Was our economy always like that?

Well, according to this book I'm reading (The silent take over, by Noreena Hertz), it was a bit different. Until about 30 years ago (before Thatcher and Reagan came into power in late 70's, early 80's), in most of western countries, including most of Europe, the heavy industry (the big corporations, like steel, energy, transport, oil, even food) were state-owned. This meant the state decided how much to produce and at what price to sell. This worked well, especially during the war when basically production was required at a maximum rate and there was social cohesion towards a common goal.

In democratic countries, politicians who wanted to stay in power had the incentive to please the electorate (government by the people, for the people). And they had the incentive to stay in power because they were in control of an enormous machine, the main bulk of the national economy (according to S.Levitt/S.Dubner, in Freakonomics, humans respond extremely well to incentives), and power made them happy. So workers conquered a lot of benefits in those days, which were not there before (payed vacation, unemployment benefits, retirement pensions, health care, better education, and so on). These were nevertheless hard-fought battles with a lot of striking and protesting, leading up to major confrontations, like the 68' student movements. That economic model was based on the economic theories by John Maynard Keynes, who advocated that government should intervene in the economy to guarantee full-employment and welfare. This model resulted from the analysis of the American Great Depression, when a vicious cycle of under-spending lead the economy into a negative spiral, such that many people lost their jobs. The idea was that if under-spending lead to recessions, than a lot of government spending would solve it.

So governments and their associated industries grew to become enormous, heavy monsters, which provided work for many people, but became extremely inefficient. Governments had to plan production for the year and they would do it by looking at figures from the past 5, 10 years, which would not always apply to the circumstances faced in the new year (aging of population, changes in preferences, bad weather or other catastrophes, or like in my country the fact that many people returned from the ex-colonies in the mid 70's). Often production was too low, causing the country to have to import (at high costs since the economies were protected with trade tariffs) and inflation would ramp, or was too high, and the producers could not sell the exceeding because the prices were fixed (i remember as a kid watching on TV farmers dumping excessive tomatoes they'd been asked to produce on the streets of our capital because they couldn't sell it). Subsidies would be put in place, taxes raised, purchase power reduced, international loans asked, debt increased, more taxes raised, and so on, down the drain. In very small countries, or countries which are rich in valuable resources (like oil) this government controlled economies may work, but as economies grow in complexity it tends to become highly inefficient, and government cannot plan it anymore (this is what lead to the collapse of the Soviet Union).

It could have happened to other European countries as well, if democratic alternating had not allowed for experimenting with other models. And this is what happened when Thatcher became elected in Britain in 1979, and Reagan in the US shortly after. The Keynes theories were abandoned and replaced by new ideas which embraced the concept that private and free markets tend to regulate themselves. That is offer will equal demand in some magical way. This magical way relies on the fact that private enterprise will aim at maximizing profit, therefore reducing waste, increasing efficiency and optimizing production. The governments saw an opportunity to cash fresh money by selling their enterprises, thus relieving the tax payers, improving the efficiency of the economy, thus making life better for all in it. Some of the reforms required to liberalize the markets were painful because in the transition periods a lot of people got worse off (for example massive lay-offs because private corporations require less workers, more competition for your job, less security, etc.), this made some of these right-wing governments unpopular, but, once this radical change started and economies became more dynamic, there was no stopping it. It was a domino effect, either you were in or you were out at the risk of seeing your economy collapse, like it did in most of Eastern Europe. Even the left-wing governments that followed (Blair, Schröder, Chirac) could not (and had no desire to) do anything to prevent it, in fact they pursued it even harder.

One more note: what lead to the collapse of the Eastern Europe economies was, i believe, more the fact that the economy of the rest of the world grew so much in production (GDP) that the money of these economies became worthless (they had little or no exports to make it worth anything to others) and vital imports (food, energy, parts) extremely expensive, when considering on top the trade tariffs that came with it. So they collapsed, not so much because they were communists, but because they didn't grow as much. It's the difference that causes the problem, not the absolute size.

And that's how we arrived at the model I described in the previous post. So from a starting point where governments were ruling the economy to a point where corporations now control the economy.
Now what's the problem with that? It all sounds efficient and fantastic. And that i hope will be the topic of the next post.