The Retreat of Rentierism under Embedded Liberalism (Keynesianism & Welfarism) (1945 - 1970s)

After 1945, Western European nations started to construct a new order that could ensure economic growth while protecting societies from capitalism’s destructive consequences. A new post-WWII social contract underpinned by Keynesianism and welfare state had taken shape between the states and the masses. For the first time in European history, rent-seeking was deliberately and systematically restrained by the elites for the benefit of the masses.

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20 June 2019

A New Postwar Order with the State as the Guardian of Society


In the aftermath of WWII, with the demise of dictators like Hitler and Mussolini, Europe again became an arena of contending ideologies as well as powers.


Politically, in Eastern Europe states such as East Germany and Hungary, socialist, communist, and agrarian parties formed coalition governments in the mid-1940s. Under the strong influence of Soviet Union, they set about implementing Stalinist policies of farm collectivization and forced industrialization, eliminating large landowners and bringing heavy industry under state control during the process. In contrast, postwar Western Europe experienced the recovery of parliamentary democracy. The discrediting of fascism led initially to a widespread swing to the left represented by the communists (共产主义) and the social democrats (社会民主主义). By this point, the various social-democratic parties not only shunned violence and revolution as tools of social change. They had also proclaimed democracy as essential for socialist ideals.[1]

Economically, as the devastated countries struggled to rebuild, there was a pervasive conviction that the political chaos and social dislocation of the 1930s were caused by the Great Depression, which in turn was the consequence of unchecked capitalism. Across the European political spectrum, there was a consensus against returning to that path of unrestrained economic liberalism. The 1947 program of the German Christian Democrats, for example, declared that the period of uncurtailed rule by private capitalism is over.”[2]


The war itself, moreover, profoundly changed many people’s views of the appropriate roles of states and markets. The success of the governments in managing the economy and controlling society during the war demonstrated conclusively that central governments could in fact control economic development effectively.[3]


After 1945, therefore, Western European nations started to construct a new order that could ensure economic growth while protecting societies from capitalism’s destructive consequences. In that new order, states would become the guardian of society rather than of the economy, and economic imperatives could be forced to take a back seat to social ones.  Throughout Western Europe, states explicitly committed themselves to managing markets and protecting society from its most destructive effects.


To achieve that, almost all social democratic parties in Western Europe eschewed economic liberalism and turned themselves into champions of Keynesianism (凯恩斯理论) and welfarism (社会福利制度), both of which dictated the return and growing influence of state interventions in economic and societal developments in postwar Europe.

Keynesianism – A Non-Totalitarian State-led Approach to Prosperity


Keynesianism, named after its originator John Maynard Keynes, rejected the view that markets operated best when left to themselves and its recognition of the need for substantial state intervention in economic affairs.


Instead, Keynes argued that state action would often be necessary to help avoid economic crises that could threaten both democracy and the capitalist system itself. Having experienced the rise of the Soviet Union and the Great Depression, Keynes understood that markets were socially and politically dangerous. He hoped to undercut the appeal of left-wing calls for capitalism’s destruction by showing how it could be rescued from its flaws, and hoped to undercut the appeal of fascism by reconciling democracy with increased state management of the economy.


Keynes thus argued that the state could use fiscal and monetary policy to influence demand, thus stabilizing profits and sustaining full employment while avoiding extensive nationalizations, as it was done by the fascists, and a command economy, as propagated by the communists.[4]  


In short, by offering a system that “held out the prospect that the state could reconcile the private ownership of the means of production with democratic management of the economy”,[5] Keynes showed that there was another state-administered and yet non-totalitarian solution to the problem.


Welfare State as the Guardian of the Citizenry[6]                 


Like Keynesianism, the welfare state also represented a transformation in the relationship between states and markets. In particular, the welfare state repudiated the view that a “good” state was one that interfered in the economy and society least. With the acceptance of the welfare state, governments were increasingly viewed as the guardians and protectors of the citizenry.


States were now committed to doing, on a massive, impersonal scale, what members of families and local communities had done in pre-capitalist times—namely, take care of people when they couldn’t help themselves. Welfare states, in other words, broke with a main tenet of liberalism by insisting that basic subsistence should be “guaranteed as a moral right of membership in a human community”[7] rather than depending haphazardly on one’s position in the marketplace.[8]


Postwar Britain led the evolution of European democracy by founding the modern welfare state. The British electorate rejected Winston Churchill’s conservative government in 1945 and gave the new prime minister, Clement Attlee (克雷芒艾德礼) an overwhelming majority in Parliament. His Labour government planned a new British democracy based on two broad policies:

  • the adoption of welfare legislation by which the state provided all citizens with basic services “from the cradle to the grave” and

  • the “nationalization of leading elements” of the British economy, on the theory that state profits would pay for welfare services


Attlee’s welfare program was derived from an idealistic wartime plan, the Beveridge Report (贝弗里奇报告) of 1942, which called for government insurance to protect the nation. The Beveridge Report laid the basis for the National Health Act (1946) and the National Insurance Act (1946), laws that promised “a national minimum standard of subsistence” to everyone. In return for a regular payroll deduction, all citizens received sick leave benefits, retirement pensions, maternity benefits, unemployment compensation, widow’s and orphan’s allowances, and medical care. For other Western European countries, Britain’s welfare program became the model for a democratic welfare state.


Nationalization of Key Industries to Pay for Welfare Services


Attlee soon also set about nationalizing (国有化) private firms into “public corporations”. The opposing conservative Tory Party (保守党) made only limited protests when Attlee nationalized the Bank of England in 1945, the coal mines in 1946, the civil aviation in 1947 (creating the parent corporation of British Air), and the iron and steel industries (1950). A broad conservative attack on the policies of the Attlee years did not come until the Margaret Thatcher (撒切尔) era, beginning in 1979, when both denationalization and the dismantling of the welfare state defined her neoliberalist government.


The French had begun their socialist program of nationalization even earlier in the 1930s to thwart the growth of the Communists. Introduced by Léon Blum of the Socialist Party, the program allowed the state to take control of energy and the utilities (gas, oil, and coal); most insurance companies and banking; and some prominent industrial companies, such as Renault and Air France. By the late 1940s, 20% of the French economy had been nationalized, making it a program of conservative nationalization even larger than the Labour Party’s efforts in Britain.[9]


Similarly, in the German Federal Republic (West Germany) newly created in May 1949, its leading founder, Konrad Adenauer (康拉德), founded a conservative party, the Christian Democratic Union (CDU), which stood for anticommunism, free-enterprise economics, and social conservatism. Adenauer, like many British and French conservatives, defended the welfare state and drew on Bismarck’s example in the 1880s to advocate “socially responsible” capitalism.

The Retreat of Rentierism in Postwar Europe


Due to a combination of factors including congenial labour relations, baby boom, and effective macroeconomic policies, not to mention also US assistance through the 1947 Marshall Plan (马歇尔计划), Europe staged a miraculous recovery of its economy in less than a generation by the 1950s.


More importantly, a new post-WWII social contract underpinned by Keynesianism and welfare state had taken shape between the states and the masses. This form of political-economic organization was known as ‘embedded liberalism’ to signal how market processes were surrounded by a web of social and political constraints and by a protective regulatory environment.


For the first time in European history, rent-seeking was deliberately and systematically restrained by the elites for the benefit of the masses.


The decade of 1950s turned out to be Western Europe’s golden age. With the rapid expansion of the postwar economy, there was full employment and West Europeans collectively enjoyed job stability, rising income and unprecedented living standards. By 1957, Prime Minister Harold MacMillan of Britain said that “most of our people have never had it so good.”[10]


By the 1960s, however, the European economic miracle could not be sustained. Western Europe and Japan had by then recovered economically from the destructions of the war and their companies faced increasing competition for growth with American companies in international markets. Economic growth soon began to stagnate. By the 1970s and early 1980s, Western Europe’s postwar golden age ended when she suffered the worst economic decline since the Great Depression, triggered by the oil shocks in 1973 and 1979.


With state finances in both the US and the Western Europe crumbling under soaring social welfare spending and with state capitalism underpinned by Keynesianism showing signs of inefficiencies attributable to the state interventions, the stage was set for the re-emergence of free-market capitalism (自由市场资本主义) but this time propagated by the neoliberals (新自由主义者).


Riding on the free-market policy regimes propagated first by the UK Prime Minister Margaret Thatcher and followed by the US President Ronald Reagan, the neoliberals began building a new world order guided by the principle of “capital first”.


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[1] See Hause 625

[2] See Sasoon, 140.

[3] See Frank Tipton and Robert Aldrich (1987). “An Economic and Social History of Europe from 1939 to the Present.” Baltimore: Johns Hopkins University Press, 6, 48.

[4] Stuart Holland, “Keynes and the Socialists,” in Skidelsky, ed., The End of the Keynesian Era, 68.

[5] Adam Przeworski, Capitalism and Social Democracy (Cambridge, MA: Cambridge University Press, 1985), 207.

[6] Hause 626

[7] Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1944) and also Marshall, “Citizenship and Social Class,” 86ff.

[8] Sheri Bergman

[9] Hause 626

[10] Hause 618