech stocks crashed: Amazon.com dropped 92.7 percent, from $75.25 to $5.51; Yahoo 96.4 percent, from $238 to $8.45; and Cisco 90.1 percent, from $82 to $8.12. All told, stocks lost roughly half of their value, a decline of $8.5 trillion from their March 2000 high to the October 2002 low. In 2001, the economy went into a brief recession, even before the September 11 terrorist attacks on the World Trade Center and the Pentagon. So much for the "new economy."3

What actually occurred was more ambiguous and durable. As inflation receded as a source ofmacroeconomic instability, some of the insecurity and instability flowed down to the level of the individual firm. The protections premised on corporate invincibility succumbed to market pressures that had been considered suppressed. It was precisely the weakening of these market forces that inspired the widespread belief, in the early decades after World War II, that capitalism had been permanently reformed and improved. The old capitalism was being deemphasized and being replaced by a more orderly and humane version.

The reappearance of unruly forces—or recognition that some had never disappeared—reaffirmed the survival of traditional capitalism or, depending on your point of view, caused it to be resurrected. Either way, there were changes in perceptions about how the economic system actually worked, as opposed to how we thought or wished it worked. There was more emphasis on individual accomplishment, accountability and wealth—and less on collective repon-sibilities. Greed gained respectability, many said, blaming Reagan. But this was misleading. Widespread changes in how the economy operated counted for more than the president's agenda. It's worth remembering that, for all of Reagan's antigovernment rhetoric, no major federal program was abolished in his two terms.

s economics, the prevailing explanation of the inflation of the

1970s—that it reflected a society whose wants had outrun the nation's capacity to fulfill them—was self-serving, simplistic and wrong. It was a monetary problem that could be fixed by monetary means. But as sociology and politics, the conventional wisdom was fairly accurate. High inflation was one unintended result of a broader, if largely uncoordinated, movement to remake capitalism into a more harmonious economic system. By controlling business

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