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One of the problems with the mechanistic approach which has dominated mainstream economic thought since the late 19th century is its neglect of the social and socio-psychological context in which the economic system functions. It simply assumes that people behave in the same way at all times and everywhere. This assumption is not restricted to economics. John Rawls developed an entire theory of justice on the basis of the idea that if choices are made without the chooser being aware of the eventual consequences of his choice for himself personally his choice would be “fair”. What Rawls is taking for granted is Aristotle’s assumption that it is “a peculiarity of men that they possess a sense of the just and the unjust”. Willy-nilly this implies that what he or the current American middle class assumes to be fair is fair. Aristotle believed that this “common understanding of justice as fairness makes a constitutional democracy,” and that “the basic liberties of a democratic regime are most firmly secured by this conception of justice”. Aristotle lived in a society which accepted slavery as a normal condition. Had Rawls lived in another era, or even today in a tribal West African environment, he would hardly have adopted this kind of assumption. To believe that behind the “veil of ignorance” (that is, ignorance about their own position in society) people would elect to live in a society in which each individual enjoys equal rights, and inequalities would only be justified on the basis of competition and in so far as they operate to everyone’s advantage, presupposes an egalitarian competitive culture in which changes in inequality can be justified only if they do not reduce the welfare of the worst-off. But this was the specific historical product of postwar Capitalism. Take out this presupposition and Rawlsian justice becomes a travesty. As said before, an egalitarian society is not inscribed into any historical plan, and people consider “just” what they have been accustomed to regard as such. The same is true for competition. Members of Guilds did not and were not allowed to compete with each other. They did not find their places in society on the basis of economic competitive proficiency. Kings were born into their status and their privileges were considered fair. Tribal chiefs are selected from particular families and their elevated social position is taken to be self-evident.

The economists of the era of Regulated Capitalism recognized that a person’s income depends on a great variety of factors of which many have little if anything to do with market forces. Nobody denied that the entire income structure might rise or fall with the varying fortunes of the economic system, but this does not mean that personal or household income differentials will remain the same. They depend on initial wealth, on sex, profession, education, personal ability and status, in short on the customs and traditions of society. Sometimes they are influenced by market forces and other times market forces are influenced by them. But they have a direct effect on aggregate expenditure and through this on the overall volumes of saving and investment and on the rate of economic growth.

In summary, what distinguished liberal or democratic capitalism from other systems was its ability to internalize most opposition. Treating labour as a factor of production whose price is determined by demand and supply in the market place, and regarding trade unions as monopolists, it transformed class struggle into wage negotiations. It allowed labour to oppose inequity but only on the system’s own terms, that is as long as the system itself remained unchallenged. Similarly, liberal capitalism did not crush symbols of discontent. It internalized them by making them into a part of the system. Long hair, protest songs, even “subversive” literature, were not prohibited, but turned into fashions. In economics the discussion of real issues was sidestepped by focusing attention on technicalities. Keynes was not rejected but incorporated into a “neoclassical synthesis” which reduced his ideas into a “special case” within the old paradigm. Opposition which could not be internalized, for example questions about the rationality of the system itself, was placed beyond the pale. It was subjected to the establishment’s powers of “repressive toleration”. No mass arrests or executions; smear campaigns against Churchmen and Berufsverbote against socially committed active people (teachers in particular) were equally effective. Just like its communist counterpart in the eastern bloc, the capitalist oligarchy discovered that compliant and unimaginative people can serve it best. Democracy remained intact, but the mechanisms which make it meaningful gradually wore out.

Keynes and the protagonists of Regulated Capitalism where not unaware of the role of government, but underrated its function when more and more collective services became necessary to sustain the increasingly complex economic structure, and they overrated its powers to exercise control over an economy which was rapidly becoming internationalized. Their models visualized something like a closed economy, a system with a large measure of autarchy topped up by imports and exports that tend to equilibrate through monetary fluctuations which, under extreme circumstances, could perhaps be adjusted by currency devaluations or revaluations. They believed that on the whole the system inclines toward equilibrium either with or without full employment. Keynes himself was of the opinion that real wages and not money wages determine the volume of employment, that the level of national income and not the rate of interest determines investment and employment, that profit expectations and not the current rate of interest is the prime cause of investment, and that the equality of savings and investment does not imply that the economic system can only be in equilibrium when there is full employment. His followers were more sceptical than he was about the last point, but accepted that “exogenous” forces, such as Union-administered “sticky wages”, could prevent the inherently equilibrating mechanism of the system from restoring full employment. But neither Keynes, nor his followers who dominated economic thought in the period of regulation, appreciated that with the proliferation of the public services provided by the state and with the internationalization of the world economy new powerful forces were coming upon the stage, the former is not subject to the mechanisms governing the market and the latter deprives the state of adequate power for their regulation.

In this article the author questions the proposition that an ‘invisible hand’ leads to an equitable income distribution. He asserts that competition encourages economic growth but only under specific circumstances. He suggests that inherent in capitalism’s competitive individualism are the seeds of a socially divisive new type of feudalism and economic stagnation.