Introduction

In the 1970s, a specter was haunting Western Europe, the specter of low employment and high prices. Termed as stagflation, this stretch with both economic dysfunction and high inflation put an end to the Golden Age, a period of three decades of constant economic growth, high living standards and expectations that characterized post-war Western Europe. It also called into question the Keynesian economic philosophy itself, which compressed the economic policies immediately after the end of the Second World War under the guise of a public investment in aggregate demand supported by policies of deficit spending. From a political point of view, the 1970s crisis was threatening the political-economic nature of an ideological regime according to which democracy and capitalism represent two complementary principles. The new reality of the times placed them on an eternal race for survival.[1] In the communist East, another specter was haunting Europe in the same period, the specter of a stagnation set in motion and deterioration of living standards after the ending of those few but highly needed reforms that could place 'the other Europe' in a better position to respond to the rigidity of a domestic production.[2] In responding to the question 'Why were capitalist democracies better placed than authoritarian socialist regimes to recover from the crises of the 1970s?', my attention will be on privatization and deregulation as two major policy-making responses to the expansionary prices and the economic malaise in Western Europe, as well as their absence in the East that continued the economic paralysis which led to the collapse of the communist regimes in the late 1980s.

Two 'Europes': between democratic capitalism and authoritarian socialism

Europe has witnessed in the middle of the 20th century, two political-economic regimes: democratic capitalism in the West, and authoritarian socialism in the East. Each regime was based on the structural (in)compatibility between capitalism, socialism and democracy. Western Europe considered that capitalism and democracy can be compatible as long as the former is brought under the political control of the latter.[3] Communist Europe on the other hand saw capitalism and democracy as contradictory as the rule of the market will in the end undermine democracy. Therefore, socialism was perceived as democratic since it eliminates market abuses, empowers equality between social classes and brings capital ownership under the democratic control of society. Given the choice of political economic regimes, the governments in the west allowed, under the spell of social democracy, for private property and market prices to co-exist alongside democratic regulation aimed to bring down market excesses and allow for an increase in standards of living made possible by the state's commitment towards full employment, free collective bargaining, independent trade unions and expansionary welfare state policies in social spending and insurance.[4] In the socialist East, governments pursued complete regulation of the economic life through strict state-driven economic planning, the forbidden of private property and the welcoming of price setting differences between sectors imposed for closing the ranks in industrialization which lagged behind compared to the West.[5]

The 1950s and the 1960s brought impressive economic growth in both the West and the East, with the latter surpassing the former in average annual growth of net material product given the lack of an industrial base to start with similar to the West, as well as the mobilization of all national resources (savings, labour, energy and raw materials) towards industry and high industry capital goods production in particular.[6] [7] In terms of employment, the two Europes advanced hand in hand, although different in the way of working. Western Europe based its labour policies on the Keynesian notion of state-financed full employment that expanded the welfare state and empowered the trade unions.[8] In the East, full employment was fuelled by a continuous mass mobilization of rural manpower towards the urban industry following both agriculture collectivization and a lack of incentives for rural labour, all at the expense of a minimization of consumer production in favour of capital production.[9] Therefore, continuous industrialization was followed by high urbanization rates and exhausting working shifts among the limited manpower to sustain an ever-increasing high industry expansion in lines with the Marxian notion of infinite accumulation of capital goods.[10]

The notorious Golden Age came to an end in the 1970s in Western Europe as low economic growth rates, starting with the end of the 1960s, could no longer support the compromise between capitalism and democracy where labour accepted private property and market forces in return for social security and high standards of living. Since capitalism has always been trying to find solutions for survival alongside democracy, the response to both low growth and popular demand for social security came in the form of an expansionist monetary policy.[11] This policy sought to appease the capitalist forces eager to reduce the workforce as a result of economic downturn, respectively the democratic exhortations to maintain the popular promises of full-employment and social security. This re-enforced compatibility between capitalism and democracy came at the expense of a high levels of inflation in the 1970s. In Eastern Europe, the 1970s also put an end to its own supposed Golden Age, a very short period of communist experimentation in the late 1950s and early 1960s with decentralized economic planning in decisions regarding investment, optimum quantity production and wage setting, as well as a reconsideration of the importance of consumer goods rather than capital goods, and of the need for higher incentives for industry managers to provide better qualitative products together with some sort of limited market to set -not all- prices.[12]

A remedy for the crisis of the 1970s

Since the West and the East oscillated between different interpretations of democracy, one better represented by capitalism while the other by socialism in the 1950s and the 1960s, it was the ideological flexibility of the former and rigidity of the latter that set them apart in the 1970s. Since capitalism has always sought for new formulas to survive alongside democracy where the majority of the population favours social security, Western Europe responded to the high levels of inflation and economic downturns with privatization of state assets and financial deregulation. The West has witnessed a gradual reduction of the share of public capital in national capital starting with the end of the 1970s.[13] Two of the most impressive virtues of privatization are given by its capacity to bring cost efficiency and improve quality and innovate.[14] Since private assets compete among themselves on the free markets, entrepreneurs, rather than unmotivated state managers had better incentives to both achieve production at minimum costs and meet consumer needs at prices that would consider production costs.[15]

Alongside the transfer of public wealth to private control, capitalist democracies have pursued in the same period a policy of increasing private investment and consumption through deregulation of the financial system. Rather than relying on the public sector to meet the demands of the population for continuous opportunities and social security through deficit spending under the spell of Keynesian full employment and aggregate demand policies, deregulation of the financial sector (or private Keynesianism) allowed the people to privately fund the same demands on the background of new borrowing opportunities offered by the financial sector set free from any governmental control.[16]

In the Communist East, the rigidity of the authoritarian socialist regime prohibited any privatization with the aim of holding the democratic control of the nation's assets. Moreover, the communist own commitment to high equality and full employment could have been endangered once incentives for efficiency enhancing could create a gap between rewarding managers and labour who feared that once the profit ingredient is introduced in the cost-price production evaluation, lower wages or higher unemployment could become a popular policy among greedy managers.[17] Consequently, the permission of some limited deregulation for managers in making decisions at the industrial enterprise level in the late 1950s-early 1960s ended abruptly once the investment and production decisions at the local level began to undermine the 5-year plans at the national level.[18] The result was a continuation of the acceleration of heavy industry, with all the resources being allocated to that end, limited consumption goods and low quality for those already existing, a reduction in private consumption and a non-existence of private investments. With the industrial capacity of the communist regimes reaching the limits of existing resources in terms of labour and raw materials, and against the background of an economic growth strictly limited to investments in industry, the stagnation set in motion in the late 1970s combined with the popular dissatisfaction with the decrease in the quality of life relative to the West, led to the collapse of the authoritarian socialist regime in favour of democratic capitalism a decade later.

Conclusion

Based on the available evidence presented in this analysis, the 1970s differences in the economic responses of a democratic capitalist regime and the authoritarian socialist counterpart were based on a balance between flexibility and rigidity once several structural crises threatened the political-economic order on which both regimes were built. In the West, the economic growth of the 1950s and the 1960s which supported the compromise between capitalism and democracy according to which the acceptance of markets and private property was conditioned by maintaining a social security based on citizenship rights was strongly shaken by the economic stagnation of the early 1970s. In response, the capitalist democratic regime reacted with expansive monetary policies to maintain the compromise through other interventionist ways, but it could not be sealed indefinitely once inflation proved difficult to manage in the long term. In the East, the partial decentralization reforms of the central planning apparatus and the outsourcing of decisions to the management of state companies were halted by the late 1960s in most communist states. The communist regime reaffirmed the virtue of central planning in the 1970s against the background of a mass mobilization of all state resources in view of the infinite Marxian accumulation of capital goods and the consequent growth of heavy industry at the expense of consumer goods and light industry as well as agriculture which remained highly collectivized.

The flexible response of the democratic capitalist West in accepting privatization and financial deregulation as two remedies to make the economy more efficient and to increase private consumption and investment (private Keynesianism) was hardly replicated in the rigid socialist authoritarian East. In communism, privatization was a non-starter while even the limited deregulation of production decisions in order to offer better options for consumer demand was halted in the early 1970s in favour of the top-down central planning and re-prioritization of capital goods and heavy industry. Consequently, the flexibility shown by the democratic capitalist regime was rewarded with the regress from the economic malaise in the West in the 1980s, while the rigidity of authoritarian socialism continued the economic stagnation of the late 1970s well into the 1980s. This abided against the background of growing popular dissatisfaction with the differences of standard of living between the two Europes, and persisted until the dissolution of the communist regime in 1989 and the claim of democratic capitalism in the Eastern part of the Iron Curtain.

Bibliography:

Eichengreen, J. Barry, 'Eastern Europe and the Planned Economy' in The European economy since 1945, Princeton, N.J. :, Princeton University Press, 2007.

Kay, J.A. and D. J. Thompson, 'Privatisation: A Policy in Search of a Rationale', The Economic Journal, Mar., 1986, Vol. 96, No. 381 (Mar., 1986).

Piketty, Thomas, 'The Capital/Income Ratio over the Long Run', in Capital in the twenty-first century, Cambridge, Massachusetts; London, England; Cambridge, Massachusetts; London, England, Harvard University Press, 2013.

Shleifer, Andrei, 'State versus Private Ownership', The Journal of Economic Perspectives, Vol. 12, No. 4 (Autumn, 1998).

Streeck, Wolfgang, 'The Crisis in Context: Democratic Capitalism and Its Contradictions', MPIfG Discussion Paper 11/15 Max-Planck-Institut für Gesellschaftsforschung, Köln, October 2011.

Temin, Peter, 'The Golden Age of European growth reconsidered', European Review of Economic History, April 2002.

[1] Wolfgang Streeck, 'The Crisis in Context: Democratic Capitalism and Its Contradictions', MPIfG Discussion Paper 11/15 Max-Planck-Institut für Gesellschaftsforschung, Köln, October 2011, pp. 6-8.

[2] Barry J., Eichengreen, 'Eastern Europe and the Planned Economy' in The European economy since 1945, Princeton, N.J. :, Princeton University Press, 2007, pp. 146-153.

[3] Wolfgang Streeck, 'The Crisis in Context: Democratic Capitalism and Its Contradictions', MPIfG Discussion Paper 11/15 Max-Planck-Institut für Gesellschaftsforschung, Köln, October 2011, pp. 6-8.

[4] Ibidem.

[5] Barry J., Eichengreen, 'Eastern Europe and the Planned Economy' in The European economy since 1945, Princeton, N.J. :, Princeton University Press, 2007, pp. 133-140.

[6] Peter Temin, 'The Golden Age of European growth reconsidered', European Review of Economic History, April 2002, Vol. 6, No. 1, p. 5.

[7] Barry J., Eichengreen, 'Eastern Europe and the Planned Economy' in The European economy since 1945, Princeton, N.J. :, Princeton University Press, 2007, pp. 139-140.

[8] Wolfgang Streeck, 'The Crisis in Context: Democratic Capitalism and Its Contradictions', MPIfG Discussion Paper 11/15 Max-Planck-Institut für Gesellschaftsforschung, Köln, October 2011, pp. 6-8.

[9] Barry J., Eichengreen, 'Eastern Europe and the Planned Economy' in The European economy since 1945, Princeton, N.J. :, Princeton University Press, 2007, p. 138.

[10] Ibidem, p. 136.

[11] Wolfgang Streeck, 'The Crisis in Context: Democratic Capitalism and Its Contradictions', MPIfG Discussion Paper 11/15 Max-Planck-Institut für Gesellschaftsforschung, Köln, October 2011, pp. 6-8.

[12] Barry J., Eichengreen, 'Eastern Europe and the Planned Economy' in The European economy since 1945, Princeton, N.J. :, Princeton University Press, 2007, pp. 146-152.

[13] Thomas Piketty, 'The Capital/Income Ratio over the Long Run', in Capital in the twenty-first century, Cambridge, Massachusetts; London, England; Cambridge, Massachusetts; London, England, Harvard University Press, 2013, p. 229.

[14] Andrei Shleifer, 'State versus Private Ownership', The Journal of Economic Perspectives, Vol. 12, No. 4 (Autumn, 1998), pp. 137-138.

[15] J. A. Kay and D. J. Thompson, 'Privatisation: A Policy in Search of a Rationale', The Economic Journal, Mar., 1986, Vol. 96, No. 381 (Mar., 1986), pp. 20-21.

[16] Wolfgang Streeck, 'The Crisis in Context: Democratic Capitalism and Its Contradictions', MPIfG Discussion Paper 11/15 Max-Planck-Institut für Gesellschaftsforschung, Köln, October 2011, pp. 12-13.

[17] Barry J., Eichengreen, 'Eastern Europe and the Planned Economy' in The European economy since 1945, Princeton, N.J. :, Princeton University Press, 2007, p. 161.

[18] Ibidem, pp. 147-152.