THE IDEA THAT it is the primary function of elected governments to raise the disposable income of their citizens is the great unwritten understanding of modern Western democracy. ‘The social contract of Cold War liberalism’ one commentator noted is, ‘a state-sponsored guarantee of private consumption.’ Tom Wolfe described the thirty-year boom that followed World War II as ‘one of those facts that are so big and so obvious (like the Big Dipper at the showground) [that] no one ever comments on them anymore’.

The political propositions that came with that postwar boom now also seem as unremarkable as the Big Dipper. By the time that he wrote The Affluent Society in 1958, John Kenneth Galbraith presented his confident conclusions that the problem of production had been solved and that the class struggle was therefore obsolete. It was, however, a very new idea that the delivery of private material prosperity was the legitimate and credible purpose of government. This idea had two important components. The first was a new confidence in the productive potential of an economy managed by modern methods. The second was the emergence of the consumer as the pivot of the economic system, catching up with the individual’s primacy in the political system since the creation of mass electoral franchises around the turn of the twentieth century. However, these two components created a feedback between consumer aspirations (including desire for welfare such as health and retirement income) and expectations about the capacity of the economy. Prosperity feeds expectations, but nobody knows how productive the economy will be.

The financial system has borne the burden of this contradiction. Financial innovation has allowed expectations of growth to be capitalised. The products that flow from this innovation are tied to the psychology of the consumer because of the rise of individuals as borrowers and savers. Now that the Big Dipper – to borrow Wolfe’s metaphor – is on a sickening downward lurch, it takes a certain steadiness of nerve to consider, as it were, the engineering, but understanding how the ride was built may help to prepare us for the water dip.

A FRENCHMAN, ERNEST Renan, expressed the romantic idea of late nineteenth century nationalism in 1882 when he described the nation-state as a ‘daily plebiscite’ in which legitimacy was achieved by responding to the aspirations of the citizens. Max Weber, also thinking about the modern state in relation to the individual at this time, was more struck by the power of the state, and especially of its professional bureaucracy, than by the nation-state’s attempts to appeal to its citizens. The power of modern governments was clear for all to see when they mobilised for World War I, but by 1918 the state was more obvious to its citizens in coercing them for war and taxes than in meeting their needs. As the German state collapsed around him in 1917-18, Weber concluded that a powerful bureaucracy was inescapable: ‘socialism too has to reckon with this – the modern economy cannot be managed any other way’. Economic modernisation had led to ‘the rule of things over men’. Although he thought that ‘the anarchy of production’ could conceivably be replaced with the meeting of needs, Weber could see neither where the leaders for such a change would come from, nor what their motives might be.

Meeting the needs of men became the crucial question in interwar Europe, and government failure to do this left the loyalties of the people open to other claimants. Europe at this time was a story of failed states as the new nation-states that had emerged in 1919 from the collapse of the Russian, Austrian and German empires struggled to establish democratic legitimacy. Of twenty-six continental states that existed in 1938, twenty had gone in one way or another by 1940.

The liberal economic system also faced a crisis of legitimacy during the 1930s. The great vulnerability of liberal capitalism, about which it had been harried by socialist parties since the mid-nineteenth century, was its attendant characteristics of waste and injustice. The Great Depression suggested that the system had failed this test. It has suited enthusiasts for activist government economic action like Galbraith to characterise the governments of the early 1930s as being locked into a nineteenth century conventional wisdom of small government and balanced budgets. World trade fell by two-thirds between 1929 and 1933; trade between France and Germany fell by four-fifths between 1929 and 1936. Faced with contraction on this scale, governments lacked a model that would release their inherent power to restore the economy. Britain’s ‘Treasury view’ in 1929 was typical: ‘We have no alternative now but to face up to the disagreeable reactionary necessity of cutting costs (including wages) in industry and cutting expenditure in public affairs.’

Behind this timid and constrained official response, however, and in contrast to the sweeping solutions being adopted in the totalitarian states of Germany and Italy, progressive thinkers were working on the rescue of the system.

The most historically prominent response was, of course, the case built by John Maynard Keynes for government spending and borrowing to counter-act self-sustaining falls in private demand. Keynes joined a long British liberal tradition that sought to remedy the system’s waste and injustice within the classical market freedoms. Keynes’ work on these problems had begun as part of the New Liberalism movement before World War I. The British Liberal Party was destroyed by that war, so it is not clear what momentum the New Liberalism would have acquired, but its practical achievements, such as the unemployment provisions of 1911, were embedded in a broader critique of the economic cycle, developed by J.A. Hobson.

Hobson suggested that society could fail to develop its full economic potential due to under-consumption by the rich and inadequate spending power in the hands of the poor. It was an extension of this observation that Keynes developed in the 1930s into the rehabilitation of the liberal trading system.

KEYNES BECAME THE polarising figure in the postwar debates about the role of government in the market and the economy – champion to the active government lobby such as Galbraith, and demon to the free-market side. The attention given to Keynes has, unfortunately, served to obscure the work done by many others in the 1930s to develop the management tools for a better system.

Even during the Great Depression, these people could see the potential outlines of a productive economy based on a positive political conception of the citizen as consumer and a role for the state in promoting economic growth and social welfare. The Economic and Financial Organisation (EFO) of the League of Nations in Geneva provides one example of this work. The League had largely given up trying to develop a multilateral solution to the economic crisis after 1933 and focused instead on its technical work in areas such as public health – concentrating on the individual, not the state.

The EFO was led after 1931 by a Briton named Alexander Loveday who had recognised the relationship between social and economic problems from his study of Indian famines at the beginning of his career. Under Loveday, EFO accordingly worked on problems of nutrition and agriculture, developing, for example, schemes of agricultural credit. Four economists associated with EFO in the 1930s have won or shared Nobel Memorial Prizes for Economics since the prize was initiated in 1969. Loveday’s EFO was an international network – the Nobel winners were Dutch, Swedish and British. The World Economic Survey was created at EFO and produced between 1931 and 1936 by J.B. Condliffe, an Australian-born New Zealander.

Loveday’s network had connections to the ‘Cambridge circle’ of economists who developed Keynes’ insights. James Meade, who worked on the World Economic Survey from 1937 until 1940, had been in this group in Cambridge in 1930-31. Meade returned to Britain in 1940 – driving through France with his wife and three small children just ahead of the German blitzkrieg – to join the Ministry of Economic Warfare. Here – with Richard Stone (who was also to win a Nobel Prize) sitting at a card table in a corridor with a mechanical calculator – Meade produced the first double-entry national accounts system for any country. This was done to marshal Britain’s resources for the war effort, but measuring and comparing national growth rates, using the system developed by Meade and Stone, became an important part of postwar politics.

Loveday worked with Frank McDougall, Australia’s economic adviser in London, to convince the League to establish in 1937 what Loveday called ‘the mature bloom’ of EFO’s work: the Food and Agriculture Organisation. Loveday and McDougall designed the FAO’s brief, which was to study ways to raise standards of living, mitigate depressions, increase agricultural credit, and link monetary policies to economic and financial trends.

This ambitious remit reflects the relationships that the economists who worked in this area at the time could see between problems of different kinds. In 1931, Loveday made a BBC broadcast as part of a series of responses by economists – the preceding week’s broadcast had been by Keynes – to the unemployment crisis. Loveday was confident that improved productivity, together with lower population growth, would enable the world to become ‘substantially richer per head than it has ever been before’ and he also understood that one effect of this rising income would be relatively more discretionary spending, so that economic success in the future would depend upon ‘satisfying those [secondary] needs’. In 1931, Loveday recognised the shift in economic activity towards servicing discretionary spending, but – whether significantly or not – he did not use the word ‘consumer’ at this time. By 1943, when writing of what would be possible after the war, with the ‘whole apparatus of production kept actively engaged in producing what is required to meet human needs’, Loveday said that this process ‘must begin with the consumer’.

Franklin Roosevelt’s New Deal in the United States embraced the consumer from the start. In his last campaign speech before the 1932 election, Roosevelt said: ‘I believe that we are at the threshold of a fundamental change in our popular economic thought; that in the future we are going to think less about the producer and more about the consumer.’ The role of the consumer was recognised through the creation of the Consumer Advisory Board. Roosevelt again acknowledged the economic component of citizenship in a campaign speech in 1936: ‘If the average citizen is guaranteed an equal opportunity in the polling place, he must have an equal opportunity in the market place.’

AMERICA WAS THE right place for the new political economy of the consumer. It had long been a relatively high-wage economy, but the introduction of mass standardised production by Henry Ford in 1910 transformed American consumption. ‘Fordism’ meant a widespread access to new products, based on a cycle of large-scale production, rising wages, lower costs, efficient distribution and attractive promotion. By the end of the 1920s, Americans could confidently see a self-sustaining system of economic growth, with the common man (and especially woman) at its heart. ‘Consumptionism,’ according to Mrs Christine Frederick in Selling Mrs Consumer in 1929, was ‘the greatest idea America has to give to the world; the idea that workmen and masses be looked upon not simply as workers and producers, but as consumers… Pay them more, sell them more, prosper more is the equation.’

The new way of life that was emerging in America also excited modernists in Europe, notably in Weimar Germany. More than fifty books were published in Germany in the 1920s on American culture, technology, prosperity and mass consumption. Some intellectual influences flowed the other way, adding modern Europe’s more private insights to Mrs Frederick’s breezy positivism. George Katona left Hungary for Berlin in 1919 to study experimental psychology. Germany’s hyper-inflation in the early 1920s prompted Katona to study the psychological dynamics of rapid price rises. He became interested in American marketing methods in the 1920s and emigrated there in 1933. He worked on Wall Street, but returned to academic life after the war, founding the first systematic survey of consumer expectations and their effect on the economy.

Katona recognised that consumer aspirations were expansive, and predicted that the ‘sweet poisoning emanating from America’ would spread around the world, even to the communist countries. Another émigré, Ernest Dichter, worked more directly with the forces of the sweet poisoning. Dichter had extended his psychoanalytic practice in Vienna in the 1930s into commercial market research using in-depth interviews, and he put these methods to work for advertising agencies when he fled to America in 1938. One of his first clients was Ivory Soap, for whom he revealed an erotic element in bathing – ‘one of the few occasions when the puritanical American was allowed to caress himself or herself’. But Dichter’s fame came when Timemagazine ran a photo story that described him as ‘the first to apply to advertising really scientific psychology … that tapped hidden desires and urges’ in connection with his research for Chrysler that revealed men’s associations between their choice of cars and their feelings about wives and mistresses.

Individual Europeans might have been excited by these forces of modernism, but the European politics of individual consumption were troubled. Among conservatives, access to material goods by the working class challenged notions of elite status that dated as far back as the medieval sumptuary laws which had classified permissible display according to social rank. Leaders on the left might have wanted to cushion the impact of adversity, but the left also had traditions of asceticism that became uncomfortable when aspirations moved from needs to wants. These European anti-materialist urges – then as now – gained much of their strength precisely from positioning themselves as the custodian of a perceived European tradition of restraint in opposition to the American psychology of abundance.

THE MASS MARKET was politically challenging. A report by the International Chamber of Commerce in 1931 concluded that the purpose of the modern distribution system was ‘to satisfy consumer wants by the most direct means and at the lowest costs’. That sort of system threatened the small-scale producers and distributors of the ‘bourgeois’ European commercial model, while the modern factory production of consumer goods challenged the basic and heavy industry bias that had existed so far for the European economy. A powerful constituency therefore existed to oppose these new forces – to be found, for example, in British trades unions and among smaller producers and retailers in Continental Europe. Businesses like these had been badly affected by the economic crisis of the early 1930s as falling prices and sales exposed their high fixed costs and inefficiencies. The question therefore was whether the state would favour the consumer by allowing market forces to lower prices and introduce new products, or favour producers by protecting the old ways of business.

The Nazi state was for the most part resistant to new forms of consumption. It was interested in some aspects of modernism – symbols of modern technology such as planes, autobahns and ocean liners were an important part of Nazi iconography. The material well-being of the German people mattered to the Nazis, especially the well-being of the artisans and clerks who formed their support base. The violence shown towards Jewish department store owners in Germany was derived in part from this Nazi support for the smaller shopkeeper but real power for individual producers and consumers was antithetical to the Nazi state. The Nazis portrayed themselves as the rebuilders of an older, purer, more fixed world for the German volk, which it was useful to contrast with a corrupt modern world of individual freedom and materialism. German attitudes to consumption had been shaped by hunger as a result of the British blockade during World War I and by the subsequent turmoil. In the 1920s, the Social Democrats had been interested in America’s high wages, but they too believed that Germany was too poor for such a model and they saw modern production as a way to meet basic needs rather than to satisfy the desire for consumer goods. Nazi economic autarky required that imports be restricted, and the Nazis exploited the willingness of the German people to accept restrictions on consumer desire.

In Britain, by contrast, the interwar Conservative Party built its middle-class constituency around a supportive attitude to material aspirations. The 1930s are popularly associated with unemployment, but in practice, outside the old industrial areas, there was some prosperity after 1931. The devaluation and the lower interest rates that followed when Britain was forced off the gold standard gave a boost to demand that set British social and economic development on a path resembling that of America, based on the same products and desires – the home and conveniences to go into it, and the personal freedom epitomised by the motor car. New industry, based around electrical appliances and the car, boomed. Four million new houses were built between the wars – adding to a stock of homes that had only numbered eight million in 1918. Nearly two-thirds of middle-class government employees owned their own homes in 1938 – a fifth with no outstanding mortgage debt. Twelve new magazines about home decoration were launched between the wars. Retailing changed. In 1920, there were two hundred chain furniture stores selling less than a twentieth of furnishings; by 1939, eight hundred chain stores accounted for a fifth of the market. The suburban materialism of this time of fragile economic security – ‘the Baldwin and Chamberlain era, when we messed about in our back gardens, [and] ran about in our little cars’, according to J.B. Priestley – became part of the charge sheet of the appeasement era’s ‘Guilty Men’ when the appeasement policy failed in 
May 1940.

PROGRESSIVE ECONOMISTS LIKE Loveday and his circle could sense the productive potential of a modern economy during the interwar years, but it was World War II that established this in the public mind. The war required all governments to run their economies at maximum productive power, with little regard for sound finance. The scale of the Red Army attack on Germany from the east was impressive, but the clear winner of the war, to its allies and its enemies alike, was the American economy. The American soldiers who arrived in Britain were conspicuously better paid and better equipped than their allies. Furthermore, by the later stages of the war, as the British economy reached the limits of its capacity, America became the major supplier of arms for the British war effort, using a very small proportion of its industrial capacity. Total supplies to Britain and her allies under lend-lease represented only a little more than a tenth of American arms production. The United States supplied a fifth of Britain’s wartime combat aircraft and almost two-thirds of its transport aircraft, yet all these planes were only one eighth of American aircraft production. The US was producing two and a half times as many weapons as Germany by 1943, and six times as 
many as Britain by 1944, yet war production never accounted for more than 43 per cent of American gross domestic product, while both Britain and Germany committed well over half of their economies to 
war production.

George Orwell called the war ‘the greatest of all agents of change’ in his 1941 essay of revolutionary patriotism, The Lion and the Unicorn, and a 1942 Fabian pamphlet rather gleefully predicted that the war would be ‘a holocaust of existing institutions’. This was certainly the case in continental Europe and Japan, where the nation-states collapsed, taking with them all previous claims to legitimacy. In retrospect, the components of the political arrangements for the post-1945 world in the West seem clear. These arrangements (with suitable variations for individual political traditions, especially between the European, Japanese and Anglo-Saxon economies) consist of government action to minimise consumer insecurity through welfare support and to sustain demand, as well as to transfer payments to special interests (for example, agriculture) to maintain economic demand and political support. This government action maintains a high and reasonably stable level of demand that allows a private corporate sector to get the benefits of scale in the mass production of goods, largely determined by consumer preference.

THE AMERICAN CONSUMER democracy fell into its place quite readily because delivering private prosperity was not a radical step. The only new feature was the postwar confidence about the role of the government. Government spending – both federal and state – had been less than a sixth of the US economy in 1930. By 1952 it had risen to over a quarter – all within an economy that had more than doubled since 1930. In continental Europe and in Britain, however, quite apart from the scale of economic devastation that the war had caused, it was not yet clear that the people wanted a political system based on individual material aspirations. West Germans seemed at first to believe that socialisation offered the best prospect of achieving reconstruction. Six of the German states passed socialisation laws between 1946 and 1948 and approval was high, garnering almost three-quarters of the vote in a plebiscite in Hesse. Britain elected 
an interventionist government in a landslide in 1945, but the undertakings of Attlee’s Labour government 
were those of an austere security: ‘meeting the people’s needs’ rather than permitting an economy 
of ‘mink coats’.

Within a few years, this seemed to change. Erhardt’s neoliberal platform was endorsed in West Germany under Allied sponsorship in 1949 as the benefits of the Marshall Plan began to flow. European economic integration which began with the formation of the Steel and Coal Commission in 1951 created the basis for a continental mass market. In Britain, the political appetite for equality in austerity was exhausted by 1951. Churchill’s Conservatives, with their slogan of ‘Freedom and abundance – these must be our aims’, remembered the constituency that they had built on individual material aspiration in the 1930s. Satirising the postwar ethos of fair shares as ‘queuetopia’, the Conservatives beat Attlee’s Labour government (campaigning on the basis of a ‘just society’) in the 1951 election and remained in office until 1964.

The durable constituency that emerged for a political economy based on growth suggests that social ambivalence between restraint and fulfillment had finally been resolved in favour of fulfillment. The cultural forces driving this resolution had been accumulating since the 1920s. Heavy industry, with its cohesion around the workplace and the communities that were formed by work, promoted identity based on productive roles and the associated group loyalties. These tribal loyalties were challenged by the growth of lighter industry, the suburbs and the increased personal mobility provided by the motor car. Options for mass entertainment increased in variety and excitement. The number of radio licences in Britain increased fourfold, to over nine million, between 1927 and 1939. When television became available, the number of licences that included television soared from fourteen thousand in 1947 to over 750,000 by 1951. More than 1,635 million cinema tickets were sold in Britain at the medium’s peak in 1946, equating to a weekly visit by every person over the age of fifteen. The new entertainment experiences of radio, cinema, and eventually television offered fertile ground for individual identification. Cinema had rich visual content and exotic locations, with stars whose imagined lives were reinforced by film magazines. Radio programs might have been broadcast to millions, and films seen in identical form around the world, but cinema was watched in the dark, and radio was heard in private at home. The Radio Year Book for 1925 recognised this element of excitement: ‘the first thrilling moment when the set is to be operated … such as we seldom feel in this unromantic age’. The advertising industry developed in conjunction with the emerging system of mass production and consumption: the US advertising trade association was founded in 1917 and its British counterpart followed in 1926. Analysts of the consumption experience follow Ernest Dieter into the private places of the mind by comparing the acquisitive urge to a romance, with its cycle of desire, fulfillment and disappointment. Advertisers quickly realised the power of the emotional appeal to the individual – the benefits to be had if they could ‘mobilise the instincts’.

The disposition towards consumer aspiration on which postwar politics has been based developed in the dreams evoked by these exciting new media. By 1950, this cultural force had become decisive. European voters, like their American counterparts, were inclined to elect on the basis of promises of material prosperity. Political platforms had evolved that could offer that preference. Of course, this promise had to be credible, and by the early 1950s belief in the new growth economics, emulating the American example, had begun to take root. Confidence developed in the growth potential of a modern economy, and in the capacity of governments to facilitate this. By 1954, The Economist magazine declared that ‘the miracle has happened: full employment without inflation’. In 1955, the British Chancellor offered the hitherto extraordinary prospect that ‘the size of the economy could double within twenty-five years’.

The new political arrangement was accidental. Demand for individual prosperity coincided with belief that it could be delivered, but it is easy to see why the political economy of growth appealed to all postwar politicians. The prospect of a growing economy made it easier to resolve the old arguments between sectional interests.

The weakness of the accidental settlement is that there is an unstable relationship between collective individual expectations and the productive capacity of the economy. If those, like Alexander Loveday, who could see the potential of a modern economy to improve the lives of its citizens were to be surprised by anything that has happened in the eighty years after the crisis of the early 1930s – years in which their optimism has been largely vindicated – it would perhaps be the extent to which growth seems to create new perceived needs as readily as it meets existing ones.

The phrase that seemed to catch the public imagination when William Beveridge’s proposal for a universal social safety net in postwar Britain was released in December 1942 was the aspiration to ‘slay the five giants’ of Want, Disease, Squalor, Ignorance and Idleness. The notion that these dragons can be slain rather than just change form is based on a world picture of relatively fixed and objective needs.

It is unlikely that Loveday – who recognised in 1931 that the modern economy should be organised around meeting consumer needs and who later joined the Mont Pelerin Society – believed in a planned society, yet he too seems to have believed that demands on the economy could be managed against its ability to meet them. Loveday wrote in 1943: ‘We want [to ensure that] this whole apparatus of production is kept actively engaged in producing what is required to satisfy human needs. We want to begin with the consumer and make sure that the essential needs of all people are satisfied first.’ However, if consumer aspirations are fuelled but not limited by the growth of the economy, while its politics are based around satisfying those aspirations, then down-payments on future growth are likely to be stretched and accelerated.

IT IS A parallel part of this political economy that financial choice and risk have been handed to the individual consumer – most significantly, for the management of retirement savings. This most important and difficult process, which is the heart and purpose of the financial system, is now another arena for product choice, subject to the same mysterious cycle of aspiration and disappointment as any other consumer product.

The nature of the present crisis is that these pressures to overestimate economic performance have fuelled improbably optimistic claims on future income. These pressures emerge for example in rising levels of personal debt, in permissive attitudes to asset values, in underfunded welfare commitments and in lean corporate equity cushions. The situation has developed as a credit crisis because the credit mechanism has failed in its job of estimating what claims should be created, and on whom. The end of the crisis will require some consensus about the level of sustainable future growth, and therefore about the capacity of the economy to meet these future claims. Sharing the burden of reduced expectations seems likely to mean an uncomfortable return to conflict between sectional – and, increasingly, generational – interests. The challenge for the present generation of policy practitioners is to redesign the political economy of the individual to insulate the financial system, which brings together expectations about the present and future, from the strains under which it has suffered from being part of the consumer economy.