The Economic History of The Netherlands 1914-1995

A Small Open Economy in the 'Long' Twentieth Century

Jan L. van Zanden

• Publisher: Taylor & Francis
• Year: 2005
• eBook ISBN: 9781134749386
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Jan L. van Zanden in The Economic History of the Netherlands 1914-1995 answers these questions. In the first four chapters the long development of the economy is analysed in detail. Central to this part of the book are the rise (and decline) of managerial enterprise; the growth (and fall) of trade unions; and the expansion (and crisis) of the welfare state. The particular Dutch features of these institutional changes are highlighted. The second part of the book deals with different periods of growth (from 1914-1929, and 1950-1973), and relative stagnation (1929-1950, and 1973-1995). Moreover, van Zanden examines the role the Netherlands played in the process of European integration, and gives an explanation of the success of the 'Dutch job machine' in the 1980s and 1990s.

1: THE LONG TWENTIETH CENTURY

It is not easy to write an economic history of the Netherlands in the twentieth century. First there is the problem of abundance: the number of relevant historical, economic, sociological and political studies is enormous. It is almost impossible to write anything on recent developments in the labour market or on the effects of government policies on economic growth without confining yourself in a library for many weeks. And even then you cannot be sure that you will not miss the most recent ‘pioneering’ dissertation on the subject. As a result, once an economic historian starts writing he is more than once seized by the fear that he failed to find the most recent papers which provide the definitive solution to his problem; there is always the temptation to continue reading.

The second problem a historian has to face is that of shortage. Historians generally prefer to do their work on somewhat more distant periods. In the Netherlands, for obvious reasons, the seventeenth century has been in strong favour, and the nineteenth century has also received more than its fair share of attention. Little basic research into archive sources has been done on the last fifty years or so, although things have recently changed for the better. What is perhaps even more important, is that the historical discussion on the nature of the twentieth century has only recently begun. Historians can give their stories a sense of unity by defining the special characteristics of economic development in, for example, the seventeenth century or the nineteenth century. But until now the twentieth century seems to be an enormous reservoir of contradictory developments without any coherence.

However, as the twentieth century draws to a close, thinking about its nature has become quite fashionable. Eric Hobsbawm has tried to bring some order into its apparent chaos by defining the ‘short’ twentieth century as the period between 1917 and 1991, that coincides with the life cycle of the Soviet Union (Hobsbawm 1994). This largely political definition of the century is, however, not much help to an economic history of the Netherlands. When there is a ‘short’ twentieth century, there should also be a ‘long’ one, a concept I would like to introduce here.¹ The ‘long’ twentieth century began in the final quarter of the nineteenth century, and its end is still unknown. The concept focuses on a number of largely institutional changes in the structure of the economy (and in society at large) that began somewhere after 1870, accelerated after the turn of the century to reach full maturity somewhere between 1960 and 1980, and now seems to be on the decline. As a result, the twentieth century has its own institutional framework that distinguishes it from the preceding century. Yet, this framework also appears to have begun to fall apart in recent years. Let me briefly review the major changes.

First, there is the growth of modern industry and, as a result of the ‘second industrial revolution’ of the 1880s, the rise of the managerial enterprise. In Chapter 3 I will show how almost all Dutch multinational companies were created in the relatively short period between 1880 and 1920, how they expanded enormously until about 1970, and experienced relative decline (even absolute in terms of employment) in the final quarter of this century. In other words, during the ‘long’ twentieth century economic growth was accompanied by an increased concentration of workers in large often multinational companies. Moreover, as a result of the separation of ownership and management the companies were controlled by managers whose principal aim was the long-term growth of the enterprise. But since the 1970s we have been witnessing the rise of a different economy in which commercial services (as opposed to industry) and small companies (as opposed to multinationals) are the most dynamic parts. And the ‘revolution’ of the shareholder has meant that managers have to pay much more attention to the realization of short-term profits.

The second part of the story of the long twentieth century has to do with changes in the labour market. The final years of the nineteenth century and the first decades of the twentieth century saw the rise of modern trade unions that aimed at forming a cartel of labour in order to improve their bargaining position. In the interwar period and especially during the 1940s the new structure was stabilized. Trade unions became part of the ‘normal’ functioning of the labour market; negotiations between employers’ organizations and trade unions (and after 1945 the government) became the standard way to regulate the market. It resulted in the ‘guided’ wage policy of the period 1945–1963, in which a rather rigid system was applied to control the growth of nominal wages. During this period of a government-controlled labour market, the structure of wages and salaries was almost completely reorganized. The system crumbled under the pressure of market forces in the late 1950s and early 1960s, when unemployment reached an historic low. Yet, the government continued to exert a relatively strong influence on the labour market and the position of trade unions remained unaffected. The standard response to the new economic problems of the late 1970s and 1980s was therefore to strive once more for controlling wages rises, which became the official policy of the trade unions after 1982. However, the rise of new labour market institutions (such as temping agencies) and the decline in the rate of unionization after 1980 gradually eroded the influence of trade unions on the labour market and there developed a strong tendency to increase the flexibility of labour.

The rise and decline of trade unions and their influence on the labour market runs almost parallel to the growth of the welfare state, the third part of the story of the long twentieth century. In general, this century has seen an enormous increase in the role of the state in economy and society, which was probably caused by democratization, the rise of trade unions, and the emergence of mass political parties. Once again the foundations for this development were laid in the final quarter of the nineteenth century, but until the 1940s progress was rather slow. After World War II a huge expansion of social services started. Moreover, the government began to take charge of economic matters; industrialization plans and a guided wage policy are cases in point. The relatively heavy reliance on the state to solve economic problems was quite out of line with the strong ‘laissez-faire’ tradition of Dutch politics. During the 1980s the tide turned: a gradual dismantling of the welfare state began, budget cuts have been with us ever since (and are here to stay) and all major political parties now state that they aim at reducing the role of the government in the economy. The longterm development of the relationship between government and economy—with heavy emphasis on the rise of the welfare state—is the subject of Chapter 4.

These three long-term developments are not unique to the Netherlands. Comparable changes in the structure of the economy, the labour market and the role of the state can be found in almost all industrial nations. However, an international comparison reveals that there seems to be a clear Dutch pattern in all three. First of all, the Netherlands was a late starter in these fields: industrialization was rather slow in the nineteenth century and small-scale industry stood its ground until the 1920s. Dutch trade unions in the nineteenth century clearly lagged behind those in neighbouring countries and the Dutch state remained a model of official liberalism well into the 1930s. However, once the changes had set in, Dutch developments tended to extremes. The economic success of Dutch managerial enterprises was huge; after 1945 large multinational firms became far more important to the Netherlands than to most other Western European countries. The same applies for the development of the welfare state: after a relatively slow start, the 1960s experienced an unprecedented rise in social spending, which put the Netherlands among the (largely Scandinavian) countries at the top of the international league in terms of the share of social services in GDP. A similar story holds true for the organization of the labour market. After 1945 the labour market was under strong government control, which was rather unique to the Netherlands. Moreover, as a result of the postwar guided wage policy the influence of the unions on labour relations became quite large, which has remained a feature of the Dutch labour market ever since. In short, the Dutch pattern can be described as a slow start followed by a ‘big bang’ in the period after World War II.

The particular Dutch version of the process of pillarization has to be introduced in the story to explain this pattern (see Chapter 2). This process ran almost completely parallel with the other major changes of the ‘long’ twentieth century. It had important consequences for the structure of the political system—which came to be dominated by the confessional parties— and, hence, for the development of the welfare state. Moreover, the moderate nature of Dutch trade unions, which was fundamental to their integration into a system of centralized wage bargaining after 1945, can probably also be attributed to the competition between confessional unions, moderate by nature, and the socialist unions; this competition was another result of pillarization. Finally, the pillarized society of the first two-thirds of the century was in many ways an entrepreneurial eldorado, where (multinational) companies were bound to prosper. Consequently, the ‘Dutch’ version of the long twentieth century is primarily connected with the process of pillarization, which will therefore receive separate attention in Chapter 2.

The Dutch pattern is one of the reasons to believe that the three longterm changes (in the structure of industry, of the labour market and of the state) are related. Of course, the close relationships between the rise of the welfare state and the growth of trade unionism are obvious and will be discussed in the chapters to come. There is however more to it. The three changes all stem from a distrust in market forces as such, and from the wish to overcome them by more efficient or just modes of organization. The debate on government intervention is a good place to start a description of the connections between the ideological frameworks of the three developments. There were basically two reasons to increase the role of government. The first one was the belief that administrative coordination—possibly with the help of some kind of plan —could be more efficient than coordination by the market. The market not only created large-scale unemployment (viz. in the 1930s) but was also unable to restructure declining industries, to operate utilities with natural monopolies, to start new basic industries, and so on. In other words, the market was (often) inefficient in the eyes of the (left-wing) reformers of the nineteenth and twentieth centuries.

A second and perhaps more fundamental reason for government intervention was that the results of the functioning of the market were often regarded as unjust, and that intervention by the government was necessary to correct (or even undo) these results. The growth of trade unions and the many changes in the labour market that came with them were another way in which to adjust the unequal results of the functioning of the labour market (and the market economy at large) that were so obvious in the nineteenth century.

The rise of managerial enterprises can at least partially be attributed to a comparable source: the efficiency of administrative coordination. For example, when during World War I Philips set out to manufacture its own glass bulbs and many other inputs instead of buying them on the market, the company internalized these markets and replaced them with its own administrative plans. In the very long run it could only do so because it was more efficient than to rely on the market for the supply of inputs. The managerial enterprise can therefore be seen as another system of administrative coordination, which is successful because it is more efficient than the markets it replaces. The rise of this type of enterprise resulted in the growth of large bureaucratic organizations—Chandler's multidivisional firm (Chandler 1990)—which operated not unlike the government bureaucracies that matured at the same time. Only the controlling influence of a (distant) market could check the growth of private bureaucracies (although after 1973 some of them have shown the same sclerosis as government administration, which has contributed to their relative decline). Both approaches—the managerial enterprise and the socialist ‘planned economy’—attach great importance to economies of scale in production (and distribution), which could only be exploited optimally by a society by concentrating activities in large bureaucratic organizations.

The decades between 1914 and 1945 were characterized by the tension between the ‘old’ liberal economic order of the nineteenth century and the new ‘anti-market’ forces of a rising (welfare) state and emerging trade unions. The 1930s saw the final disintegration of the liberal, ‘international’ order and its replacement by all kinds of ‘nationalistic’ ad hoc policies aimed at softening the worst effects of the Depression. However, after World War II a new ‘settlement’ emerged from the apparent chaos (Eichengreen 1996). Its ideological basis was formed by the new economic ideas of J.M.Keynes that legitimized ‘nationalistic’ government policies towards the economy and, to a lesser extent, by the socialist tradition of economic planning. At the same time, during the occupation a new historical compromise was reached between ‘labour’ and ‘capital’ (see Chapter 5, p. 79); both parties wanted to work closely together to rebuild the economy after the liberation. The government soon became a partner in the new alliance. The second half of the 1940s witnessed the consolidation of this new institutional framework of ‘organized capitalism within one country’, a new synthesis of the (formerly antagonizing) forces of the ‘long’ twentieth century: big business, big government, and big unions. Concurrently a set of ‘national’ growth policies (guided wage policy, industrialization plans) was developed, which were ironically oriented more towards the supply side of the economy than towards the manipulation of demand. These policies also contributed to the success of the new ‘model’.

Judged by its growth performance the postwar ‘new settlement’ was exceptionally successful. Yet, its very success created the forces that would eventually undermine the settlement. Rapid economic growth led to increased tensions on the labour market which, in the long run, undermined the profitability of industry. More importantly, the ‘nationalistic’ outlook of the new model was undermined by processes of economic integration which it had started. The settlement was based on a certain degree of government control over international trade and international capital movements, but at the same time governments needed larger export markets to realize their growth objectives. Out of this dilemma came a complicated process of European cooperation, which increasingly narrowed down the margins of national economic policy (Chapter 8, pp. 155–7).

The U-turn that occurred in the 1970s and 1980s is still something of a mystery, but on a few points the story can perhaps be made more clear. First of all, the model of ‘organized capitalism within one country’ was severely discredited by the events of the 1970s when inflation and taxes were too high and the increase in unemployment was too fast. Its ideological basis, which had not developed beyond plain Keynesianism, crumbled under the attacks of neo-liberal economists. Perhaps the changes of the 1980s should be interpreted as a ‘counter-revolution’ of ‘capital’ after it had been on the defence for a long time. The globalization of capital markets probably brought about significant changes in business strategy, which resulted in an almost continuous ‘downsizing’ of firms. At the same time, the margins for government intervention in the economy had become very small. Confidence in government planning and in a rational control of the economy completely disappeared and a passionate belief in the benevolent influence of the market made an exceptionally strong return. In a way, that is how and when the ‘long’ twentieth century came to an end. Currently we face an economy with a gradually declining share of employment in large enterprises, with a slow but persistent increase in the flexibility of labour markets (in spite of attempts by trade unions to slow down the process), and with a government that at least officially wants to reduce its role in the economy. Beneath the decay of the old structures of the ‘long’ twentieth century new structures are in the making, but it is much too soon to speculate about their precise nature and the reasons for their appearance. As an economic historian I aim to try and reconstruct the past, which is a sufficiently hazardous job in itself, especially for the twentieth century.

NOTE

1 During the completion of the manuscript Erik Vanhaute drew my attention to the book by G.Arrighi (1996) who uses the term ‘the long twentieth century’ in a comparable way. When writing I was unaware of this important book.

2: CHARACTERISTICS OF THE DUTCH ECONOMY

A VERSATILE, SMALL AND OPEN ECONOMY: THE NETHERLANDS AT THE BEGINNING OF THE TWENTIETH CENTURY

Economic historians who study the nineteenth century have been almost obsessed with the problem of the late industrialization of the Netherlands. The fundamental issue was why ‘modern industry’ arose much later than in neighbouring countries such as Britain, Belgium, or even Germany (Griffiths 1996a). Sometimes it helps to approach the issue in a completely different way: why did ‘modern industry’ arise at all in the Netherlands in this period? During the nineteenth century most small economies seem to have moved in the direction of greater specialization and to have concentrated on activities in which they had a ‘comparative advantage’. The Danish economy, for example, became increasingly dependent on the export of a small number of agricultural products, while Belgium specialized in a specific range of (semifinished) industrial products. Why did the Dutch economy not follow a comparable path of development? The ‘agrocommercial’ nation of the first half of the nineteenth century was heavily dependent on its exports of agricultural products and the supply of international services to the mainly German hinterland. After 1860 the Netherlands began to develop an economic structure that was much more differentiated and balanced. In this respect the development of the Dutch economy is more comparable to that of large countries, such as Germany, France, and Italy (Griffiths 1996a).

That the Dutch economy diversified rather than specialized can to some extent be explained from developments related to the two sectors of the economy that were already strong: agriculture and international services. The modernization of agriculture resulted in the rise of agro-based industries that contributed significantly to the industrialization of a number of regions (East Groningen, West Brabant). Through various backward linkages the growth of international shipping stimulated the industrialization of the port cities of Holland. Shipbuilding is the most obvious example. Yet, the gradual industrialization of the Netherlands was a far more complex process. At least two other factors played an important role: the large regional differences in economic structure and the vast colonial empire.

It is remarkable that in a small country such as the Netherlands highly different economic niches could exist simultaneously. To put it simply, the economic structure of Holland (and the other coastal provinces) was quite unlike that of the inland provinces. The history of the divergence between the economic centre of the country and its periphery goes back to (at least) the sixteenth and seventeenth centuries. The industrialization of a number of regions in the ‘peripheral’ inland provinces (Twente, the Achterhoek, parts of Brabant) was based on the elastic supply of proto-industrial labour. Labour intensive activities that did not demand many skills (textiles, leatherware, electric bulbs) were concentrated in regions where wages were much lower than in Holland. Improvements in infrastructure (railways) turned these regions into independent centres of economic growth—almost challenging Holland in this respect—where capital and entrepreneurship was largely supplied by the families of protoindustrial entrepreneurs (Fischer 1983).

A different structure of incentives underlay the industrialization of Holland. Since the Netherlands was poor in natural resources, all raw materials and a large part of the food supply had to be imported. Together with the rapidly growing demand for raw materials from the German hinterland, this created a great deal of employment in the two port cities, Amsterdam and Rotterdam. In the old centres of industry and trade in Holland an enormously wealthy bourgeoisie and a highly skilled labour force formed a large market for all kinds of products. In Holland the old processing industries (trafieken)—such as breweries, distilleries, sugar refineries, and shipyards—and a number of industries that were related to the urban supply of skilled labour (diamond cutting, printing) were the backbone of industrialization (Van Zanden 1987). Wages were relatively high in the skill and capital intensive industries.

Therefore, the industri...

Table of contents

• COVER PAGE
• THE ECONOMIC HISTORY OF THE NETHERLANDS 1914–1995
• CONTEMPORARY ECONOMIC HISTORY OF EUROPE SERIES
• TITLE PAGE
• COPYRIGHT PAGE
• LIST OF GRAPHS
• LIST OF TABLES
• EDITOR'S INTRODUCTION
• PREFACE
• 1: THE LONG TWENTIETH CENTURY
• 2: CHARACTERISTICS OF THE DUTCH ECONOMY
• 3: THE RISE OF THE MANAGERIAL ENTERPRISE
• 4: THE POLITICS OF A PILLARIZED SOCIETY AND THE DEVELOPMENT OF THE WELFARE STATE
• 5: THE LABOUR MARKET
• 6: THE BEST OF BOTH WORLDS; CATCHING UP 1914–1929
• 7: THE LONG STAGNATION 1929–1949
• 8: THE GOLDEN YEARS 1950–1973
• 9: 1973–1995: FALLING BEHIND AGAIN?
• BIBLIOGRAPHY