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A New Paradigm: The New Deal of the 1930s

by Rainer Land Saturday, Oct. 31, 2009 at 3:45 AM
mbatko01@gmail.com

The New Deal that led out of the worldwide economic crisis in the 1930s was based on the combination of a new technical-economic model with a new socio-economic model. Obama's achievement is not turning the necessity of overcoming the crisis against the social principle

A NEW PARADIGM OF SOCIO-ECONOMIC DEVELOPMENT

The New Deal of the 1930s and Postwar Capitalism

By Rainer Land

[This article published in: Initial-Berliner Debatte is translated from the German on the Internet, http://www.linksnet.de/de/artikel/24912. Dr. Rainer Land is a philosopher and economist at the Thunen Institute in Bollewick.]




The New Deal that led out of the worldwide economic crisis (1929-1938) in the 1930s was based on the combination of a new technical-economic model with a new socio-economic model. The technical-economic model was Fordist mass production, the economy of scale and the related model of industrial research, development, production and utilization of nature. The socio-economic model was the participation of workers in economic development in the form of higher income, growing consumption and better social security: productivity-oriented wage policy and the welfare state. The New Deal was obviously not the result of intentionally planned political decisions of President Roosevelt, US economic bosses, the voters or the population. It was the result of socio-economic and political developments (in the sense of Schumpeter), of an evolutionary process under the conditions of a profound worldwide economic crisis, of a systemic crisis of capitalism, the second systemic crisis after the First World War, the revolutions and the German-Austrian inflation.

As everybody knows, this process of institutional change in the search for a way out of the crisis in the 1930s first led to different paths of development – if one compares Germany (a nationalist social policy combined with protectionism, screening, conquest and exploitation of other people), other European powers (above all Britain that sought to come out of the crisis by means of protectionist strategies and adopting a socially-oriented economic policy after the Second World War), the Stalinist industrialization policy in the Soviet Union and the US. The American way out of crisis was first carried out in the course of the Second World War and afterwards while the British and German way soon turned out not viable and the Soviet way first appeared unfeasible in the 1970s.

The take-off of this American development path was the combination of the New Deal of President Roosevelt with Fordist mass production. The former included state economic programs against the distress of workers, unemployment, and for stimulation of the economy.

The New Deal brought about a new version of the social in the context of US capitalism. Several measures should be underlined here: state monitoring of the stock exchange, price controls for agricultural products (today price controls on energy products are vital), reduction of working hours, voluntary labor, communal investments, legal grounds for unions and the right to strike, introduction of a state pension, an unemployment insurance and the minimum wage, introduction of a progressive income tax (a tax on the rich!) and prohibition of private ownership of gold and silver. Free trade and the principle of most-favored nation status in international trade were added. [1]

The New Deal was a new version of the social in US capitalism. It was radically different from other kinds of crisis mastery. German fascism attempted a new version of the social in a very different way. [2] At first the effects of the New Deal were very limited. Its combination with the greatest credit-financed investment push of all time – triggered by the entrance of the US in the Second World War and the beginning of war preparations – was the prelude to the longest and most extensive phase of economic development in capitalism from 1941 to 1975. The arms industry and other industries boomed as a result of this investment push. Wages rose to unheard-of heights. A boom in the consumer goods industry followed the boom in the arms- and investment goods industries. In the US, the war did not lead to a policy of “tightening belts” regarding wages and consumption. The US even provided Britain with arms- and investment-goods, shipped food and consumer articles to the Soviet Union and supplied half of Europe after the war’s end. The economic miracle was always a consumer miracle that functioned even without war and with considerably lower arms spending when there was no war economy.

This combination is important. The new version of the social and entrance into a new industrialization- and investment cycle, the Fordist mass production, made possible the crucial combinations: mass production and mass consumption, capital exploitation and participation of paid labor in the growing wealth. The way out of the crisis was a new path of economic development that joined a new principle of industrial development with a new principle of social development on the basis of capitalism.

The way out of crisis was the re-orientation of capitalism through the politically induced new version of its social context and the construction of a new path of industrial development, which expanded during the Second World War, afterwards to all Western Europe and Japan and finally was established in wide parts of Asia. The way out of crisis was not the national and social dictatorship as in Germany, the direct planned economy and a policy of restrictions at the expense of workers as attempted in conser4vative western European countries. When this path was first exhausted and fell into crisis (in the 1970s and 1980s), the collapse of the state socialist economic system also led these countries to the path of a Fordist welfare capitalism – at a time when that model did not function very well any more. From a contemporary perspective, this kind of economic development, this model of capital exploitation coupled to the consumption of the masses – above all the workers – can be criticized. Firstly, it did not exclude the extraordinary luxury consumption of the very rich, thus it remained “unjust” even if the workers participated in economic outcomes. Secondly, it solved the problem of hunger and misery for the majority of the population in developed capitalist countries. However small parts of the domestic population and large parts of the populations in the so-called third world were excluded from participating in the consumer society.

Thirdly, this type of economic development must destroy its own foundation since it is based on permanently increased labor productivity and not on a rapid increase of resource- and energy-efficiency. Thus the economic development went along with a constantly increasing strain on natural resources, energy- and resource consumption, waste products and emissions. Sometime or other the stability limits will be reached. In several regards, these limits were already reached in the 1970s. We recall the 1970s and 1980s, the oil crisis, the ozone hole, the stagnation gases, the dying of the forests, the poisoning of rivers and lakes. Hopefully some of these early problems can be solved or mitigated: CO2 emissions, global warming, climate problems, the strain on the world’s oceans with CO2, the overstrain on the environment with unnatural chemicals, problems of safe long-term storage of nuclear waste, the dramatic loss of biodiversity and the destabilization of important eco-systems of the earth like the rainforests and the glaciers.

Since the 1970s, the negative scale effects of declining resource efficiency devour the positive scale efficiency of mass production and higher labor productivity. That is my thesis. In the world economy, stagnation of the total efficiency can probably be expected, synthesis of labor productivity, resource efficiency and capital productivity. Since the 1970s, the exploitation of the aggregate capital has succeeded in three different ways and no longer through the increasing total efficiency of industrial productivity. Firstly, through redistribution at the expense of the population, that is through partial withdrawal of the participation-principle, of productivity-oriented wage policy and of the welfare state, that is the prerequisite for the success of postwar capitalism. Secondly, through location competition, redistribution at the expense of competitors, realized especially in the model of the competition state that destroyed a world trade system of comparative advantages in trade with Fordist mass production goods and the necessary investment goods and raw materials. The systemic destruction of the world financial system occurred, beginning with the end of the Bretton Woods model. Thirdly and lastly, through an independence of the exploitation of finance capital, the genesis of a financial market capitalism with its redistribution of the gross domestic product at the expense of the general public and in favor of successful financial market actors in the fiction of a monetary growth without real economic growth.

The way of continued deregulation of the financial system and inflation of money capital led unavoidably to financial crises like the present crisis. All three ways can only postpone without solving the problem of the limits of the Fordist type of economic development. The only logical possible solu9tion would be the transition to a resource-efficient and environmentally compatible type of economic development.

Renouncing on economic development would not be a way out because it would sanction the status quo. The environmental problems existing today and unsolvable without another type of industry will continue and cause the death of today’s humanity. Renouncing on economic development would mean renouncing on the future technologies with which environmental destruction could be avoided and environmental problems at least partly repaired.

Renouncing on growth urged again and again would also not be a solution. The current path of population growth will lead to a stabilization of the world population at nine to ten billion people by 2050 (currently seven billion). Renouncing on increased production of food, consumer goods and services meant less and less had to be consumed per capital year after year. Thus people of developed countries must lose more and more so people in the third world can win. At the end everyone suffers distress. The only alternative is a new combination of development and growth, an economic development where growing production goes along with declining resource consumption (energy, raw materials and emissions) and environmentally compatible industry arises.

Renouncing on development and renouncing on growth would be fatal like growth without development or development without growth. The alternative is another path of economic development, growth based on another principle of economic development and invention and extension of a new type of industry. If such a change of direction occurs, a greater investment boom and development push would occur than the boo9m after the Second World War that led to the genesis of Fordist participation capitalism.

THE POLITICAL AGENDA OF BARACK OBAMA CAN BECOME A STARTING POINT TO A NEW PATH OF DEVELOPMENT

The global energy turn is the key to a new path of development and industrialization. An industrial revolution is involved, not a simple structural change, a scientific-technical and a socio-economic revolution that could be a paradigm shift of economic development. We stand globally at a similar crossroads as 80 years ago. The old world of the Fordist welfare economy is at an end after 30 years in decline. Now the worldwide economic crisis shows that the expedients – the way of finance market capitalism and the competition state – were cul de sacs that only made everything worse. A new combination is necessary: another path of industrialization (an energy-efficient and resource-efficient world economy) and a new principle of social partnership (India, China and Latin America cannot be excluded). A new form of global cooperation is also necessary that supersedes the neoliberal model of exclusion of the superfluous and the principle of the competition state.

As then the crisis can be the catalysor of a political process leading to a new way of development that functions temporarily (not for ever). This time a new type of economic development will not be caused by political evolution or political confrontation. This time a new principle of mediation of industry and the environment is involved. The restoration of the social, the annulment of neoliberal deregulation at the expense of labor through a social principle that adjusts to a new relation to nature and a new industry, making possible paid work and mass consumption with less resource consumption, not through simple reinstitution of Fordist regulation of wages and consumption.

The restoration of a world market based on comparative advantages and a global financial system is also imperative, ending the system of the competition state and profits at the expense of other world market actors. “Comparative advantages” mean strategies of industrial development in which everyone profits potentially. In any case, the sum of all profits is greater than all losses (so-called win-win scenarios emphasized in the last years are not favored by the present world trade- and financial system). This means today seeking strategies of a global energy turn in which solving the energy question for the catch-up development (the extension of the energy system in China, India, Latin America and Africa) and reorganizing energy systems in developed industrial countries are tackled as common projects with comparative advantages for everyone. Shifting the burden to others cannot solve the question.

Until a few months ago, the US – its government and large parts of the businesses and financial market actors – was the guarantor that a political change of paradigms leading to the long-term evolutionary path of a different industrialization model and another socio-economic configuration would not occur.

However the tide turned within a few months – perhaps. Whether it will succeed or not and what this path will look like at the end are uncertain (as little as Roosevelt could have seen the welfare state capitalism of the 1980s).

Now a “miracle” has happened. The three core elements necessary to change to a new path of socio-economic development are part of the new President Barack Obama’s agenda. They were intimated in the election campaign and became clear in the agenda of the White House and in the policy of struggling against the worldwide economic crisis since February 2009. The necessities of limiting the recession in the US and cushioning the social consequences encourage the new orientation to a new path of development – unlike Germany where the search for a new strategy seems undermined.

The three components are: firstly, restoration and expansion of the social principle, secondly, the establishment of a new principle of economic development with the energy turn as the key and thirdly transition to a new principle of foreign policy and world economic policy where one’s interests are pursued through cooperation and agreement, seeking positive sum games in the world economy and world politics, not forgetting or turning back one’s interests (Obama’s politics is still interest-politics like all politics!). Therefore a new world political economics appears in which profits are gained through cooperation and comparative advantages, not through monopolies or protectionism. Only then is free trade good. These distinctions could become concrete through re-regulation of the world financial system and the world economy.

Obama’s great achievement today is not turning the necessity of overcoming the economic crisis against the social principle and not pressing the necessity of a renewal of the social against an energy turn and finally not turning the renewal of America’s strength against cooperative work for a better world order.

Whether this can succeed is unknown. The contours of a policy that can equal the policy of the New Deal are imaginable.





NOTES

1. cf. http://de.wikipedia.org/wik/New_Deal. The following measures are named:

- State monitoring of the stock exchange

- Minimum prices on agricultural products

- Union demand of a 40-hour week was supported by businessmen and introduced.

- Voluntary work service (Civilian Conservation Corps-CCC) was organized for re-forestation and soil improvement.

- 122,000 public buildings, a million miles of roads and 77,000 bridges were built to stimulate the economy. Different authorities were responsible (Civil Works Administration-CWA, Works Progress Administration-WPA.

- Tennessee Valley Authority (TVA) built 20 dams in Tennessee.

- Agricultural production was reduced to create profitable prices for farmers. The Federal government granted farmers subsidies from the Agricultural Adjustment Act (AAA) from May 11, 1933.

- Unions were given a stable legal foundation. A formal right to strike was introduced.

- Child labor was prohibited.

- A state pension was introduced.

- Unemployment insurance was started up.

- Minimum wages were introduced for industrial workers.

- A tax system with low rates for the poor and high rates for the rich was introduced.

- Private ownership of gold and silver was prohibited (from 1933 to 1974).

- The Reciprocal Trade Agreement in which the US government laid the first foundations for free trade according to the most-favored nation principle was also important.

2 Cf. Manfred Lauermann: The Social in National Socialism in: Berliner Debatte Initial 9/1998. Cf. Wolfgang Schwelbusch





RELATED LINKS

Great Depression in the US – Wikipedia:

http://en.wikipedia.org/wiki/Great_Depression_in_the_United_States

Franklin D. Roosevelt – First Inaugural Address – March 4, 1933

http://www.bartleby.com/124/pres49.html

Presidents and Job Growth – New York Times

http://graphics7.nytimes.com/images/2003/07/02/business/03JOBSch450.gif



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