(Above: The World War I Boom is a significant plot point in The Plow that Broke the Plains)
In the latest episode of Dan Denvir’s podcast The Dig (recommended as always), the topic is Bidenomics and the guests are Ted Fertik, Tim Sahay, and Daniela Gabor. There is plenty to say about the discussion, but one thing it got me thinking about was the idea of “derisking,” or government policy to ensure some level of returns to private investors. The term is key to Gabor’s criticisms of Bidenomics, which she sees as continuous with the derisking model inherited with neoliberalism. But Fertik and Sahay, speaking from a more sympathetic (though by no means uncritical or unrealistic) position on Bidenomics, largely accept that derisking is involved, while adding that it’s hard to see what other alternatives were on the table.
As a historian, it struck me that another reason the term may be useful is that examples can be found, not just across the spectrum of disagreement about Biden, but throughout history. If I recall correctly, Gabor says that the word itself originates in Washington Consensus (i.e. 1990s)-era development financing, but the idea is clearly older. Recently, I came across an interesting little book from 1920 by a Michigan economist named David Friday, entitled Profits, Wages, and Prices. I came across the reference in an essay by economic historian Hugh Rockoff, who glosses Friday’s argument—“the lesson of [World War I] was that production had been maximized because the government was insuring private enterprise against the risk of loss”—and adds that Friday “proposed that government insurance of private losses be made a permanent feature of the economy.”
If you are intrigued, as I was, the entire Friday book is available for free at Internet Archive. In the foreword, dated June 25, 1920, Friday presents his book as a modest contribution to the empirical study of recent business trends:
In the autumn of 1916, my attention was first attracted to the enormous growth of profits which resulted from the business activity induced by European war demands. It has fallen to my lot since that time to collect a considerable amount of material on profits, wages, prices and related subjects, most of which is today not readily available except to the specialist. This little book has no more pretentious ambition than that of presenting these facts briefly and in such form as to make them comprehensible to the general reader.
But Friday is consciously selling his book short. Its conclusions are actually profound, showing no less than “that the productive resourcefulness revealed by the war gives a substantial basis for social and economic optimism.” The theme is set out in the first chapter, “The Curse of Peace,” which opens:
When one compares the tone of American life during the spring and summer of 1918 with the state of public opinion and industrial activity of 1920, he wonders whether peace is really a blessing. Edwin Cannan tells the story of a charwoman who remarked to a charity worker: ‘‘This war has made many a happy family, sir.’’…Today [in 1920] no great national end is unifying public opinion; instead there are innumerable bickerings. Neither the size of real wages nor the growth of national capital is fulfilling the hope raised by our industrial output during the war.
Friday’s stress on the absence of “a great national end” is significant, and leads him to stress the importance of ideals (as opposed, presumably, to state coercion) in wartime mobilization:
One thing wartime experience showed clearly. American labor will respond to the appeal of idealism. We were making the world safe for democracy. That meant fighting militarism, an institution which we abhorred. We could not entertain for a moment the possibility of allowing it to triumph. Out of the unity of mind and purpose which was born from this national end, ethical in import, flowed an unprecedented stream of production. If some end as important and compelling can be set up now, it seems reasonable to expect that our industrial attainments of the last five years can be duplicated.
Friday was not the first to call for a moral-economic equivalent to war, nor would he be the last. But the Great War’s rhetorical focus on world democracy furnished him with a distinctive idea: the crusade at home might also be fought in the name of democracy, i.e the democratization of living standards between classes. “The problem of raising real wages,” writes Friday, “remains our most persistent social task. We are pre-eminently an industrial society, and we are aspiring to become a democratic one.” But “thus far we have tried democracy only tentatively, with a rope tied to its hind leg, as it were.” A true democrat believes, or ought to, that “the capacity for living a well-ordered and satisfying career inheres in most of the members of every class, and that many born into each class have the capabilities needed for intellectual and artistic attainment.” As the last sentence suggests, Friday’s vision of industrial democracy referred not just to material consumption levels but to a somewhat more equitable distribution of the “individual liberty and independence which the professional and employing classes consider necessary to maintain their self-respect.”
This vision of human flourishing might provide the working class with its moral equivalent to war:
If we could fully and honestly believe that a high standard of living for all is better than ostentation for some, and that decent living for the masses is a more important economic end than capital accumulation, we might convince the laborer that exertion to the point of maximum efficiency is really worth while.
But what would motivate the rich, who presumably saw “capital accumulation” as a fairly important economic end? Here, Friday pulled no punches: “our greatest obstacle is the profound distrust of democracy which exists among those who are in a position of influence and power in American industry.” Naturally, it is the people with influence and power whose peacetime behavior needs to be changed. As a good economist, Friday believes this can be done by altering the incentive structure:
A more fundamental explanation [of unemployed workers and capacity] is that low profits, or even ordinary profits, are not sufficient to tempt business men to high productive activity. Modern business is carried on for profit. When large profits are in prospect, therefore, production goes on at a feverish rate.
But Friday thinks this explanation requires qualification. Capitalists are held back not by the inadequacy of profits but by the fact low profits imply a risk of negative returns:
Most business men are perfectly willing to produce for low profits, especially when no opportunity presents itself to make high ones. The fundamental reason why production is retarded when only low profits are in sight is that a situation which yields small profits is one in which the prices of products and those of cost goods are close together. The risk that a fall in the former or a rise in the latter shall completely absorb the margin of profit is increased as these two sets of prices approach each other and is lessened as the margin between them widens. If the prices of the labor and material come to exceed the price of the product, the entrepreneur faces loss and ruin... The factor that prevents a full realization of our productive capacities is this risk of loss. If it could be minimized or eliminated the nation could have a high level of productive output even with moderate profits.
According to Friday, the Great War effectively, if temporarily, solved the problem:
During the last three years prices for products have risen at an enormous rate, and while it was certain that the prices of cost goods would rise also, the margin between the two was so great as to minimize the entrepreneur’s risk. In this situation he was willing to produce to the full capacity of his plant.
Since it was possible in wartime, Friday thinks it “pertinent, therefore, to inquire into the possibility of decreasing industrial risk through formal organization.” For a peacetime equivalent, Friday looks to “the most successful institution which has been developed for the elimination of individual risk: the institution of insurance,” or risk pooling. As Friday writes:
Houses burn; the building of houses would, in the absence of insurance, be a venture fraught with risk, and the supply of houses would therefore be restricted and of poorer quality. But by pooling the risk through fire insurance, one can be relieved for a small payment of the risk of loss by fire. One can then proceed to make his plans for building as though no risk of such loss existed.
Cannot a similar principle be applied to the risk of industrial loss? If it were possible to guarantee every entrepreneur at least his operating expenses, including depreciation, the risk of loss could be minimized. This would unquestionably stimulate production. Such a guaranty could be made only by the government, for it alone can exercise the taxing power necessary to take from the more fortunate industries those fortuitous profits which are the obverse of the losses incident to the modern industrial process. It would not do away with the right of private property or with individual initiative, nor would it in any wise lessen the incentive to prudence and efficiency. Neither would it induce anyone to put his capital into an unwise venture. There would still be the same incentive to exercise care in the direction of production, and to attain proficiency in its prosecution, for without these no adequate rate of profit could be realized.
Writing in the middle of the global revolutionary wave of 1917-1921, which showed up in the US mostly as a Red Scare, Friday reassures his readers that his insurance scheme “would not be socialism, because the entire industrial equipment of the country would still remain private property, and the profits of industry would belong to the owner.” Moreover, “Production would continue to be directed by individuals who would decide what should be produced and who would choose the methods of production.”
But despite his protestations, Friday also makes clear that “the right of private property in the means of production” would undergo serious modifications, including an excess profits tax-cum-insurance premium (“adjusted in such manner as to take from certain highly profitable enterprises the amount needed to cover the insured losses arising from the risks of modern business.”) Perhaps more instructively, unemployment would become illegal: “If the government assumed part of the risk of industrial loss it would no longer allow an owner to keep plants standing idle when such idleness caused unemployment.”
Friday allowed that there was “of course no absolute certainty that this plan of insurance against industrial risk would work satisfactorily. It may be that upon closer examination of the details involved in its administration it will prove to be impracticable and unworkable.” But considering certain practical aspects, including “an examination and approval of the costs of labor and material before insuring them,” Friday concluded that: “after our experiences during the war this task certainly is not an impossible one.” Moreover,
if it were successful its possibilities are so epoch-making that it deserves thorough and unprejudiced consideration. No amount of talk about returning to the pre-war situation can or should satisfy us. We have discovered our industrial power during the war, and on the basis of that discovery we should re-construct and reorganize our industrial life. If it means the scrapping of some institutions, by all means let them be scrapped. Our old price level has already gone into the discard. We have erected a new banking system with new policies. What we need is to overhaul our industrial institutions in the same rational manner…
We have learned that it is possible to produce enough so that every class may have a decent standard of living. With this result realized, poverty will be abolished. This attainment is one of which nations have dreamed for centuries. No nation has been within striking distance of its realization before. If any national leader or any group can be found with the imagination and the courage to appeal to America on the basis of this motive, and with an adequate program, we shall see the most promising and worth-while political and industrial experiment which we have tried in our national career.
It would be interesting to look into the contemporary reception of Friday’s book, and into his later career. As Hugh Rockoff notes, in the useful essay which first alerted me to Friday’s existence, radical proposals for extending wartime planning were swamped in the 1920s by a felt need to return to “normalcy.” But Rockoff’s analysis vindicates Friday’s faith in the institutionally revolutionary consequences of wartime. It was just that Friday bet on the wrong war. Into the 1930s, economists tended to believe that “resources allocated to the war effort had alternative uses.” By contrast, after “the end of World War II, most U.S. economists were Keynesians” who believed that “the war paid for itself by increasing total output through the multiplier process.”
The next chapter of the history of derisking, therefore, would start from the coming of the Second World War. For now, it is worth noting that Michael Bernstein, in his excellent study of the Depression, also offers a powerful interpretation of American history framed around the joint histories of derisking and military mobilization. In his conclusion Bernstein writes:
The opportunity afforded American businessmen “to mold industrial society closer to their perceptions”1 was provided by World War II, the Korean conflict, and subsequent cold war. The opportunity was seized upon precisely because the business community could control the planning process itself. Moreover, unlike the New Deal years, there was no risk in the undertaking of investment during times of war or rearmament. In their 1936 Annual Report, the board of directors of the U.S. Chamber of Commerce focused on this issue in their condemnation of New Deal policy…calling for a risk-free environment—something secured only later with the start of war.
It seems appropriate, therefore, to regard the American business community of the interwar years (and indeed of subsequent decades) as composed of capitalists against capitalism. They could accept government intervention, but only on their own terms. They wanted centralized cooperation in order to ensure the validation of investments and the resultant generation of high rates of growth. They did not want that cooperation to be so centralized and rigid as to deprive them of the independence and freedom of action characteristic of capitalist ventures. Herein lay the fundamental contradiction in the attitudes of the business community toward government economic intervention.
If indeed we have left neoliberalism behind, it this history which may help us understand the new terrain of political economic conflict: once government sets aside the fiction of laissez-faire, where does it stop? What becomes, or ought to become, of the “independence and freedom of action characteristic of capitalist ventures”? For Friday in 1920, it was apparently obvious that “If the government assumed part of the risk of industrial loss it would no longer allow an owner to keep plants standing idle when such idleness caused unemployment” [or, we might add, inflation]. A century later we have a long way to go before catching up with him, even in the realm of discourse, let alone institutional reality.
Here Bernstein is quoting the historian Kim McQuaid.
This pairs very well with Clara Mattei’s recent book “the capital order”... the interwar period is fascinating to study
Really great excavation of the concept in a North American context. If we accept "derisking" in its widest sense, it has been a common feature of multiple developmental projects, with an extensive gray area in terms of the degree of autonomy and control afforded to governments vs. private sector. For instance, in rural development projects of the 1960s and 1970s, it was understood that the role of the World Bank was removing risk from the equation for smallholders, which could be understood as simple underwriting of loans, but also as the wider provisioning of infrastructures as public goods (banking, but also irrigation, electricity, etc.). I would thus argue and agree that derisking is an open, rather than closed, concept.