The Nation 98/10/19
Not for the First Time, World Sours on Free Markets
BY JOHN GRAY
It is beginning to be accepted that global capitalism is in serious trouble. That has not always been so. When my book False Dawn was published this past spring, I expected it to be attacked. I was not disappointed. Most reviewers were incredulous. Some dismissed the claim that the global market was heading for breakdown as an apocalyptic fantasy. Less than six months after False Dawn was published, that claim has been largely vindicated. The regime that a seemingly unshakable consensus took to be permanent has begun to fall apart. Soon, I have no doubt, it will be an irrecoverable memory. A year or so from now, it will be difficult to find a single person who admits ever having believed that a global free market is a sensible way of running the world economy.
False Dawn's reception confirmed one of its central theses. Contemporary opinion does not know how to distinguish utopian fantasies from historical realities. It should always have been obvious that refashioning the world's diverse economies on the singular model of the free market is an unrealizable project. It is--or should be--self-evident that the world's varied economies express its diverse cultures. All economic systems are imperfect; none are suitable everywhere. The attempt to make any of them universal can have only the most dystopian results. Yet the fantasy that the free market can and should be adopted throughout the world became for a while a litmus test of sound thinking, not only on the neoliberal right but also in the ranks of the center left.
The late-twentieth-century political fad for the free market arose at a time when memory of it had faded. Mid-Victorian laissez-faire was short-lived (some historians have made the hyperbolic claim that there was never such an episode). The free market came about in England as a result not of slow evolution but swiftly, as a consequence of the unremitting use of the power of the state. Through the enclosures, the Poor Laws and the repeal of the Corn Laws, a Parliament in which most people were unrepresented turned land, labor and bread into commodities like any others. Yet as the franchise was widened, the needs of ordinary people were able to find political expression. The free market withered away gradually, through the natural workings of democratic political competition. By the time of the First World War, the economy had been largely re-regulated.
The short history of the free market in nineteenth-century England illustrates a vital truth: Democracy and the free market are rivals, not allies. "Democratic capitalism"--the vacuous rallying cry of neoconservatives everywhere--signifies (or conceals) a deeply problematic relationship. The normal concomitant of free markets is not stable democratic government but the volatile--and not always democratic--politics of economic insecurity.
History exemplifies an equally important fact: Free-market economies lack built-in stabilizers. Without effective management by government, they are liable to recurrent booms and busts--with all their costs in social cohesion and political stability. The Great Depression was partly an aftershock of the First World War, which destroyed the Romanov and Habsburg empires and left an unstable balance of power in Europe. But it was also a consequence of governments' holding to an orthodoxy that believed that so long as inflation is under control the economy can be relied upon to be self-regulating. In the thirties, when deflation was a greater danger, this was a recipe for disaster. It was against the background of slump and political upheaval aggravated by this orthodoxy that John Maynard Keynes developed his proposals for managing the economy; but it took the catastrophe of the Second World War to jolt governments into implementing them.
Different as they are in many important respects, our circumstances today have some curious parallels with those of the period between the two world wars. Now, as then, the world has failed to cope with the effects of a cataclysmic geopolitical shift. The Soviet collapse was not, as Western neoliberals seem to have imagined at the time, a triumph of privatization policy. It was an event of world-historical magnitude that demanded an imaginative and clear-thinking response from the West. Unfortunately, in the nineties as well as in the twenties, the defeat of one of the world's great powers has been the occasion of an exhibition of callow dogmatism and hubris.
The attempt to impose free markets on Russia has been ruinous. Placing the control of inflation above any other objective has not only caused the economy to shrink by half--a development that is unprecedented in any advanced country during peacetime. It has also made hyperinflation inevitable, and a second change of regime increasingly probable. The government that emerges from the coming Russian winter will be authoritarian even if it retains the apparatus of democracy, it will be in some degree anti-Western, and it will defect from the policies imposed upon the country by the Western economic consensus. These are not remote or hypothetical possibilities. By now they are near-certainties.
Economic collapse in Russia is the first unequivocal sign of the breakdown of global laissez-faire, but East Asia has been signaling severe strain in the world economy for at least a year. Contrary to triumphalist and frequently racist interpretations current in the Western media, the Asian depression does not signify a crisis of Asian capitalism--Asia's economies are too dissimilar for that--but a fast-developing crisis of global capitalism. Uncontrolled capital flows have inflicted heavy and lasting damage on Asian countries as different as Thailand, Indonesia and South Korea. The depression they have produced has spread to China. Now footloose capital threatens to destabilize other regions of the world, notably Latin America. The myth that Asia's economic difficulties are a symptom of the peculiar vices of its "crony capitalism" is no longer credible--even in the United States.
In its early stages, the global economic crisis actually helped prolong America's boom, as the "flight to quality" from emerging markets boosted Wall Street. Now that US markets have at last begun to realize their vulnerability, full-scale panic among America's private investors, estimated by the New York Stock Exchange at 65 to 70 million, is a real possibility. Yet the political class in the United States is currently preoccupied with whether serial fellatio constitutes a sexual relationship. As in the thirties, a crisis of the global economy is unfolding at a time when the international community is effectively leaderless.
An implosion in US markets would signal a historic shift in America's relations with the world. American commitment to free trade is not longstanding. In the longer history of the United States it looks more like an aberration. Because larger numbers of Americans have exposed more of their wealth to the stock market than ever before, a sustained slide on Wall Street will have a significantly greater economic impact than in the past. Unemployment will surely rise--at a time when the federal welfare safety net inherited from the Roosevelt era has been torn apart. With that, there is every likelihood of a strong resurgence of US protectionism.
It is a well-worn truth of economic history that countries that lack a well-developed welfare state tend to resort to trade protection in times of economic difficulty. Clinton's welfare "reforms" were based on the sunshine economics of the "new paradigm," according to which an unending boom would guarantee a continuous stream of new jobs. With many of those who have been thrown off welfare about to lose their jobs and much of the middle class facing lean times, it cannot be long before the United States returns to economic nationalism.
In a curiously predictable irony, it is likely to be the United States that ditches the "Washington consensus" that it has tried to impose on the rest of the world. America's experiment in imperial laissez-faire was the geopolitical expression of a stock market bubble. Now that this bubble has been pricked, we will hear no more ranting sermons on the unique virtues of the American economic model.
An emerging world slump bodes ill for the Blair government in Britain. So far, it has achieved the remarkable feat of running ultra-orthodox fiscal and monetary policies in tandem with an interventionist labor policy. The contradiction within New Labor between neoliberal monetarism and a neo-Rooseveltian New Deal does not matter greatly as long as the economy stays buoyant. If Britain's recession is deeper and longer than has been officially forecast, that tension will become politically explosive.
The government's support among first-time Labor voters depends crucially on their perception of its economic competence. The Tories--busily reopening their Euroskeptic wounds and far more heavily compromised by the cult of the free market than Labor--are not at present a serious threat. Even so, it cannot be taken for granted that Labor will be in office for two full terms.
New Labor is rehearsing a familiar pattern in which center-left governments lose control of events by clinging to a defunct economic consensus. It is not too late to prevent that debacle. The government could change the mandate of the Bank of England's Monetary Policy Committee to allow it to take account of employment as well as inflation when it sets interest rates. As Japan has shown, lowering interest rates will not of itself resolve the crisis; but amending the bank's brief would give it vital freedom in responding to events.
The current era of free capital flows cannot survive much longer. Internationally coordinated movement toward a new regime of regulation is the only alternative to the disastrous prospect of tit-for-tat protectionism.
John Gray, a professor of European thought at the London School of Economics, was associated with think tanks that advised the government early in the Thatcher era. His book False Dawn: The Delusions of Global Capitalism, published in Britain in March, will be published in the United States, with a postscript updating the argument, by The New Press in the spring.
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