The End of Protest: How Free-Market Capitalism Learned to Control Dissent

1

Schumpeter’s Paradox

There is someone else who might have been surprised by our quiet crisis, if he had lived to see it: the economist Joseph Schumpeter. Schumpeter was an Austrian who immigrated to the United States in 1932. He was not, by any stretch of the imagination, a progressive. He hated Franklin Roosevelt and the New Deal. But Schumpeter also had a cold-eyed view of free-market capitalism. Capitalist reality, Schumpeter wrote in 1942, is first and last a process of change. . . . [It is a process] that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of creative destruction is the essential fact about capitalism.¹¹

In the late 1990s, the revival of free-market capitalism that had been started by Reagan and Thatcher was reaching its high-water mark, and Schumpeter enjoyed a surprising comeback too. His idea of creative destruction seemed to capture the dynamism of the new global economy: crushing old practices, inventing powerful new technologies, and always surging forward. Schumpeter, the business magazine Fast Company said in 2001, was the poster boy for the post-millennial, hyper speed, shock-a-minute economy.¹² But the vision of creative destruction that was popularized in the late 1990s was not Schumpeter’s. It was bloodless and painless. It envisaged incessant revolution without suffering, anger, or resistance. Schumpeter’s own view of creative destruction was much darker. Schumpeter admired the vitality of free-market capitalism but understood its capacity to cause anguish and resentment. The history of capitalism, he said, is studded with violent bursts and catastrophes. Wrenching change inevitably cloaked the capitalist engine with an atmosphere of almost universal hostility . . . [which] increases, instead of diminishing, with every achievement of capitalist evolution.¹³

Schumpeter took this mounting hostility very seriously. He thought that it would eventually prove fatal to the free-market system. He was not quite right: in the aftermath of the Great Depression, laissez faire capitalism was wounded but not killed. Politicians in the United States and other countries were weary of the cycle of boom and bust, which was not just an economic phenomenon, but also an unending oscillation between social peace and social chaos. After the Second World War, they took steps to guarantee economic and social stability. For many years, these measures worked. They kept the peace. But they also entailed a substantial retreat from free-market ideals of the prewar era.

So here is the mystery that we want to solve today. Call it Schumpeter’s Paradox. After 1980, politicians in the United States and the United Kingdom began to reverse many of the measures that had been set in place after the Great Depression. They wanted a return to free-market ideals. By the early 1990s, that free-market model was being adopted around the world. The result was a liberalized global economy of unprecedented scale and complexity. If Schumpeter was right, however, the return to laissez faire policies also meant unleashing the power of creative destruction. It threatened a return to that atmosphere of almost universal hostility about which Schumpeter had written in 1942, and which seemed most likely to boil over when the economy crashed, as it did in 2008.

Many advocates of free-market policies argued that Schumpeter’s dark view of laissez faire capitalism was no longer relevant. The modern free-market economy, they insisted, was less prone to crashes, and generated such wealth that it was easy to compensate people whose lives were upended by market forces. But as the neoliberal model spread, experience showed that none of this was right. Many countries that followed free-market prescriptions after the United States and the United Kingdom did suffer debilitating unrest. This included many advanced economies that were struck by the financial crisis of 2008. In those countries, modern market forces were just as disruptive, and as likely to trigger unrest, as they had been in the United States and the United Kingdom a century ago. But disorder in the modern age was limited in the United States, and to a lesser degree in the United Kingdom, even after the crash 2008. In those two countries, the link between free-market economics and unrest seemed to have been broken. How did this happen?

There is an answer to this question, but we have to dig to find it. While technocrats in Washington and London were always been happy to provide other countries with detailed instructions on how to dismantle barriers to the operation of market forces, they were never so explicit about the methods that were used to manage the risk of unrest at home. Still, there was a formula. It has three important components. The first involved disabling the capacity to mobilize protest, mainly through measures that weakened the capacity of workers to organize. The second involved the reinvention of policing, to squash the new forms of networked protest that rose up as the power of organized labor declined. And the third involved ceding emergency powers to technocrats so that they could take steps to avoid full-blown economic calamities.

In the two leading free-market nations, this was the unstated formula for keeping the peace. As we will see, there are important ways in which it contradicted our usual understanding of what the promarket reform program was all about. An economic program that aims at shrinking the role of government in general actually depended on making an important part of government (that is, domestic security forces) more robust than ever before. For police forces, in other words, this was the era of big government. Similarly, an economic program that was usually criticized for its doctrinal rigidity—that is, its unflinching attachment to cold principle—proved to be deeply pragmatic in moments of crisis. Experimentation in economic policy was allowed, so long as it was technocrats rather than politicians who did the experimenting.

In other ways, though, this formula for keeping the peace fit well with our preconceptions about what neoliberalism is about. It rested on an unprecedented intolerance for economic and social disruption and a deep skepticism about democratic politics. In fact, it threatened to extinguish crowd politics—that is, the method of expressing political and economic grievances through collective action in the streets. Citizens were told that they had a remedy through the traditional mechanisms of democratic politics. But this was not much of a consolation in an age when democratic institutions were crippled or captured by market forces.

2

Controlling Disorder in the First Liberal Age

There have been two great ages of free-market capitalism. The first spanned the nineteenth and early twentieth centuries, and came to a definite end after the Great Depression. The second age—marked by the revival of free-market principles that became known as neoliberalism—began with the election of British Prime Minister Margaret Thatcher in 1979 and President Ronald Reagan in 1980, and was a global phenomenon by the early 1990s.

These two ages were united by a faith in free markets and skepticism about government activism. But they were divided on a crucial question: Whether a market economy was inherently volatile, or inherently stable? As we will see later, the neoliberal age was distinguished by the belief that free markets were essentially self-stabilizing. It was commonly accepted that the market economy produced steady growth and adjusted smoothly to surprises. Moreover, the gains from growth were thought to be large enough that people whose lives were turned upside down because of economic transformations could be compensated easily for their suffering. As economists liked to say in the neoliberal age, a rising tide lifts all boats: eventually, everyone is better off in a free-market economy.

Few people living in the first age of liberalism had such a happy view of free-market capitalism. Schumpeter was not alone in recognizing that the system produced spectacular wealth, but also great pain, as market forces destroyed old ways of living. Karl Marx and Friedrich Engels, who witnessed the early stages of British industrialization, concluded in 1848 that capitalist development involved the constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty, and agitation.¹⁴ This was the demon that Schumpeter later called creative destruction.

Not only was free-market capitalism remorseless in destroying traditional ways of life. It was also temperamental and prone to wild swings in performance. As the British journalist Walter Bagehot noted in 1873, the power of the system was matched by its delicacy. Economic collapses happened so often that they were taken to be an inevitability, and the main question for economists was whether the timing of slumps could be predicted.¹⁵ The invention of the roller coaster in 1885 was fortunate, because it provided a metaphor for the experience of everyday life: giddy highs followed by sickening plunges. Boom and slump, slump and boom; such is all financial and commercial history, wrote Everybody’s Magazine in 1904. A panic every so many years; then recovery; then over-stimulation, and panic again. . . . Bury the dead, cart off the cripples!¹⁶

Bread or Blood

But the dead were not really the problem. It was the living who caused all the trouble: workers who lost their jobs and savings, and households that could no longer afford food, housing, or clothes. When creative destruction took hold, people would organize massive marches and demonstrations. They would collect themselves into unions and go on strike. Sometimes they would vandalize factories and riot in city streets. Every significant economic collapse mutated into a crisis of public order. By the end of the nineteenth century, this mutation was accepted as an inevitability, just as economic collapse was regarded as an inevitability. Periodic bouts of popular unrest were intrinsic to the free-market system.

The British, pioneers of laissez faire capitalism, learned this very quickly. Certainly, the early decades of the industrial revolution constituted a period of extraordinary material progress. Per capita consumption doubled between 1800 and 1850. Britons marveled at the advent of complex methods of factory production, the annihilation of space and time by railways, and the growth of foreign trade. In 1851, Britain’s Royal Society of