[T]he revolution eagerly anticipated by Marx never materialized — at least, not where it was supposed to, in the advanced industrial countries. The great bouleversements of 1830 and 1848 were the results of short-run spikes in food prices and financial crises more than of social polarization. As agricultural productivity improved in Europe, as industrial employment increased, and as the amplitude of the business cycle diminished, the risk of revolution declined. Instead of coalescing into an impoverished mass, the proletariat subdivided into “labor aristocracies” with skills and a Lumpenproletariat with vices. The former favored strikes and collective bargaining over revolution and thereby secured higher real wages. The latter favored gin. The respectable working class had its trade unions and working men’s clubs. The ruffians had the music hall and street fights.

The prescriptions of The Communist Manifesto were in any case singularly unappealing to the industrial workers they were aimed at. Marx and Engels called for the abolition of private property; the abolition of inheritance; the centralization of credit and communications; the state ownership of all factories and instruments of production; the creation of “industrial armies for agriculture”; the abolition of the distinction between town and country; the abolition of the family; “community of women” (wife-swapping); and the abolition of all nationalities. By contrast, mid-nineteenth-century liberals wanted constitutional government, the freedoms of speech, press, and assembly, wider political representation through electoral reform, free trade, and, where it was lacking, national self-determination (“home rule”). In the half-century after the upheaval of 1848 they got a great many of these things — enough, at any rate, to make the desperate remedies of Marx and Engels seem de trop. In 1850 only France, Greece, and Switzerland had franchises in which more than a fifth of the population got to vote. By 1900 ten European countries did and Britain and Sweden were not far below that threshold. Broader representation led to legislation that benefited lower-income groups. Free trade in Britain meant cheap bread, and cheap bread plus rising nominal wages thanks to union pressure meant a significant gain in real terms for workers. Building laborers’ day wages in London doubled in real terms between 1848 and 1913. Broader representation also led to more progressive taxation. Britain led the way in 1842 when Sir Robert Peel introduced a peacetime income tax; by 1913 the standard rate was 14 pence in the pound. Prior to 1842 nearly all British tax revenue had come from the indirect taxation of consumption via customs and excise duties, regressive taxes that take a proportionately smaller amount of your income the richer you are. By 1913 a third of revenue was coming from direct taxes on the relatively rich. In 1842 the central government had spent virtually nothing on education and the arts and sciences. In 1913 those items accounted for 10 percent of expenditures. By that time, Britain had followed Germany in introducing a state pension for the elderly.

Marx and Engels were wrong on two scores, then. First, their iron law of wages did not exist. Wealth did indeed become highly concentrated under capitalism, and it stayed that way into the second quarter of the twentieth century, but income differentials began to narrow as real wages rose and taxation became less regressive. Capitalists understood what Marx missed: that workers were also consumers. It therefore made no sense to try to grind their wages down to subsistence levels. On the contrary, as the case of the United States was making increasingly clear, there was no bigger potential market for capitalist enterprises than their own employees. Far from condemning the masses to immiseration, the mechanization of textile production created growing employment opportunities for Western workers — albeit at the expense of Indian spinners and weavers — and the decline in the prices of cotton and other goods meant that Western workers could buy more with their weekly wages. The impact is best captured by the exploding differential between Western and non-Western wages and living standards in this period. Even within the West the gap between the industrialized vanguard and the rural laggards widened dramatically. In early seventeenth-century London, an unskilled worker’s real wages were not so different from what his counterpart earned in Milan. From the 1750s until the 1850s, however, Londoners pulled far ahead. At the peak of the great divergence within Europe, London real wages were six times those in Milan. With the industrialization of northern Italy in the second half of the nineteenth century, the gap began to close, so that by the eve of the First World War it was closer to a ratio of 3:1. German and Dutch workers also benefited from industrialization, though even in 1913 they still lagged behind their English counterparts.

Niall Ferguson, “Capitalism, Socialism and Nationalism: Lessons from History”, 2020-02.