5.1.4 Historical context: from Cold War to 2008 financial crisis

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Unit 5 Contents


You will recall that in Unit 2 you were asked to do an Exercise on major events in twentieth century history.  The Response to this Exercise gave a list of some of these.  Read this through again.


Reading (1p)

Module A, 2.1.5 ‘Response to Exercise’


A basic knowledge of the history of the past century is necessary for understanding what what we shall now look at.

Turning from capitalism to ‘socialism’, one defining aspect of this (as Unit 2 explained) is advocacy of common ownership of property, especially of large and valuable pieces of property like factories and farms.  (In one sense, therefore, John Lewis is a ‘socialist’ company.)  In practice, the term ‘socialism’ became closely associated during the twentieth century with the Communist governments which were in power in Russia from 1917 and much of the rest of eastern Europe and also China from the late 1940s.  The eastern European governments came to refer to their economic system as ‘really existing socialism’, a term which Pope John Paul used in critiquing this socialism in Centesimus Annus.  While some socialists in other parts of the world always supported the Communist regimes, many others thought that the Soviet Communist system wasn’t socialist at all, and indeed that it was a betrayal of socialist ideals.  Despite this, use of the label ‘socialist’ for the economic system these regimes established is appropriate to the extent that they attempted to make a reality of common ownership, through the state taking over ownership of all large businesses in those countries.

During the Cold War from 1945 to 1989, when the USA and its Western allies opposed the Communist countries, the conflict between ‘capitalism’ and ‘socialism’ was one pivotal issue.  One of the effects of this conflict was to simplify what people meant by both of these terms.  Those in the West who were most opposed to Communism were, for the most part, strong defenders of ‘capitalism’ in the strict sense – they favoured traditional laissez-faire capitalism.  At the same time, they regarded ‘socialism’ as inevitably leading to state ownership of capital and therefore state control of business.  Correspondingly, for most defenders of Soviet-style Communism in eastern Europe, this is indeed what ‘really existing socialism’ meant.

Contrasting capitalism and socialism in this simple, stark way was a main feature especially of what was called ‘Thatcherism’ in the UK and ‘Reaganomics’ in the USA.  These labels referred to a revived version of nineteenth century economic liberalism which became hugely influential in the Western world from the 1970s onwards.  A small group of writers, the most influential of whom was Friedrich Hayek, had been arguing, ever since the 1940s, in favour of such economic liberalism and against even limited attempts by Western governments to regulate private business and direct their economies. They insisted that business should be as free as possible to pursue profit.  This view gained strong political backing in the 1980s under Prime Minister Thatcher in Britain and President Reagan in the USA.  Since then this economic stance has generally been known as ‘neoliberalism’, and I’ll use this label frequently in the rest of the module.

So the Cold War debate came to be basically between capitalism, in the narrow sense of this term, and ‘state socialism’.  One effect of this binary contrast was to oversimplify the real issues.  The possibility that that there could be a form of market economy that is not, in the strict sense, ‘capitalist’ got little attention.  Likewise, the possibility that there might be one or more versions of ‘socialism’ other than the Communist one was often squeezed out.1

The significance of this over-simplified conflict for what has happened between the end of the Cold War in 1989 and today is immense.  Basically, many both in the West and in the former Communist countries interpreted the great revolutions of 1989-91 that brought down the Communist regimes in Europe as showing that capitalism had won and socialism had decisively lost.  The effect of this has been, in the two decades since then, that the world has been ‘uni-polar’ in economic terms – i.e. there has been one dominant view.  Neoliberal capitalism, a system driven by the overriding objective of maximizing profit, has been the only game in town.

More than anything else, this explains the financial crisis that began in 2007 and reached an early climax in 2008, symbolized by the bankruptcy of the investment bank Lehman Brothers, and from which the world was still struggling to recover in 2013.  Banks and other financial institutions, most of which exemplified capitalism in its strict sense – they were driven by the overriding aim of maximizing return to capital – had for years been making larger and larger loans, both to ordinary people and in complex deals among themselves.  The problem was that, the larger the loans, the more money there was chasing housing and other property.  So the main reason property prices went so ridiculously high in many Western countries during the decade up to 2008 was simply that banks were lending so much.  The financial institutions regarded their practice as acceptable because, in neoliberal capitalism, the aim of profit maximization legitimizes any activity that is legal.

But that growth in lending was a classic example of a ‘bubble’.  To a large extent, economic growth during the decade up to 2008 was an illusion – because an ever expanding quantity of money was chasing roughly the same number of goods.  The pin that burst the bubble was that some banks, especially in the USA, loaned money for house purchase to poor people who had no hope of repaying – so-called ‘sub-prime’ borrowers.  The banks did this because they thought that house prices would go on rising, and that, if the poor people couldn’t repay, the banks wouldn’t lose out as they would repossess the houses and could then sell them at a profit.   But the problem was that prices were rising so much only because the banks were lending so much – in effect creating more and more money.  If ‘sub-prime’ mortgages had not burst the bubble, something else would have.

All of this came out of the global domination of capitalism and the neoliberal defence of it that followed the end of the Cold War in 1989-90.

As you know from earlier units, CST has always rejected ‘capitalism’ in that narrow or literal sense, and the statements of CST during this period critiqued it, most notably Pope John Paul’s Centesimus Annus of 1991.  Readings you will do in a moment will show this.  By the end of this unit you will have a good sense of what CST favours instead of neoliberal capitalism.


End of 5.1.4

Go to 5.1.5 Historical context: an argument about knowledge in markets

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  1. Donal Dorr is one writer on CST who criticizes this binary representation of the twentieth century debate. See his Option for the Poor: A Hundred Years of Catholic Social Teaching (2nd ed., Orbis, 1992), 138-9.