AFTER TWO WORLD WARS, the Great Depression, and experiments with socialism interrupted the liberal economic order that began in the 19th century, the world economy has now returned to the level of globalization that it previously enjoyed. By the 1970s, trade as a share of world economic output had already reached its pre–World War I height. During the past 20 years, international integration has continued to increase with the subsequent liberalization of capital controls, reduction of trade barriers, revolutionary technological advances, and the dramatic collapse of central planning.
Compared with the 1950s and 1960s, when most of the world’s population lived in economically unfree countries and only 20 percent of the world’s population lived in countries with open economies, the current era of global capitalism seems unprecedented. Yet John Maynard Keynes’s description of the world before 1914 vividly reminds us that there was a thriving global economy during that time.
The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages…. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.
Significant differences between the two eras of global capitalism have resulted from the growth of government during the 20th century. For example, central banks, fiat currencies, and various exchange-rate regimes have replaced the gold standard. Rich countries now impose extensive restrictions on immigration — a result, as Deepak Lal explains in his chapter, of the rise of the welfare state, which has created property rights in citizenship. Nevertheless, the world is by most measures more integrated today than it was 100 years ago. The volume of trade is greater, gross capital flows (now at some $1.5 trillion per day) are far larger, cross-border lending is more diversified, and international production is more complex. Traditionally poor Latin American and Asian nations, moreover, are experiencing high and self-sustaining growth rates, a sign that the West’s dramatic escape from poverty is an experience that can be replicated.
But the return to a global economy has been accompanied by financial turmoil in Asia and elsewhere, prompting a range of critics to fault markets for spreading instability and poverty. When the Russian ruble fell in August 1998, financier George Soros asserted that “right now, market fundamentalism is a greater threat to open society than any totalitarianism.” President Clinton’s call to “put a human face on the global economy” and the International Monetary Fund’s bailouts of Brazil, Russia, and Asian countries — ostensibly intended to bolster the free market — contributed to the notion that capitalism had somehow failed. “The proposition that utterly unregulated markets rule society more wisely than sovereign governments,” journalist William Greider declared, “is being smashed by reality.”
The purpose of this book is to assess such bold claims and to take stock of the ways in which the spread of capitalism has contributed to human progress. The contributors document how the countries that have succumbed to economic crises in recent years, far from having experienced an excess of market reforms, have in fact suffered from perverse forms of state interventionism. Indeed, beginning with Mexico in 1994, all of the crisis countries maintained some combination of the following flawed policies: pegged exchange rates, state-protected banks, irresponsible monetary and fiscal policy, government-directed credit, and implicit or explicit government guarantees to domestic firms and industries. Countries with sound economies, on the other hand, did not become victims of so-called contagion. Thus it is difficult to speak of a truly international economic crisis, much less a crisis of capitalism.
The real crisis of the 20th century was otherwise. Indeed, one of the clearest lessons of the past 100 years has been that inward-looking economic policies of import substitution, development planning, capital controls, and state-owned production have impoverished both the Third World and socialist nations. One of the lessons of the 1990s was that an incoherent mix of market and interventionist policies — such as maintaining pegged exchange rates after liberalizing capital flows — is a recipe for disaster. The challenge for both the developed and developing world is to keep the process of globalization going and not to lose sight of the tremendous blessings resulting from a liberal world economy.
The spread of capitalism
Mario Vargas Llosa explains in his chapter that “it is liberalism — more than any other doctrine — that symbolizes the extraordinary advances that liberty has made in the long course of human civilization.” Even though classical liberalism has won the great battle of ideas over various forms of totalitarianism, Vargas Llosa warns us not to become complacent. In his view, stereotypes and caricatures are today being used to undermine economic and political freedom. A prominent part of that strategy has been the frequent use of the derisive term “neoliberal” to explain nearly every social and economic ill in society.
To Vargas Llosa, who has met many liberals but no neoliberals, the term is a straw man and is emblematic of much of the misguided criticism aimed at globalization. For example, in response to the oft-heard accusation that multinational corporations behave with impunity, Vargas Llosa stresses the need to establish the proper institutional framework for a free society:
If in many developing countries the behavior of multinationals is reprehensible, the ultimate responsibility rests on those who fix the rules of the game in economic, social, and political life.
Thus, Vargas Llosa urges the capitalist democracies to do as much as they can to promote the rule of law and economic and political pluralism in the developing world.
Deepak Lal cautions both developed and developing countries that there is no third way between the free market and socialism. In contrast with Vargas Llosa, however, Lal finds no necessary connection between democracy and development.
According to Lal developing nations can modernize without Westernizing. People in poor countries can easily adapt to, and are eager to attain, economic freedom, but “cosmological beliefs” take longer to evolve and may not be consistent with many values the West wishes to advance. Thus Lal warns against “the West’s growing attempt to legislate its ‘habits of the heart’ worldwide.” The West’s efforts to promote labor, environmental, and other standards and its insistence on majoritarian democracy remind Lal of 19th-century imperialism, which helped unravel that era’s liberal economic order. That is particularly unfortunate, since other major factors that led to the breakdown of the first era of globalization are absent today. “If the West ties its moral crusade too closely to the emerging processes of globalization,” Lal concludes, “there is a danger that there will also be a backlash against the process of globalization.”
In the struggle for global capitalism, the liberal cause nevertheless has the long-term advantage, Brink Lindsey contends. He analyzes the arguments of those who claim that recent financial crises have been the result of unrestrained capitalism and finds that the arguments “are illuminating in their almost perfect inversion of the truth.”
The world is not seeing an overreliance on markets, a phenomenon that supposedly led to the cataclysms of the 20th century. Lindsey catalogues the anti-market forces that have created bouts of economic instability and notes the dynamics that have changed the world economy. The global economy that existed 100 years ago came to an end because of the rise of economic nationalism and a pervasive loss of faith in markets.
Today, by contrast, “although globalization is charged with undermining the state, the more powerful flows of historical causation have actually been in the opposite direction: it is the retreat of the state that has allowed international market relationships to regain a foothold.” Lindsey predicts that liberalization will continue, but because of the widespread presence of statist distortions to the market economy, that process will occur through fits and starts in a pattern of reform, crisis, and reform.
The rewards of liberalization are amply demonstrated by the United States, one of the consistently freest economies in the world. Stephen Moore and the late Julian Simon document 25 U.S. trends to show that “there has been more improvement in the human condition, for people living in the United States in the 20th century than for all people in all previous centuries of human history combined.” In the past 100 years, nearly every indicator of health, safety, environmental quality, and affordability of consumer goods and services has shown rapid and dramatic progress. For example, U.S. life expectancy at birth has risen from 47 to 77 years, agricultural productivity has increased five- to tenfold, diseases that used to kill thousands of Americans per year have been extinguished, and per capita annual income has grown from $5,000 to $30,000. Moore and Simon believe that the gains of the 20th century are part of a long-term trend. Those gains are virtually irreversible because they are based primarily on advances in knowledge, which, in the information age, are difficult to erase or suppress.
In Russia, nine years of “reforms” have barely moved the country from the plan to the market, according to Andrei Illarionov. Indeed, Russia is still among the least economically free countries in the world. The 1998 financial crisis, which was “the culmination of years of misguided policy,” wiped out the country’s few successes — namely, low inflation and exchange-rate stability. Illarionov describes a country in which a corruption-plagued government has increasingly interfered in the economy and in which “domestic economic liberalization effectively stopped in mid 1992.” The real struggle over the past eight years in Russia has not been between liberal reformers and old-line statists but rather over who or whose team would win control over the state institutions in charge of distributing economic resources.
Unfortunately, the IMF and other lending institutions have helped sustain that situation by providing Russia with more than $25 billion in credits.
Because Moscow has for years been uninterested in reform, Illarionov asserts that IMF credits have actually “postponed the implementation of a coherent economic strategy … and have reduced the willingness of national authorities to make painful but necessary changes in economic policies.” The most perverse and discouraging legacy of the “transition” period, however, is that, in the minds of many Russians, the free market itself has been discredited.
Global fortune
The welfare of humanity is in large part tied to the fortune of capitalism itself. We must not again allow globalization to “stumble” because of a loss of faith in liberal institutions. The consequences of doing so would be devastating to world prosperity and peace. That is why it is important to dispel erroneous notions about global capitalism before they become enduring myths that influence policymakers and the public at large.
This book attempts to contribute to that effort. Drawing lessons from a century that began and ended with globalization, the authors in this volume take a generally optimistic view of the prospects of the new era of global capitalism. Their sentiments are summed up by Vargas Llosa, who writes, “We should celebrate the achievements of liberalism with joy and serenity, but without triumphalist hubris…. That which remains to be done is more important still.”
This is an edited version of his introduction to Global Fortune. Reprinted by permission.