The rise of Britain and the laissez-faire system

The “long” nineteenth century, from the 1770s–80s to 1914, was the most spectacular period of economic change in Europe. The British Industrial Revolution opened a new chapter of economic history. By the middle of the eighteenth century Britain had achieved the prerequisites for sustained economic growth. More than 1,000 miles of navigable canals and waterways, 300 Newcomen steam engines, a revolutionized agriculture, and dynamic proto-industrial development made Britain the center of world trade. Domestic markets played a dominant role during this period (Flinn, 1966: 62); only 5–9 percent of British output was exported during the eighteenth century. However, higher profits in foreign markets increased the role of exports to 10–12 percent (Bairoch, 1976: 196). Export activity, nevertheless, became the driving force of industry: during the first half of the eighteenth century the output of export industries increased by 76 percent, while output in other industries grew only 7 percent. The value of British exports doubled between 1700 and 1750, and then more than tripled by 1800. The leading textile industry by then exported half its output. Eric Hobsbawm concludes that the origins of British industrialization were rooted in foreign trade, especially with less developed areas such as India and other colonies (Hobsbawm, 1968: 49).

In the early eighteenth century, Britain defended its domestic market in a traditional mercantilist way. For example, the so-called Calico Law banned the imports of Indian cotton goods. Exports flourished, especially in the leading textile sector. The value of British exports increased thirty-fold during the long nineteenth century to 40 percent of the national income (Schlote, 1952: 53). The rate of export growth also increased, from 2 percent to 4 percent, and then to 6 percent during the 1860s to 1870s. Already by 1820 the value of British merchandise exports surpassed the value of merchandise exports of France, Switzerland, Austria, the Low Countries, and Italy combined. By 1870, British exports reached 40 percent of total Western European exports, and by World War I still accounted for more than one-third (Maddison, 2001: 361). British industrial development also intensified. During the first four decades of the nineteenth century industrial output grew at rates of 23 percent, 39 percent, 47 percent, and 37 percent. Britain gradually gave up agricultural self-sufficiency.

Globalization and its impact on Europe

During the last third of the twentieth century, a new trend figured in the world economy: globalization. Europe became one of the main participants in this transfiguration. Several historians maintain that there is nothing new in globalization – consider an ancient form of globalization, the Christian Church (Hopkins, 2002). According to others, early modern times, and even more so the nineteenth century, marked the beginnings of globalization. In this view, globalization was successively advanced by the colonial empires, the railroads, the laissez-faire system, and the international gold standard. From late medieval times, long-distance trade and cashless payment networks began internationalizing the European economy. Worldwide trade networks emerged during the early modern centuries. All these, however, were only the beginning of a long historical trend that led to globalization.

O'Rourke and Williamson speak about a “first globalization” from the second half of the nineteenth century, and, after a third of a century backlash in the interwar world economy, a second wave of globalization after World War II. All of these interpretations may have a rationale. However, late nineteenth-century globalization, while representing a strong globalizing tendency, did not yet lead to a globalized world system. That happened only in the late twentieth century. Economic interactions between various countries and continents – trade, migration, capital investment, establishment of subsidiaries, production abroad, and financial transactions – all existed before but became dominant in the last third of the twentieth century.

John Maynard Keynes, in his Sidney Ball Lecture at Oxford University in 1924, challenged the biases in favor of laissez-faire. As in the title of his essay, The End of Laissez-faire, Keynes prophesied a new age. War experiences certainly played an important role in forming his revolutionary views and negating the basic principle of Adam Smith:

The twentieth century, especially after World War I, began with a major challenge to the laissez-faire regime with the emergence of alternative economic systems. The entire continent gave up free trade and laissez-faire market economy and turned toward protectionism, state interventionism, and a regulated market system.

World War I was a turning point. It “marked the true watershed between the nineteenth and twentieth centuries” (Feinstein et al., 1997: 18). One could add, it accelerated the collapse of laissez-faire. German experiments in state regulation of the war economy became a kind of model for all combatant countries, including Britain. Instead of further building an international economic system, these countries adopted economic nationalism and sought self-sufficiency. State interventionism vigorously returned.

A decades-old debate persists over the existence of a “fascist economic regime.” Alan Milward, more than a quarter of a century ago, argued

Besides the debate over the similarities and differences between the Italian and German systems, debate persisted over fascism itself. From the perspective of this economic history analysis, it is not relevant whether Italian fascism and German National Socialism may be generalized as fascist regimes, nor is there a need to differentiate them or establish that “nazism [is] a distinctive branch grafted on the fascist tree.” It is not relevant here whether a narrower definition of fascism excludes “the royal military-bureaucratic-oligarchic dictatorships,” including regimes led by political forces such as Primo de Rivera's Union Patriotica and later Franco's Movimiento Nacional in Spain, or Salazar's União Nacional in Portugal (Linz, 1976: 9, 11). In his History of Fascism, Stanley G. Payne includes the military-led right-wing regimes in Southern and Eastern Europe in the history of fascism. Although those regimes were not explicitly fascist, they definitely contained elements of fascism, from the Horthy regime in Hungary to post-Stambolinski Bulgaria, from Piłsudski's Poland to the even more authoritarian regime that followed. They were all authoritarian and subordinated the economy to the state, especially during the 1930s. Their political systems were often characterized by one-party rule, as in the case of the later Piłsudski era, often as a result of the elimination of political parties, as under the Balkan royal dictatorships and Ioannis Metaxas's dictatorial regime in Greece.

General Metaxas's dictatorship in Greece had no party backing at all. His “Fourth of August Regime” rejected party organizations.

History does not abide by the strict schedule of the calendar. The economic history of twentieth-century Europe begins somewhat earlier than the century itself and certainly does not end by the close of the last calendar year. In the time span from the late nineteenth century to the early twenty-first century – thus about one-third longer than the calendar twentieth century – the history of the European economy was consistent. It was during this time that laissez-faire capitalism was born, challenged and almost defeated by alternative economic regimes, adjusted, and was eventually reborn. This book covers the long twentieth century of economic history in Europe.

This book plays a special role in my long professional career and maintains a distinctive place among the great number of books I have written and published. Its first edition, published in 2006, was translated into more than a dozen languages and was published across Asia and Europe.

Writing an economic history of an entire continent over the course of longer than a century is probably an over-ambitious enterprise. Several inspirations, however, have prompted me to write one. Starting with my very personal historical experience, I lived through and survived more than eight decades of the period I am going to discuss, and closely watched the latter two-thirds of it. I had personal experiences with economic nationalism in the authoritarian state and its war economy in Hungary. Soon after the war, a Soviet-style command economy was introduced. I actively participated both in attempts to reform it, and, in the 1980s, also in the economic regime change. I closely followed the transformation of the centrally planned economy into a private-market system. At last, in the past quarter of a century, I have lived in the globalized, free market economic regime in the United States. I feel fortunate for this unique, motivating experience.

My long career and numerous publications as an economic historian of nineteenth- and twentieth-century Europe also provided personal inspiration to author a new approach to the various economic regimes of the twentieth century. Some of my good friends and colleagues published broad economic histories: David Landes's classic The Unbound Prometheus and Sidney Pollard's Peaceful Conquest on the industrialization of Europe covered roughly two centuries between 1760 and 1970.

If economic dirigisme was an extreme version of the regulated market economy, the centrally planned system was the most extreme version of economic dirigisme. It was equally statist and interventionist. If economic dirigisme was strongly growth-oriented in an autarchic way, and served war preparation, the centrally planned economy was a special system to achieve a forced maximum economic growth and self-sufficiency. It was a “child” of the German war economy, and also served, with an extraordinary radicalism, the modernization and war preparation of economically less developed countries. The state socialist planned economy abolished private ownership, the market mechanism, the role of market prices, and the role of supply and demand. Unlike all the other systems, this first non-market economic regime was, at least partly, born from a theory.

Marxist theoretical legacy, Lenin and the Bolshevik program

Karl Marx was an extraordinary product of his time: the philosophy of Enlightenment and passionate Romanticism. A renaissance scholar, Marx, as his later disciples maintained, combined German philosophy, English political economy, and French socialism, and made important contributions to philosophy, economics, and history. As a radical journalist he left Germany and emigrated to Britain after the 1848 Revolution and became a student of contemporary British capitalism. According to Marx, capitalism historically opened the road toward a stormy development of productive forces, technology, and organization, but meanwhile led to a polarization of society. Marx believed that economically interpreted history and political economy were the master sciences to understand and influence social development. He used the Hegelian dialectic and shared a teleological concept of history, believing, as all the children of the age, in progress as a law of nature. As expressed in the foreword of Das Kapital, historical progress, though unilinear, is realized by class struggle and revolutions. Social harmony is a natural law, but attainable only through continual struggle – beyond capitalism.

Marx's point of departure was Ricardo's labor theory of value, but he transformed it by distinguishing between the labor value of the product of labor and the value of the workers' labor power. In his powerful concept, labor was a special commodity, which produced more labor value than required for its reproduction.