The socialist challenge of capitalism required an effective response. The first chapter of this rivalry was opened in the late nineteenth century. Chancellor Otto von Bismarck, in his struggle with the strong German socialist movement, turned towards the introduction of welfare institutions. Pension system, health care, and other welfare institutions were introduced for workers to take the wind out of the sail of the emerging socialist movement. For these developments, the Great Depression of the early 1930s brought about a turning point. The Swedish Social Democratic government, elected in 1932, started building a welfare state. President Franklin D. Roosevelt also initiated major social legislation and the introduction of the social security system. The comprehensive system of the welfare state, however, emerged only after World War II in Western Europe. Capitalism, in contrast with its nineteenth century features, initiated widespread social legislation. Paid vacation, short workweek, nationwide pension systems, free health care, education, maternity leave, cheap housing, and many other institutions were established. Human rights were re-evaluated and the right to work, i.e., a full-employment policy, became dominant. Inequity, at least in the middle layers of the society, markedly diminished in the advanced capitalist countries.
The period after the Second World War also saw the spread of mixed economies. Almost all of the advanced Western European countries, led by France and Britain, nationalized entire sectors of their economies and established new state-owned firms in various industries.
Capitalism underwent a spectacular transformation. In his article on The Instability of Capitalism (1928), the leading Austrian-American economist, Joseph Schumpeter, prophesied the transformation of the system and the fading of the original meaning of capitalism. He maintained that capitalism is inherently stable and able to recover from great crises, but generates socio-intellectual effects discordant with its spirit and institutions. As a consequence, ‘Capitalism is … in so obvious process of transformation into something else … [that] it will be merely matter of taste and terminology to call it Socialism or not.’
Towards the end of the twentieth century, capitalism adjusted to the new historical situation and markedly transformed but preserved entrepreneurial interest, market flexibility, efficiency, competitiveness, and reached its highest prosperity and fastest growth rate ever. The Western core countries of the world system successfully adjusted to a new technological-communication revolution and became the leader of new technologies and the rise of postindustrial society.
During the long period of postwar prosperity, a part of the former Asian and South European peripheries of the capitalist world system reached a higher than average growth and became an integrated and equal part of the core countries. After a long period of rivalry, capitalism emerged victorious while the parallel world system of centrally planned state socialism, which conquered one-third of the world and influenced an even greater part by its policy after World War II, collapsed in 1989–91. The former Soviet Bloc countries introduced radical market reforms, thus re-establishing capitalism. During the last third of the twentieth century, laissez-faire capitalism became the leading model again. Neo-liberal economics triumphed and challenged mixed economy and welfare state.
Capitalism in late twentieth century reached a new stage in its history. The main trend of this new age is globalization. National boundaries and national economies rapidly lost their importance. Multi- or transnational companies penetrated previously independent economies. Foreign direct investment became instrumental all over the world, including the advanced core countries. Towards the end of the 1990s nearly one-third of American exports and two-thirds of imports were intrafirm deliveries. About one-third of French, Dutch, and British industrial output was produced and roughly 25–40 percent of their research and development expenditure was financed by affiliates of transnational companies. In Ireland, and former state-socialist Hungary, foreign affiliates produced two-thirds of industrial output and financed roughly 70 percent of research and development expenditures.
While globalization, in some cases, contributed to a successful catching-up process with the core, it also preserved and even strengthened the core–periphery inequity. The gap between advanced core and the peripheries was growing considerably: intercountry income spread was 10:1 in 1913; 26:1 in 1950, but it increased to 40:1 at the end of the twentieth century. A newly globalized but even more polarized capitalist world system, dominated by an expanding Western core, was emerging at the turn of the millennium.
