Mercantilism and Capitalism More State, Again The Rise of the Social and Interventionist State The 1870’s acted as a watershed in the central European history of the 19th and 20th centuries. This was true of, e.g., the development of liberalism. In the 1860’s and early 1870’s, it had much influence, even if it had to share power with the government of the less-than-completely-liberal Bismarck, and even if it wasn’t ever quite as strong in Germany as it was, e.g., in England. But now, at the end of the 1870’s, it began its decades-long decline. The 1870’s also represent a watershed, if one considers the long- term changing relationship between the economy and the state. The economy and the state: three phases The economy and the state in mercantilism: in the 17th and 18th centuries, there were many interventions by the state into economic and social relations. In order to expand taxes, and increase their power, the noble territorial rulers and their bureaucrats had attempted to encourage business and trade. They had roads and canals built, and enabled the founding of manufacturing industries (and sometimes actively led them themselves) by freeing the enterprising individual from the rules of the trade guilds, by providing venture capital, or by giving physical facilities. This absolutist policy, aimed at strengthening the economy and the state, was called mercantilism. It consisted of many small interventions into the economy. Its success was usually rather limited. If the demand and the transportation infrastructure weren’t there, then the construction of the best silk factory was of little use. The bureaucrats weren’t entrepreneurs. Their economic “big picture” was rather narrow. If they were successful, the prince or the state benefited, not they. If they failed, they didn’t have to “make even for it” out of their own pockets. All of this didn’t exactly drive them onwards. Lots of economy, little state: the phase of liberal economics. Mercantilism ended around 1800. The conviction slowly spread, that the state should only set the framework needed by the economy; but that the economy otherwise should be left to itself, if it was to be successful and useful to all. In England, this economic liberalism had already arrived in the 17th and 18th centuries. In the famous book, The Wealth of Nations, by Englishman Adam Smith, this economic liberalism had been given its classical formulation: a brilliant plea for capitalism, i.e., for an economic system which is governed neither by the strangle-hold of bureaucracy, nor by the guilds and professional fraternities, but rather by the market. It is based upon the private ownership of capital, upon the free and profit- driven decisions of private entrepreneurs, and upon trade between them, and also upon their right to hire workers on a contractual basis, and to have the workers work for them in exchange for a wage, i.e., to exchange work for a wage. If everyone, in an enlightened attitude and in respect for the laws, follows his own personal individual interests, then the common good also indirectly benefits, because only in this way are the powers of the Mercantilism – page 1 individual mobilized, and the economic thought of many people be brought into action. This was the message of Adam Smith. In the German states, too, this or similar convictions made themselves felt among the bureaucrats, and among many citizens, beginning around 1800. The regulations of trade guilds were dismantled step by step, in Prussia already by 1810 and 1811, in Saxony, Bavaria, and other southern German states only finally in the 1860’s. Within the framework of the law, then, everyone could choose his occupation freely, and correspondingly follow his best judgment, pursuing his own interests. Governmental agricultural reforms freed the farmers from their hereditary ties to the land and from obligations to rulers; they allowed the sale and purchase of farmland. The state retreated step by step from economic life. Less and less did the officials participate in the founding of firms. Until 1861, bureaucrats still directed mining in Prussia. Between 1861 and 1865, the direction of mining transitioned into the private sector. Duties inside the states - often at each city limits – had long hindered free trade; they fell in the early 19th century. Since around 1860, free trade dominated also between European states. Protective duties were removed, trade treaties signed. To be sure, the state never retreated entirely from economics. Trade schools, like general eduction, remained governmental. The state continued to build streets, canals, and - in southern Germany - also most of the earliest railroads. The state was, especially in Germany, always more than merely a “night watchman state” and never restricted itself only to the enforcement of calmness and orderliness. Despite this, one can say that the reality in the 1860’s and 1870’s came very close to the economic-liberal-capitalist model: much market, little state - very different than at the beginning of the 19th century. And this system, based on free enterprise, private property, and work for wage, did well for itself. To be sure, it distributed the fruits of economic growth somewhat unevenly, and there was a distinction between rich and poor. There was inequality, dependency, insecurity, and exploitation. The socialists criticized this sharply. But, on the other hand, the system brought so much technical progress, and so much industrial economic growth, that even the poor became less poor, the survival chances of the general population increased, and the Industrial Revolution was put into motion, which promised still much more and better things for the future. The state gets more strongly involved again. In the 1870’s, there was a change in the trend: the state’s intervention into the economy and the society increased again, even if only gradually. We have learned the reasons: The serious economic crisis, and the sharpening of social tensions mainly between the workers and the middle class which went along with it, brought forth changes, in the course of which the state’s offices again intervened more strongly, even if the basic principles of a capitalistic market and entrepreneur economy remained intact. By means of protective tariffs, the state intervened in foreign trade, and with the help of socialist laws, it intervened in the social Mercantilism – page 2 conflict. In other areas of life, too, the state became more strongly involved. Thus the railroads, which had been private until then, were nationalized for the most part by 1890, and the continuing construction of the railroad infrastructure happened under state direction. A further example: between 1883 and 1889, the German empire created a modern system of social security (nationalized insurance). In 1883, nationalized health insurance arose; in 1884, accident insurance; and in 1889, retirement and disability insurance. The funds were contributed largely by the workers and employers. The disbursements were substantially lower than today, but slowly, they began to increase. Those covered, at first only a few, grew in number. In 1911, a separate social security system arose for white- collar workers. By 1913, the vast majority of all workers were covered. The retirees couldn’t live on the pensions, but the pensions formed a basis for other small incomes, through the family, small jobs, or savings and investments. Unemployment insurance arose not until 1927. According to Bismarck’s intentions, the social security system was to take the wind out of the sails of the social-democratic movement. This didn’t exactly happen, but social security did bring, for the mass of the population, a minimum of security against the risks of life. In the examples of protective tariff policy, nationalized railroads, and social security, it can be seen that the significance of the state – and thus of the bureaucrats – in economic and social life increased starting in the 1870’s and 1880’s. Other examples could be mentioned. Thus legal protection for workers made progress, above all in the 1890’s. The duties and the personnel of the post office were expanded – in Germany, this, too, was a state activity. Starting in the 1880’s, telephone service was a part of this. Even in the towns, things changed. The city government busied itself more with the needs of daily life: building streets and parks, serious sewer problems, and naturally the schools. Many of the new electrical generating plants were built, starting in the 1890’s, as “economically mixed enterprises”, in which the towns worked together with private entrepreneurs. Mercantilism – page 3 .