The Decline of Fordism and the Challenge to American Power

Walter Russell Mead is the Kissinger Fellow at the Council on Foreign Relations in New York. This article was excerpted from Power, Terror, Peace and War by Walter Russell Mead. ©2004 by Walter Russell Mead. Published by Alfred A. Knopf, a division of Random House, Inc.

New York — Talking about stages of capitalism is a difficult business. Over time, however, it is clear that capitalism has existed in somewhat different forms. In its very early stages, European capitalism rose in a world still dominated by feudalism and was mostly confined to a handful of merchants and producers, while the great majority of the population continued to live as, at best, free peasants in a near-feudal economy where money was rare and profit was hardly a concept.

The Industrial Revolution unleashed another stage in capitalist history. One can call this the era of Victorian capitalism. It was the time of Oliver Twist and William Blake’s “dark satanic mills.” Workers were brutally exploited, and competition between capitalists was fierce and unstinting. Frequent financial upheavals and panics sent waves of bankruptcy through the ranks of entrepreneurs and investors; bitter class struggles over wages and working conditions increasingly influenced politics. State regulation of industry was limited, and capitalists were largely free to do what they pleased without oversight of any kind. This is the system that Marx predicted would someday be overthrown by impoverished workers, but as we have seen it gave rise instead to Fordism.

The capitalism of the Fordist era was kinder, gentler and more predictable than its Victorian predecessor, and its heyday accompanied and facilitated the establishment of the American system after World War II. The trouble is that capitalism did not stop with Henry Ford and the system named for him. The era of regulation, income equality, state planning and stability has gradually been yielding to a new form of capitalism over the last generation.

Many writers have worked to describe the difference between Fordism and what we might as well call “millennial capitalism,” the new system we seem to be inventing and exploring. For some, the shift from Fordism to millennialism is a rake’s progress: the end of a system that produced peace, justice, mass prosperity and social security and the rise of a grotesque new system of inequality, instability and bare-knuckled competition in a hideous, neoliberal dog-eat-dog world. For others, the shift represents the glorious triumph of technology and entrepreneurial spirit over a decadent and stagnant era, and the new and more dynamic capitalism offers opportunities to eliminate poverty and transform the human condition.

Both views, of course, are partly true. Most observers seem to agree that Ronald Reagan and Margaret Thatcher were the first political leaders who set about the conscious destruction of Fordism in the interest of a new, more vigorous form of capitalism. It is not yet and may never be clear exactly why the shift occurred when and as it did; many analysts point to the rise of unregulated, offshore “Eurodollar” markets in the late 1960s and early 1970s as the economic beginning of the transition. The rise of computer technology played a major role by making financial markets infinitely more sophisticated and complex than ever before; the growth of international trade from the very low levels following the disruptions of the Great Depression and World War II was also a factor.

In any case, for much of the last generation, economic practices and institutions that were once seen as pillars of a successful economy have been increasingly considered obstacles to progress. Labor unions, state ownership of key companies, and state-guided investment strategies—building blocks of Fordism—have come under increasing attack around the world.

The globalization of production has played an increasing role in the breakdown of the Fordist model. From a system in which a handful of national companies presided placidly over stable markets, distributing the rents of oligopoly to unionized workers and shareholders while docile, slow-moving banks made low-risk loans to captive customers, we have moved to a volatile system of global competition. Jobs and whole industries rise and vanish within a few years. The progress of capital is destroying the Fordist economy and the political and international systems that rose with it.

This phenomenon, which I first wrote about 20 years ago in Mortal Splendor: The American Empire in Transition, after a shaky start has given the American economy a new burst of growth and contributed to the climate of confidence and invulnerability of the lost years. Although the transition was a bitter one for many people in the United States, and much of the public would like, if possible, to reverse the decades of change, the new capitalism remains much more popular inside the US than in most places outside it.

Here I have to ask readers to indulge me. It is quite possible that a more thorough study of the subject would lead to a somewhat different treatment of the new capitalism than I am giving here. I am not trying to give a full and theoretically coherent description of anything as complicated as a new (and still emerging) form of social and economic organization; I am just trying to highlight some of the most significant features of a set of changes that are reshaping the choices facing American foreign-policy makers.

Millennial Capitalism | Because I have to call it something, and because the obvious terms of Reaganite and Thatcherite capitalism are too dated and one sided to describe a phenomenon that is still growing and changing, I have chosen to call the new capitalism “millennial capitalism.” This is partly because the new capitalism is taking shape around the turn of the millennium, and partly because its emergence causes both its supporters and its opponents to indulge in near-apocalyptic hopes and fears. It is also a neutral term; both those who like the new system and those who hate it can call it millennial capitalism without compromise or concession.

Millennial capitalism is not simply a return to the laissez-faire capitalism of an earlier age. In 1900 the federal budget stood at an estimated 3 percent of GDP.¹ We are not headed back in anything like that direction. The gold standard is not about to return; money will remain a frankly artificial and political measure of value and central banks will continue to intervene in the credit markets. Fiscal stimulus is still very much with us as a policy tool, and the panoply of social insurance programs dating back to the New Deal and beyond in the US, and back to Bismarck’s day in Europe, will be overhauled, trimmed and reformed, but not abolished.

It is a great misunderstanding to suppose that millennial capitalism is simply a matter of deregulation. Many of the structures of Fordist regulation have been overturned, but new forms are taking their place. In Fordist capitalism, the market was seen as a dangerous force that had to be harnessed and restricted. Ordinary people needed to be protected from its vagaries.

In millennial capitalism, the role of regulation is to protect the existence and efficiency of markets in order to allow wider access to their benefits. One can argue over the wisdom of proposed reforms like substituting individual retirement accounts for programs like Social Security, and there is much to be said on both sides, but the intent of the changes is to allow individuals more opportunities to accumulate assets and to gain higher returns on their retirement savings. Fordism sought to protect consumers in monopoly industries like electricity or water from the abuse of monopoly power through preventive regulation. Millennialism seeks to achieve the same results by promoting more competition among what had previously been considered natural monopolies. Both types of regulation lend themselves to abuses, and the record of millennial reform has not always been inspiring, but there is a vast difference between the flexible regulatory networks millennial capitalism proposes and the utter absence of regulation that characterized the apogee of Victorian capitalism.

National regulation may be decreasing, but the rise of millennial capitalism is creating new forms of international regulation that simply did not exist in the past. Free-trade agreements are much more than trade agreements; they create new transnational forms of regulation and justice. Foreign investment, industrial subsidies, environmental practices: They all face new kinds of scrutiny from new kinds of institutions.

Millennial capitalism is also driven in part by the demographic shift now taking place in so much of the world. As population growth shrinks and goes into reverse, many of the social and economic policies of the demographic booms no longer make sense. Medical and pension insurance programs in particular are becoming less and less viable in many economies; for these programs to continue to work, the rate of return on savings (both social and individual) must rise. In general, this means that investment decisions need to move from state allocation and subsidy programs to market-driven, yield-sensitive investments. This shift has enormous implications for political and financial systems across the globe and it plays a major role in driving the economic shift.

Another factor that needs to be mentioned is that millennial capitalism is a natural and logical outgrowth of Fordism itself. A Fordist society is a consumer society; liberated from the need to spend every last bit of money on the basic necessities of life, Fordist consumers begin to express themselves through the kinds of cultural products they buy and the resulting social and cultural changes can ultimately no longer be satisfied within the framework of Fordist society.

The empowered consumers of a developed Fordist society increasingly bring a consumers’ psychology to social institutions as well. The Baby Boom in the US, the first generation with no memory of anything but a Fordist society, refused to take existing institutions and limits for granted, reinventing everything from religion to government to social institutions like marriage. The Fordist individual no longer wants to be part of a bloc, nor is he or she prepared to delegate control over political and social decisions to a handful of leaders. The regimentation, discipline and passivity before power that, for example, New York-area householders were expected to exhibit when Robert Moses wanted to put a freeway through their property disappear as the consumer psychology spreads among voters. The cultural contradictions of capitalism observed by Daniel Bell might be more usefully understood as cultural contradictions in Fordism. The social conditions promoted by Fordist society steadily undermine the cultural, psychological and political foundations of that society.

Globalization | It is also important to draw a distinction between millennial capitalism as an analytic concept and globalization. Globalization is to some degree a consequence of millennial capitalism and the two phenomena are clearly related, but globalization has been used so widely to describe so many different phenomena that we need a term that focuses more on the structural dimensions of the changes remaking so much of the world. Globalization and millennial capitalism are related, but they are not the same thing.

The shift away from Fordism has much greater implications for world politics and, especially, for America’s hegemonic power than we often realize. Globally, the shift from Fordism is deeply unpopular with three audiences, and, unfortunately, they are key audiences for American foreign policy. By and large, governments and the established classes around them hate millennial capitalism. In a Fordist world economy, governments were able to steer credit toward selected regions, sectors and companies. Japan and other Asian countries used this system to build world-class exporting economies. In Germany, France and much of Western Europe, state involvement in the economy not only helped build a planned and stable manufacturing prosperity, it also allowed the creation of the welfare systems that ended a century of social conflict. In Latin America, the system allowed the creation of national industries that established islands of affluence for significant sectors of the population, but also provided governments with instruments of social and political control. Even in Africa, where economic policy of all kinds was mostly a dismal failure, the ability of the state to control and direct economic activity and resources, however poor the results for development, was absolutely necessary for the fragile political and social stability that existed in most countries for at least the first decades of independence.

As the US moved from Fordism to millennialism, both its government policy and, perhaps more importantly, its corporations and investors exerted increasing pressure on the world to move toward millennialism. The nation, in effect, was becoming the enemy of every other state in the world. France, Syria, Brazil, Japan, South Korea, Nigeria, Argentina and many others are one in resenting and resisting the “neoliberal globalization” that threatens their ability to shape domestic economic and political events. A conflict was growing that Karl Marx would have recognized and accurately interpreted: a conflict between the “cosmopolitan” capital of the global, millennial system and the “national” capital of countries whose elites were desperately protecting their Fordist and statist systems against the new threats.

In the Cold War our military and political power was preserving the independence of these states while our economic system was enriching and empowering them. Now our predominant political and military power threatens to eclipse and marginalize them in the “unipolar world” of which we are so fond, while our economic policy aims systematically to strip them of their power at home. The only surprise here is that so many Americans were surprised at the rise of political opposition to American policy and of anti-American political cooperation on a broad global scale.

If opposition was limited to states and the elites closely aligned to them, this would be a difficult enough foreign policy problem. Unfortunately, the problem goes much further—to the beneficiaries, real or aspiring, of the old Fordist system. When Europeans read in their morning papers that their government wants to raise the retirement age, cut unemployment benefits, increase co-payments for health care or raise college tuition, many people curse the US and the neoliberal globalization they feel it is forcing on the world. Politicians are eager to assist them with the cursing; blaming unpopular measures on the insidious “Anglo-Saxon” model of capitalism now spreading throughout the world is a good way to deflect hostility for unpopular measures.

In the developing world the attachment to the subsidies, protected niches and social legislation of the Fordist era runs even deeper, even though in many countries only a minority of the population may receive substantial benefits. In countries like Egypt, Peru and Malaysia, governments provide secure and usually not too demanding ways of making a living for a lucky percentage of the population. The “establishment” in these countries is usually closely linked to the government and fiercely defensive of its own privileged position. When outside economic forces or agencies—currency markets, the International Monetary Fund, the US—push for unpopular changes, the politically active and educated minority is almost unanimous in its resentment and resistance. Again, when concessions are necessary, politicians blame unscrupulous but irresistible pressure from all-powerful and malign “neoliberals” and “Washington consensus” bureaucrats. The result is a poisonous mix of anti-American sentiment that grew steadily throughout much of the world while Americans congratulated themselves on their irresistible soft power during the lost years.

The situation varies from country to country and region to region, and not all the consequences of the economic shift have been negative. America’s willingness to accept large trade deficits has helped to improve relations between the US and China, for example. On the other hand, in Asian countries that experienced the worst effects of the 1997 financial crisis, a popular suspicion of, and even at times hatred of, the US as an arrogant, indifferent force has grown steadily.

In most cases it is not American diplomatic pressure (either direct or indirect through the IMF and the World Bank) or even American economic pressure that is responsible for economic change. Fordism is coming to an end because it is no longer the most efficient method to organize capitalist production. The subsidies, costs and state interference of the old system ultimately create a web of costs, corruption, vested interests and irrational allocations of resources that can no longer be tolerated. Like water seeking the path of least resistance and its own level, capital seeks the countries, the industries and the firms in which it can earn the best returns. When it is blocked in one direction, it flows harder and faster in others. Countries that restrict its free search for profit quickly discover that the capital they invest earns a lower rate of return than capital in other parts of the world.

Made in the USA? | None of this matters much in the contest for public opinion. We now live in a world in which hundreds of millions, if not billions, of people are firmly convinced that the unwelcome and confusing changes roiling their lives bear a “Made in the USA” label.

Xenophobic hatred of “Made in America” globalization is strongest in the Middle East, where half a century of support for Israel had already laid a strong basis for anti-American feelings. The Arab world includes some of the leading examples of “failed Fordism.” State-led development and education strategies in these countries failed to generate the kind of prosperous, diversified economies one sees in Europe and Asia. Instead, the network of protected industries, civil service positions and subsidies to politically important constituencies created a kind of pseudo-middle class. In income and aspirations this class is something like the mass middle classes that Fordism creates in more successful economies; unlike those classes, however, the pseudo-middle class is dependent on government jobs or patronage. Even business takes place in a stifling atmosphere of licensing, regulation, corruption and protection.

Miserable as this system is, and limited as its successes have been, in its heyday it managed the transition from colonialism to independence and saw the construction of such basic elements of industrial life as a power grid and urban infrastructure. Talented young people had far more opportunity than ever before to escape the confines of village life, and a spotty and partial modernization occurred in most Arab countries.

Arab Fordism has been in crisis for some time. As in other countries, the hidden and direct costs of Fordist subsidies climb as years go by. Every old and outmoded subsidy has a constituency fiercely fighting to save it; the costs of industrial protection and isolation proliferate in ways that are hard to measure but easy to see as national firms grow increasingly backward and the goods they offer become increasingly shoddy and costly by world standards. As in many developing countries, the state’s economic power has often gone to the head of the political elite. Control over credit allocation and economic activity has been used to cement a political machine so powerful that opposition withers, and sloth and corruption reign largely unchecked.

The population explosion in the Arab world has dramatically worsened these problems. Every year more young people graduate from universities, but stagnant businesses and government bureaucracies can absorb only a fraction of them. The vibrant, successful Fordist societies of North America and Western Europe thrived on the demographic growth that ensured an expanding workforce for economies that had largely mastered the secrets of full employment in the regulated national economies of the advanced industrial democracies in the post-World War II world. The Fordism manqué of developing countries, and especially in the Arab world, has been unable to rise to this challenge. An educated proletariat forms of capable people who have no prospects for the economic security they have been educated to expect and demand. Civil engineers, lawyers, doctors and dentists are economically marginalized and lack the patrons who would land them secure state or state-supported employment. Because most Arab countries now offer very limited political options, these dissatisfied citizens are unable to express their resentment through conventional political channels. This population has been a prime source for the alternative Islamicist establishment: a nonstate alternative source of employment built on frustration and, in part, rage.

Into this cauldron now comes the demand—portrayed as made in America regardless of where it comes from—to dismantle the subsidies, open economies to outside competition, allow foreign investment and do all the other difficult things millennial capitalism requires. The same US that everyone knows is in the pocket of the Zionist war criminals, the source of the pornographic and disturbing entertainment and ideas that are corrupting the youth, that makes alliances with corrupt local tyrants and oil sheiks to steal resources that properly belong to the people—this US is now demanding that the entire country be drawn into a whirlpool of usury and misery.

The gap between the Arab Middle East and the US is only broadened by the way that the transition from Fordism to millennial capitalism in the US heightened the aspect of Fordist society that was always difficult for the Middle East to accept: the increased ability of women and homosexuals to flout convention and live in their own way. In American life, but even more dramatically in the representations of American life disseminated through the global media, more and more people were acting in ways that challenged the ability of Muslim society in particular to defend traditional values. The increased access to foreign media throughout the Middle East meant that the image of a newly libertine post-Fordist America was almost impossible for traditionalists and worried parents to keep out of their homes. From a conservative Middle Eastern point of view, the increased military power of the US, the deeper penetration of its increasingly immoral media, the increased power and presence of its economic model and methods combined to make the American presence in the region all but unendurable to large numbers of people. It will take more than a few TV spots and scholarships to overcome these problems.

¹ Historical Statistics of the United States: Colonial Times to 1970 (White Plains, NY: Kraus International Publications, 1989), 224, 1114.