CHAPTER 9

The Underside of Western Free Market Democracy

From Jim Crow to the Holocaust

DO MARKET-DOMINANT MINORITIES exist in the United States or Canada or Western Europe? The answer is: not today, at least not at the national level.

Take the United States. While some ethnic minorities have outperformed others, the United States economy is absolutely not controlled by any ethnic minority. On the contrary, if any group can be said to dominate our economy, it is the “white” majority. Generally speaking, Caucasians dominate every major economic sector: finance, technology, real estate, professions, corporate ownership and leadership, and so on. The ten richest Americans in 2001—Microsoft’s Bill Gates, Paul Allen, and Steve Ballmer; Oracle’s Lawrence Ellison; Warren Buffett; and five members of the Wal-Mart-founding Walton family¹—are all white. (Incidentally, if Jewish-Americans are viewed as an ethnic minority in the United States, they do not remotely dominate the U.S. economy; unlike in Russia, for example, only one or at most two of the ten wealthiest Americans are Jewish.)

Of course, there is a good deal of artificiality in referring to “whites” as an ethnic group in the United States. Italian-Americans, for example, are counted as “whites” for census purposes, while Hispanic-Americans are treated as a separate ethnic group. Nonetheless, the core ethnic problem in the United States, as experienced by ordinary Americans, is one that pits an economically and politically dominant “white” majority against economically and politically weaker ethnic minorities.

The same is true in all the industrialized Western nations. In the West we grapple daily with the problem of economically underprivileged ethnic minorities—blacks and Hispanics in the United States, African immigrants in France, aborigines in Australia, Maori in New Zealand, and so on. In stark contrast, the non-Western world today tends to be characterized by just the opposite dynamic: the presence, in country after country, of a tiny but economically powerful market-dominant ethnic minority.

The problems of ethnic conflict in the Western world today are therefore strikingly different from those outside the West, with very different implications for free market democracy. In the developing world, markets tend to enrich ethnic minorities, while democracy tends to empower poor, “indigenous” majorities, creating a highly combustible dynamic. By contrast, in the contemporary Western nations both markets and democracy tend to reinforce the economic dominance of a perceived ethnic majority.

The Inherent Tension between Markets and Democracy

A closer look, however, reveals that the West is not free from the core dynamic—the confrontation between market wealth held by a few and democratic power held by the many—described in this book. For one thing, market-dominant ethnic minorities have existed, albeit rarely, in the Western nations in the past. As will be discussed below, the “solutions” the Western nations pursued to deal with market-dominant minorities were as ugly as any found in the developing world.

But even in the absence of a market-dominant minority, there is always, in any democratic, capitalist society a potential conflict between market-generated wealth disparities and majoritarian politics. Even when the wealthy are not ethnically distinct, they are still a minority. Even when the poor do not view the rich as a different, “outsider” group, they may still feel resentment and envy toward those who employ them, exploit them, and have immensely more wealth.

Societies with a market-dominant minority face a specially formidable problem: class conflict and ethnic conflict overlap in a particularly explosive way. The rich are not just rich, but members of a hated, outsider ethnic group. In societies with no market-dominant minority, the division between the few who are rich and the many who are poorer is unlikely to be ethnicized—but it remains, at least potentially, a source of conflict. Wherever democracy and capitalism are joined together, mass political movements directed against the rich become a possibility, fueled by resentments and demagogic manipulation similar to (but usually less murderous than) that which arises in the presence of market-dominant minorities.

Indeed, for centuries it was thought that the danger of class conflict made universal suffrage irreconcilable with a market economy. Although largely forgotten today, leading Western statesmen, political philosophers, and economists long recognized a profound tension between market capitalism and democracy. Markets, it was thought, would produce enormous concentrations of wealth in the hands of a few, while democracy, by empowering the poor majority, would inevitably lead to convulsive acts of expropriation and confiscation. In Adam Smith’s words in 1776, “For one very rich man, there must be at least five hundred poor. … The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions.”

Similarly, James Madison warned against the “danger” to the rights of property posed by “an equality & universality of suffrage, vesting compleat power over property in hands without a share in it.” David Ricardo was willing to extend suffrage only “to that part of [the people] which cannot be supposed to have any interest in overturning the rights of property.” British statesman Thomas Babington Macaulay went further, portraying universal suffrage as “incompatible with property” and “consequently incompatible with civilization” itself:

Imagine a well-meaning laborious mechanic fondly attached to his wife and children. Bad times come. He sees his wife whom he loves grow thinner and paler every day. His little ones cry for bread. … Then come the professional agitators, the tempters, and tell him that there is enough and more than enough for everybody, and that he has too little only because landed gentlemen, fundholders, bankers, manufacturers, railway proprietors, shopkeepers, have too much? Is it strange that the poor man should be deluded, and should eagerly sign such a petition as this? The inequality with which wealth is distributed forces itself on everybody’s notice. … The reasons which irrefragably prove this inequality to be necessary to the well-being of all classes are not equally obvious. …

[I]s it possible to doubt what the result [of universal suffrage] must be? … What could follow but one vast spoliation? One vast spoliation!²

As it turned out, of course, these early doubters of free market democracy were proved wrong. Defining the terms broadly, markets and democracy have coexisted quite healthily in the United States for two hundred years, and the other leading developed countries have been both capitalist and democratic for at least a half century. That democratic politics proved compatible with capitalism in the West—that, in Claus Offe’s words, the electoral “power of numbers” did not overwhelm the “power of property”—is one of the great surprises of modern history.³

Why didn’t democracy result in confiscations and one “vast spoliation”? Why doesn’t it do so today? Redistribution is one reason: All the Western nations today have enormous tax-and-transfer programs, dulling the harshest edges of class conflict. But redistribution is only part of the answer. As the West started down the road of free market democracy, a number of different institutions and cultural factors worked together to defuse the fissionable conflict between market-generated wealth and majoritarian politics. It is important to take a look at the most important of these institutions and cultural factors, to see whether they might be transplantable to countries outside the West today.

Two cautions should, however, be borne in mind. First, measures that help negotiate class conflict in societies with no market-dominant minority will not necessarily have the same success in societies where class conflict is magnified by the furies of ethnic hatred. Second, not all the devices used in the West to keep “the power of numbers” from overwhelming the “power of property” would make good exports to the non-Western world. Some of them are unique to circumstances of the early modern Western nations and could not be reproduced today. Some of them are invidious and should not be reproduced today.

Disenfranchisement of the Poor

In the early stages of capitalism in all the Western nations—and precisely because the wealthy were afraid that their property might be confiscated and redistributed—the poor were expressly disenfranchised. Until relatively recently, all of the Western democracies had massive exclusions from the suffrage. To take the case of the United States, after the Federal Convention of 1787 the poor were disenfranchised in virtually every state through formal property qualifications. Although such qualifications were largely eliminated by 1860, they were typically replaced by provisions denying suffrage to the very poor: for example, through taxpaying requirements and “pauper” exclusions. Moreover, as will be discussed below, blacks in the American South, and to a lesser extent throughout the United States, were effectively disenfranchised well into the twentieth century. Meanwhile, in at least fourteen states, recipients of poor relief were deprived of the franchise as late as 1934.⁴

Throughout Europe, the details differ but the basic story is the same: The poor and the propertyless were for decades, sometimes centuries, explicitly denied the right to vote. In England, a statute from 1430 provided that only those adult males with “a freehold estate the annual income from which was forty shillings” could elect members of the House of Commons. Forty shillings was the amount that in 1430 supposedly would “furnish all the necessaries of life, and render the freeholder, if he pleased, an independent man.” In France, property and tax payment qualifications severely limited the franchise, even during the revolutionary period. In nineteenth-century Belgium, class domination by French speakers was perpetuated by laws limiting the vote to the propertied classes. Universal male suffrage came only in 1919.⁵ The list goes on. Not only the United States, but all the Western nations had long-standing exclusions from suffrage. However repugnant, these political exclusions were arguably important to the success of the Western nations in establishing stable free market democracies.

Americans, however, have forgotten our own history. For the last twenty years the United States has been vigorously promoting instantaneous democratization—essentially overnight elections with universal suffrage—throughout the non-Western world. In doing so we are asking developing and post-Communist countries to embrace a process of democratization that no Western nation ever went through.

Capitalism Softened: The Rise of the Welfare State

As noted, in all the Western nations, and more recently Japan, the extreme wealth inequalities produced in a capitalist economy are alleviated by strong networks of redistributive institutions. The history, form, and mix of these institutions vary considerably. Generally speaking, social safety net programs have been broader, and governmental transfers larger, in Scandinavia and Western Europe than in the United States. In England, for example, the British government continues to provide broad national insurance benefits for unemployment, sickness, and disability, nationalized health care, and universally free public education, although there is constant talk of “radical” welfare reform. Germany’s welfare system is supplemented by expansive pro-labor legislation. Under Japan’s distinctive firm-as-extended-family employment system, Japanese firms promise (or used to promise) their employees lifetime job security. Sweden and the other Nordic countries all have extensive “cradle to grave” social legislation, including worker management rights, government-paid maternity and child support, and rent control. Not surprisingly, income tax rates in the Scandinavian countries are among the highest in the world.

Despite these variations, the bottom line is again the same. Starting in the late nineteenth century, the explosion of market activity throughout the West was accompanied by the emergence of redistributive institutions of unprecedented magnitude, softening the harshest effects of capitalism. In every developed country these institutions include not only relief to the extremely poor but also progressive taxation, social security, minimum wage laws, worker safety regulation, antitrust laws, and numerous other features of Western society that we take for granted.⁶ These redistributive institutions have almost certainly helped dampen the conflict between market wealth disparities and democratic politics in the industrialized West.

By contrast, the version of capitalism being promoted outside the West today is essentially laissez-faire and rarely includes any significant redistributive mechanisms. In other words, the United States is aggressively exporting a model of capitalism that the Western nations themselves abandoned a century ago. More broadly, it is critical to recognize that the formula of free market democracy currently being pressed on non-Western nations—the simultaneous pursuit of laissez-faire capitalism and universal suffrage—is one that no Western nation ever adopted at any point in history.

Is this wise? Almost by definition, in the developing world today the poor are far more numerous, poverty is far more extreme, and inequality far more glaring than in the Western countries, either today or at analogous historical periods. The ongoing population explosion outside the West only makes things worse. If current World Bank projections are correct, the population in countries now classified as developing is expected to increase from roughly four billion today to roughly eight billion by the year 2050.⁷ Meanwhile, the poor countries of the world lack the West’s well-established rule of law traditions. As a result, political transitions in the developing world tend to be marked not by continuity and compromise, but rather by abrupt upheavals, military intervention, violence, and bloodshed.

In other words, today’s universal policy prescription for “underdevelopment,” shaped and promulgated to a large extent by the United States, essentially amounts to this. Take the rawest form of capitalism, slap it together with the rawest form of democracy, and export the two as a package deal to the poorest, most frustrated, most unstable, and most desperate countries of the world. Add market-dominant minorities to the picture, and the instability inherent in this bareknuckle version of free market democracy is compounded a thousandfold by the manipulable forces of ethnic hatred.

The Idiosyncracy of the American Dream

Disenfranchisement of the poor and the welfare state only partially explain why capitalism and democracy have proved so compatible in the West. In all the Western nations, many among the less-well-off majority do not want to confiscate from the rich or equalize incomes. The reasons for this, which might be described as cultural or ideological, are enormously complicated and obviously depend on the particular country in question. As an illustration, I will focus here primarily on the United States.

Poor and lower-middle-class Americans are often capitalism’s biggest fans. Although there is an important racial underside to this story—to which I will return below—the fact is that a surprising percentage of America’s less well off love billionaires and spurn welfare mothers. They vote Republican and fight higher taxes. The last thing they want is government interference and redistribution.

Why? Part of the answer is the American Dream. Significant numbers of Americans believe that anyone, high or low, can move up the economic ladder as long as they are talented, hardworking, entrepreneurial, and not too unlucky. A driven Vietnamese-immigrant student once explained to me, “I may be poor now, but the reason I vote Republican is because I don’t plan to be poor for very much longer.” And recently from Forbes:

America has created a system in which anyone with talent and energy has access to the financial resources needed for success. …

Today banks, venture capitalists, underwriters and stock brokers here don’t much care who your grandfather was or whether you went to a prep school or dropped out of college. All they care about is: Can we make some bucks by backing this guy (or gal)?

This is not true in Japan. It is not true in Brazil. It is not even true in France or Germany. … In Germany, Bill Gates might well have had to go to work for Siemens. In Japan, Gates most certainly would have ended up as salaryman for Hitachi. …⁸

The belief in the possibility of upward mobility has characterized America since its inception. No doubt it reflects in part our history of westward expansion and our distinctive immigrant foundations. More fundamentally, it is sustained by an impressive number of actual rags-to-riches stories. American literature, for example, is filled with such stories: from Horatio Alger’s Ragged Dick to F. Scott Fitzgerald’s The Great Gatsby to the recent biographies of Lee Iacocca, Arnold Schwarzenegger, and Oprah Winfrey, not to mention Bill Clinton and Bill Gates.

Ideally, the American Dream gives everyone a psychological stake in the continuing success of the market economy. At its extreme, the American Dream teaches the worse-off that their plight is the result not of an unfair or invidious economic system, but rather of their own deficiencies. In both these ways, the American Dream helps make acceptable the extreme wealth disparities inevitably produced in a capitalist economy.

It is important to recognize that the belief that anyone has a shot at fame and fortune is in some ways idiosyncratic to the United States. It has no real analogue even in the high-income countries of Western Europe, let alone the chronically poor, malnourished societies of the developing world.

Outside the West, in countries with widespread poverty and a market-dominant minority, the dream of upward mobility is largely a nonstarter. It is extremely difficult to believe in the possibility of market-generated upward mobility if you and everyone around you is mired in intractable poverty and the only wealthy people in the country appear to be members of a different ethnic group. (In the United States, African-Americans are probably the group who least credit the idea that in America anyone with talent and industry can “make it.”) The truth is that among the impoverished indigenous majorities of the developing world, exceedingly few believe that free markets will enable them to go “from rags to riches.” For this reason, anti-market backlashes are much more common outside the West than in the United States or Europe.

Racism in America: Fracturing the Poor Majority

Finally, in the United States, racism has arguably helped neutralize the conflict between markets and democracy, essentially by fracturing the poor majority. As a historical matter, it is well-established that racism hindered the formation of political alliances between poor and working-class whites on one hand, and poor and working-class minorities on the other hand. After the Second World War, for example, the CIO’s mass unionization campaign in the Southern states known as “Operation Dixie” failed dismally, unable to overcome “the insuperable task of forming unified workplace movements between white workers, who attended Klan meetings after work, and black workers.”⁹ And starting in the sixties, as the Democratic Party became increasingly associated with civil rights, lower-class whites in the South jumped to the Republican Party in droves.¹⁰

Even today, many poor and lower-middle-class whites feel more solidarity with Bill Gates or George W. Bush than with African-Americans or Hispanic-Americans of comparable economic status. Indeed, as many have observed, large numbers of working-class whites in the United States oppose welfare and increased government spending on social services, often voting against what might be expected to be their economic self-interest. It is widely suspected that racism (together with a thriving ideology of upward mobility) plays a role in this pattern.

TO SUMMARIZE, THERE is always an inherent instability in free market democracy. None of the Western democracies today faces this instability in its most explosive form: when the wealthy minority is also a hated, ethnic “outsider” group. Even so, every one of the Western democracies has alleviated the potential conflict between the rich few and the poor many through a host of devices, past and present, such as extensive social safety nets and redistribution, gradual expansion of the suffrage, upward mobility, and even racism. It is important to recognize, as we export free market democracy to the non-Western world, that many of these stabilizing devices do not exist in the developing world, that some of them are unsavory, and that others are, practically speaking, unreproducible.

The next section will cast a further shadow. As already mentioned, market-dominant minorities have existed in the West in the past. On the relatively rare occasions when a Western nation had to confront the problem of rapid democratization in the face of widespread poverty and a deeply resented, perceived market-dominant minority, the consequences were as terrible as any the world has seen. I will focus on just two examples here, one from the United States, the other from Western Europe.

The American South

In the United States after the Civil War, newly emancipated blacks represented a majority of the population in a number of Southern states including Alabama, Florida, Georgia, Louisiana, Mississippi, and South Carolina. In all these states—not unlike postapartheid South Africa—whites were a starkly market-dominant minority, terrified to the point of hysteria at the prospect of black majority rule. Thus, the first year after the Emancipation Declaration, “a great fear of black insurrection and revenge seized many minds,” writes C. Vann Woodward in The Strange Career of Jim Crow. “[T]he black race,” warned Southern politicians, if mobilized, “will be in a large majority, and then we will have black governors, black legislatures, black juries, black everything. … We will be completely exterminated, and the land will be left in the possession of the blacks, and then it will go back into a wilderness and become another Africa or St. Domingo.”¹¹

Southern whites responded to the threat of black majority rule by effectively disenfranchising blacks. They did so, moreover, in the name of capitalism and white supremacy. (Else, in the words of Alabama’s James S. Clark, “our lovely State, with its few Caucasian inhabitants, would be converted into a kind of American Congo.”)¹² To be sure, these Southerners faced the problem of the newly enacted Fifteenth Amendment, supposedly prohibiting discrimination against blacks in the suffrage. Led, however, by Mississippi, where impoverished blacks constituted 70 percent of the population in 1870, all the Southern states found elaborate ways to prevent blacks from exercising their right to vote. There were even, as late as the mid-twentieth century, delegations from the American South to South Africa to learn “tips” on how to disenfranchise and subjugate an ethnic majority.

The basic technique for establishing white minority rule in the American South was to set up barriers to voting such as property or literacy qualifications, and then to create exemptions that only white males could satisfy. Between 1895 and 1910, variations of this scheme were incorporated into the state constitutions of South Carolina, Louisiana, North Carolina, Alabama, Virginia, Georgia, and Oklahoma. Although these restrictions were highly effective in reducing the black vote, many Southern states adopted poll taxes as further obstacles. Violence, intimidation, and racially motivated redistricting took care of most remaining blacks. As late as the 1960s it was physically dangerous for blacks as well as whites to demonstrate on behalf of black voter registration or to try to organize blacks to register and vote; some were killed for doing so.¹³

The Fifteenth Amendment of the U.S. Constitution notwithstanding, disenfranchisement of black majorities during the Jim Crow period was highly successful. In Louisiana, for example, the number of registered African-American voters fell from 130,334 in 1896 to only 1,342 in 1904. In 1896, African-Americans represented a majority in twenty-six districts; by 1900 in none. At the same time, “separate but equal” laws were proliferating. During the First World War, Maurice Evans, an Englishman who lived in South Africa, visited the American South. He found the situation there “strikingly similar” to the one he had left behind at home: “The separation of the races in all social matters is as distinct in South Africa as in the Southern States. There are separate railway cars … and no black man enters hotel, theatre, public library or art gallery.” In addition, there were “the same separate schools, the same disenfranchisement, and the same political and economic subordination of the black man.” Wealthy Southern whites were aware of the parallel as well. “There are more Negroes in Mississippi,” wrote Alfred Stone, a plantation owner from the Yazoo Delta of Mississippi, “than in Cape Colony, or Natal, even with the great territory of Zululand annexed to the latter; more than in the Transvaal, and not far from as many as in both of the Boer colonies combined.”¹⁴

After the Second World War, with the rise of the civil rights movement in the United States, the paths of the American South and South Africa dramatically diverged. Nevertheless, the bottom line remains. After the Civil War, whites in a number of Southern states suddenly found themselves in the position of a starkly market-dominant minority, fearful of “black domination,” revenge, confiscation, and radical redistribution at the hands of a newly empowered black majority. Facing what it saw as the unresolvable conflict between a black-dominated democracy and the maintenance of their own wealth and status, Southern whites opted aggressively for the latter, doing everything in their power to undercut the former.

By contrast to the developing world today, Americans generally have not had to deal with the problem of sudden democratization in the face of pervasive poverty and a deeply resented, market-dominant minority. But several post–Civil War Southern states did face this precise problem, and Americans hardly rose with dignity to the challenge. As in apartheid South Africa or Rhodesia, market-dominant whites in the American South responded to the prospect of black majority rule by mass disenfranchisement.

Thus, along with the developing-world illustrations I gave in chapter 6, the American South during the Jim Crow era is a classic example of a backlash against democracy, in which a market-dominant minority, fearful of confiscation and redistribution, seizes political power. Unfortunately, the historical record of the West is darker still.

Weimar Germany and the Nazi Holocaust

Weimar Germany is a rare example of a Western nation that pursued—with catastrophic ethnonationalist consequences—free market democracy under conditions strikingly analogous to those characteristic of many developing countries today. Caution is required here. The Holocaust is in some ways so singularly evil that no straightforward comparison can be made between Nazi Germany and any other country, at any other time. To avoid misunderstanding, I offer three preliminary clarifications.

First, the Jews in Weimar Germany were not an economically dominant minority in the sense that, say, the Chinese are economically dominant in most Southeast Asian countries. Claims that “Jews ran the German economy” were patently false. Second, I am distinctly not suggesting that the roots of anti-Semitism in Weimar Germany, or anywhere else for that matter, were economic in nature. Anti-Semitism in Germany, as elsewhere in the world, existed long before Jews were particularly successful economically. (Economic grievances certainly had nothing to do with the numerous pogroms directed at poor shtetls in Russia and Eastern Europe.) Third, Weimar Germany obviously differed in profound respects from most of today’s developing countries. For example, Germany was a former imperial power, with colonies and protectorates all over Africa and a formidable naval fleet and army. Weimar Germans, including women, were far more educated than the average inhabitant of the developing world today. Commentators have described Weimar Germany as “a cradle of modernity.” Moreover, Weimar Germany had a powerful industrial base, an impressive network of railways and infrastructure, and a highly sophisticated banking system.¹⁵

Nevertheless, conditions in post–World War I Germany were more analogous to those in the developing world today than one might think. Most crucially, Weimar Germany was characterized by widespread economic deprivation and suffering, in large part because of inflation that reached catastrophic proportions in 1923. (By most accounts the principal cause of the inflation was not reparations to the Allies, but rather the excessive national debt that Imperial Germany had incurred in financing the war.) With the plunging mark, writes historian Gordon Craig, “the simplest of objects were … invested with monstrous value—the humble kohlrabi shamefacedly wearing a price-tag of 50 millions, the penny postage stamp costing as much as a Dahlem villa in 1890. …” While a few—principally industrialists and speculators—profited from the inflation, millions of working and middle-class Germans were left suddenly impoverished. Those on fixed incomes or pensions were hit hardest. At one point, in late 1923, only 29 percent of the total German labor force was fully employed. Contributing to the mass frustration was a chronic national housing shortage, estimated at 1.5 million dwellings in 1919–20. As in the developing world, malnutrition and disease in the Weimar Republic were pervasive, particularly among children and the old. Deaths from hunger were common.¹⁶

Against this background, Jews in the Weimar Republic were widely perceived as an “outsider” ethnic minority wielding outrageously disproportionate economic power vis-à-vis the “indigenous” majority. The reality of the Jews’ economic situation in the Weimar Republic was as follows. Relative to their tiny numbers—Jews formed just under 1 percent of the total population of Germany—they were disproportionately represented in certain professions and occupations. Between 1918 and 1933, nearly three-quarters of German Jews earned their livelihood from trade, commerce, banking, and the professions, particularly law and medicine. By contrast, only about one-quarter of the non-Jewish population of Germany was similarly employed.

Thus in 1933, Jews made up around 10 percent of Germany’s doctors and more than 16 percent of its lawyers and notaries public. Commerce and finance, however, were the major pursuits of most German Jews. In 1930, Jews owned 40 percent of Germany’s wholesale textile firms and nearly 60 percent of the country’s wholesale and retail clothing businesses. In 1932, Jews owned roughly 80 percent of all department store business. Weimar Jews were also prominent in banking. Nearly half of the country’s private banks were owned by Jewish banking families like the Bleichroders, Mendelssohns, and Schlesingers. On the other hand, Jews controlled almost none of Germany’s more numerous and increasingly important credit banks; nor were the modern large banks that financed the German industrialization principally controlled by Jews. Although a significant number of German Jews were extremely well off, the great majority of them belonged to the middle classes, and many Weimar Jews were poor.¹⁷

The economic picture of the Weimar Jews was thus a mixed one. Jews plainly did not control the Weimar economy. To the contrary, the wealthiest Germans in the Weimar Republic by and large were non-Jews: members of the nobility or landowning aristocracy as well as powerful industrialists such as Robert Bosch, Carl Friedrich von Siemens, and Hugo Stinnes.¹⁸ On the other hand, almost no Jews were peasants, farmers, or members of the urban proletariat, and the average income of Jews was 3.2 times that of the general Weimar population.¹⁹

It is crucial to reiterate that the “Jewish problem” in Germany was far more than an economic problem. As many have pointed out, anti-Semitic economic hostility “is necessarily predicated upon the antisemites’ marking of the Jews as being different, identifying them not by the many other (more relevant) features of these people’s identities, but as Jews, and then using this label as the defining feature of these people …”²⁰ The imagery and rhetoric used against German Jews was contradictory and confused. Thus, writes Gordon Craig, “the arrogant Jew” included “the flea-market and marts-of-trade and stock-market Jew, the Press and literature Jew, the parliamentary Jew, the theatre and music Jew, the culture and humanity Jew …” Although “materialist,” Jews did not work but only “exploited.” Jews were both greedy “capitalists” and the “secret force behind Communism.”²¹

Nevertheless, regardless of the falsity of the charges of Jewish economic dominance, there was undeniably an economic dimension to the mobilization of German anti-Semitism. The stereotype of the Jew as rich and rapacious had long existed in Germany (as in many other European countries). Four hundred years before Hitler capitalized on this theme, Martin Luther wrote: “[T]hey hold us Christians captive in our country. They let us work in the sweat of our noses, to earn money and property for them, while they … mock us and spit on us, because we work and permit them to be lazy squires who own us and our realm.” Similar rhetoric accompanied the vicious wave of anti-Semitism following the financial crash of 1873. Fifty years later, Jews in Weimar were widely accused, by Germans high and low, of being “uniformly prosperous,” “ruling Germany financially, economically,” and causing the nation’s economic privations.²² In other words, the Jews were said to be a grossly economically dominant outsider minority even though their actual level of economic success did not warrant this perception. As in many developing countries today, these charges of economic dominance provided a convenient spur to, and rationalization of, ethnic mobilization.

Weimar Germany shared another feature in common with most of today’s developing countries: Germany after the First World War embarked on a period of intense marketization and democratization. Whereas normal market transactions had ground virtually to a halt during the war, Germany after 1918 saw a massive influx of foreign investment, new international trade opportunities, a burst in industrialization, and the accumulation of huge fortunes by big business and financiers. Like today’s “emerging economies,” the Weimar government undertook freewheeling economic liberalization, for example by eliminating import-export quotas; offering tax breaks to businesses and holders of capital; and, after 1923, repealing significant labor-law protections including, perhaps most strikingly, the eight-hour workday.

At the same time, Weimar Germany pursued intense democratization. In 1918 and 1919, over a period of barely ten months, Emperor Wilhelm II abdicated, the German people elected a National Assembly, and the National Assembly promulgated a new constitution providing for universal suffrage, direct popular election of the Reich president, and the never-before-tried practice of popular referenda. The new constitution also guaranteed a lengthy list of fundamental human rights (Grundrechte).²³

In other words, to a surprising extent Weimar Germany shared both the basic background conditions prevalent in many developing countries today and the standard policy package being pursued by these countries. In conditions of widespread economic distress and a (perceived) economically dominant minority, Weimar Germany pursued intensive market liberalization and rapid democratization. Indeed, in important respects, conditions in Weimar Germany were more propitious for the success of these policies than they are in the developing world today. For example, Weimar Germany had a much higher general level of education; an impressive array of “social safety nets”; and a much stronger legal system, whose judges were notoriously independent (and anti-Semitic).

The fate, however, of Weimar free market democracy is well known. In 1932 and 1933, the National Socialist German Workers’ Party, as the Nazi Party was formally named, gained control of the German government through electoral means. Although historians over the last fifty years have repeatedly described the Nazi movement as self-contradictory and ideologically inconsistent—“a confused mixture of nationalistic, anti-Semitic, and pseudo-socialist demands”²⁴—the Nazi movement led by Adolf Hitler was in fact unwaveringly and quintessentially ethnonationalist, and in this diseased sense, perfectly coherent. Point Four of the twenty-five-point party program (coauthored by Hitler and promulgated in 1920) declared: “Only members of the nation may be citizens of the State. Only those of German blood, whatever their creed, may be members of the nation. Accordingly no Jew may be a member of the nation.”²⁵

Like the ethnonationalist movements of the developing world, National Socialism was never truly socialist. The Nazis never undertook to abolish the institution of private property nor to eradicate all economic classes. On the contrary, Hitler repeatedly made overtures to big business, and the Nazi movement was supported by many wealthy Germans, including industrial magnates and aristocrats. Indeed, Nazism was more anti-Communist than it was anticapitalist—in either case with the same anti-Semitic thrust. Precisely because its principal commitment was to ethnonationalism, there was little need for an economic policy. (Once heard at a Nazi gathering: “We don’t want higher bread prices! We don’t want lower bread prices! We don’t want unchanged bread prices! We want National Socialist bread prices!”) Far more than any of its rivals, the Nazi Party was successful in bridging social cleavages and transcending class divisions—from industrial tycoons to farmers, but above all the middle class—in its call for a once-again-powerful Germany for “true Germans” and the destruction of Germany’s “enemies” at home and abroad.²⁶

Once Hitler was in power, “the destruction of the Jewish race in Europe” became a guiding principle of official state policy. Hitler began with a series of laws depriving Jews, through stringent “racial” qualifications, of their positions in the state bureaucracy, the judiciary, universities, and the professions. In 1938, for example, Hermann Goering required Jewish physicians and lawyers to liquidate their practices, then issued the more general Decree on Eliminating the Jews from German Economic Life. Soon afterward he dictated the wholesale expropriation of Jewish property and businesses. Goering insisted that expropriated Jewish property belonged to the state. In reality, private German enterprises were the main beneficiaries. At the same time, Jews were stripped of their citizenship and political rights. Hitler’s “final solution” was the extermination between 1941 and 1945 of an estimated 6 million people, most of them Jews.²⁷

Once again, I am making no claims here about the immediate or ultimate causes of the Holocaust. The point is simply that Weimar Germany stands as a somber warning against having excessive confidence in free market democracy as the universal solution to the problems of underdevelopment in societies with a (real or perceived) market-dominant minority. Weimar Germany marketized and democratized with a steadiness that would make most of today’s international policymakers proud. Yet in Germany after World War I, the pursuit of free market democracy fueled an ethnonationalist conflagration of precisely the kind that today threatens much of the non-Western world.

Market-Dominant Minorities in U.S. Inner Cities

Are market-dominant minorities a thing of the past in the West? For the moment, the answer is yes. At the national level, none of the contemporary Western nations has an ethnic minority that comes close to controlling the economy. In the United States, self-identified “whites” make up roughly 72 percent of the population and wield roughly proportionate economic power. On the other hand, the story becomes more complex if we look both within certain pockets of the United States today and at nationwide demographic projections for the future.

In the inner cities of all the major metropolitan areas across the United States, ethnic Koreans represent an increasingly glaring market-dominant minority vis-à-vis the relatively economically depressed African-American majorities around them. In New York City, Koreans, less than .1 percent of the city’s population, own 85 percent of produce stands, 70 percent of grocery stores, 80 percent of nail salons, and 60 percent of dry cleaners. In portions of downtown Los Angeles, Koreans own 40 percent of the real estate but constitute only 10 percent of the residents. Korean-American businesses in Los Angeles County number roughly 25,000, with gross sales of $4.5 billion. Nationwide, Korean entrepreneurs have in the last decade come to control 80 percent of the $2.5 billion African-American beauty business, which—“like preaching and burying people”—historically was always a “black” business and a source of pride, income, and jobs for African-Americans. “They’ve come in and taken away a market that’s not rightfully theirs,” is the common, angry view among inner-city blacks.²⁸

Because Asians are relative newcomers, African-Americans view themselves as the “indigenous” and “true” inhabitants of the inner cities, who are now being ripped off, condescended to, and economically displaced by exploitative “outsiders.” In 1990, a nine-month racial boycott against two Korean produce stores in Flatbush, Brooklyn, eventually drove both stores out of business. Led by the Reverend Al Sharpton, the boycotts fueled Asian-black tensions across the city. Two years later, during the Los Angeles riots that followed the jury acquittal of police officers charged with beating Rodney King, African-Americans burned or looted an estimated two hundred Korean grocery shops, smashing windows and attacking Korean shopowners with knives, guns, and crowbars. In the end, fifty-five people died (many of them African-American), another two thousand were injured, and property losses totaled roughly $1 billion.

Relations between Korean-Americans and African-Americans seem to have improved since the Los Angeles riots, as leaders from both groups have made conciliatory efforts. Nevertheless, periodic bursts of anti-Korean baiting and violence still occur. At a December 31, 1994, rally, Norman “Grand Dad” Reide, vice president of Al Sharpton’s National Action Network, accused Koreans of “reaping a financial harvest at the expense of black people” and recommended that “we boycott the bloodsucking Koreans.” More recently, in November 2000, African-Americans firebombed a Korean-owned grocery store in northeast Washington, D.C. The spray-painted message on the charred walls: “Burn them down, Shut them down, Black Power!”²⁹

Ethnic Koreans, along with other Asian subgroups such as Chinese or Vietnamese, are not the only market-dominant minorities in America’s inner cities. In certain communities—Brooklyn’s Crown Heights, for example—Orthodox Jews are a highly visible “outsider” entrepreneurial minority, deeply resented by the much more numerous, and far poorer, African-American majorities around them. In 1991, after ethnic violence broke out when a Hasidic Jewish driver in Crown Heights struck and killed a black child, anger on both sides ran especially high. “You’re not going to run New York City any longer,” Nancy Mere, an African-American Housing Authority assistant, shouted at Orthodox Jewish leaders at a news conference at city hall. “It was okay when our mothers were cleaning your floors and taking care of your babies—that was okay. But we’re not going to have it anymore.” Mere then added, expressing a typical sentiment, “We hear about the Holocaust, the Holocaust, the Holocaust. Well, the black man has lived through a holocaust in this city and it’s terrible, and we’re not taking it anymore.”

Meanwhile, black community leaders have done their share in fomenting resentment against entrepreneurial minorities. At a series of fiery rallies in 1995, and shortly after calling for anti-Korean boycotts, Reide called for mass boycotts targeting Jewish-owned businesses. “Nobody loves money any more than the Jewish people,” he yelled in a speech that was broadcast live on radio station WWRL. In response to charges that national black leaders like Al Sharpton and Louis Farrakhan were anti-Semitic, Reide threatened, to thunderous applause, that unless the accusations stopped, “we will marshal six million black men and women and boycott every Jewish-owned business throughout the United States.” He then named specific targets: “There are 91 Waldbaum’s stores; we will boycott them. There are 618 nationwide Toys ‘R’ Us stores; we will boycott them. There are 145 New York City Key Food shopping markets; we will boycott them. We will boycott Macy’s.”³⁰

The “Browning of America”

According to the latest census data, in the state of California the number of whites is less than the combined number of Hispanic-, Asian-, and African-Americans. In the United States as a whole, the Census Bureau projects that whites will be a minority by 2060.³¹ At that point, if these projections hold true, the United States may well have a market-dominant minority at the national level, starting in the latter half of this century.

Nevertheless, anxiety about “the browning of America” must be kept in perspective. There are powerful reasons to think that majority-based ethnonationalist movements targeting a white market-dominant minority are unlikely to develop in the United States. To begin with, given how large a percentage of America’s population will still be white, it is extremely implausible that an antiwhite political movement could be democratically successful in the United States. Moreover, unlike most developing countries, there is a strong, ethnically crosscutting national identity in the United States, which would make it far more difficult for politicians to portray American whites as “outsiders” stealing the wealth from America’s “true” Hispanic, black, or Asian “owners.” (If Native Americans were still a majority in the United States, it might be a very different story.) In addition, rates of ethnic intermarriage and cultural assimilation are relatively high in the United States. While intermarriage is no guarantee against ethnic conflict, it is hard to imagine that American society will ever again look like a South Africa or Indonesia, where ethnic intermarriage rates are virtually nil.

Finally, as in all the Western nations, America’s less well off are rich by comparison to their developing-world counterparts. In the United States, even blue-collar workers have cars, television sets, and some savings. At work they are entitled to health benefits, paid vacations, and disability compensation. Outside the West, great majorities own no property and live in hopeless, open-sewer poverty. As a result, they are much more embracing of anti-market rhetoric and confiscatory policies. In the United States, most people have CD players and a garden, think of themselves as middle-class, and, at least outside our inner cities, believe at some level in the American Dream. For all these reasons, the possibility that there might someday arise within the United States, or for that matter in any of the Western nations, an antiwhite, anti-market ethnonationalist backlash is extraordinarily slim.

Indeed, precisely because American society is so wealthy overall, America has come to occupy the role of a starkly market-dominant minority vis-à-vis the rest of world. We are now the object of intense resentment, even hatred, spurred by globalization. But this is the subject of chapter 11.