Indeed, economic nationalism soon became another pillar of the postwar consensus. While the war discredited the virulent nationalism of the Axis powers, it also justified the benevolent nationalism of the Allies. Across Europe, governments nationalized “strategic industries” so that they could be run for the benefit of the nation as a whole rather than that of international speculators, just as they also took control of the burgeoning broadcasting industries so that they could prevent national identities from being diluted. The New Jerusalem of the Labor government, which swept Winston Churchill out of power in 1945, was built on nationalizing the coal industry, which provided 90 percent of the country’s energy needs, as well as the steel industry, the utilities, and the railroads. Nationalization, the Labor leadership argued, would give these industries the scale that they needed to be competitive in the modern world, and it would replace shortsighted bosses with professional managers and also make good the government’s promise of full employment.
It was hardly surprising that many governments—particularly in the third world—assumed that the right to shelter chosen industries was an intep. 18gral part of the Keynesian legacy. Countries such as India, Brazil, and Argentina argued that they stood chances of progressing from raw-material providers into fully fledged industrial powers only if they protected their “infant industries” from competition with established multinationals. Such protection was always presented as a temporary measure, to be abandoned when the time came to be reconnected with the international economy. But somehow the time was never quite right, and protectionism, particularly in the developing world, became—alongside nationalism and the divine intelligence of government bureaucrats—the third pillar of the postwar consensus.
Bidets and Jackboots
This makes it sound as if the consensus was a disaster from the start. Far from it: Handing control of what Lenin called “the commanding heights” of the economy to the state seemed to work extremely well. Certain liberal economists have tried to rewrite the history of the postwar miracles in Japan and Germany to downplay the roles of the states. But both contained hefty dollops of statism, nationalism, and protectionism. Similar ideas lay behind France’s trente glorieuse (thirty glorious years) from 1945 to 1975, when many French people saw spectacular changes in their living standards. At the end of the war, Paris was a dump: From lavatories (normally courtyard privies, shared between several apartments) to lightbulbs (more than a couple of which could blow a building’s fuse), it had barely advanced since the turn of the century.[21] The dirigiste bureaucrats from schools such as the École Nationale d’Administration changed all this, giving their citizens not just better electricity and sanitation but modern roads, railways, telephones, a welfare service, and cheap cars.
Dirigisme spread quickly around the world, taking on the peculiar hues of each host country, from jackbooted militarism in Latin America to fussy paternalism in India. Some governments, such as South Korea’s, were relatively clever about using their resources to build export industries and relatively ruthless about dropping businesses whose products could not hack it overseas. But most focused more on defense rather than on attack. Jawaharlal Nehru, India’s first prime minister after independence, introduced a fully fledged system of national planning, in which elite mandarins devoted their talents to telling lowly businesspeople what to do. They treated international trade as the devil incarnate, partly because it threatened their power and partly because it threatened India’s hard-won independence.
In Latin America, a generation of economists developed something called p. 19 “dependency theory,” which held that, far from being an engine of prosperity, international trade was a tool of oppression. The rich world treated the poor one as a source of cheap commodities while keeping all the higher, value-added jobs for itself. The only chance the poor world had of freeing itself from perpetual commodity-producing servitude lay in allowing their governments to use tariffs and licenses to steer trade. Dependency theorists not only exercised a Svengalian influence over Latin American politicians from Juan Perón to Salvador Allende but also managed to turn parts of the United Nations into propaganda vehicles for their theories.
The late 1960s and the 1970s saw antiglobal ideas sweep all before them in the developing world. Hirsute ideological descendants of the Webbs argued that the third world was engaged in an anticolonial struggle against its imperial masters, and the 1973 oil crisis suggested that the struggle was finally being resolved in favor of the formerly colonized. From Chile to Kuwait, third-world politicians expropriated foreign-owned companies on a massive scale, especially in the oil and mineral sectors, and created nationalized companies to protect their economies from multinational predators.[22] In the developed world, most of the big economies started to tighten their immigration rules and created national champions in computers, aerospace, and nuclear power to safeguard these “strategic sectors.” Harold Wilson, who won four British elections in the 1960s and 1970s, blamed his woes on “the gnomes of Zurich” and praised nationalization as a way “to render accountable to the public the power of those increasingly anonymous, unidentifiable, often faceless, more often soulless corporations, national and multinational.”[23]
Gradually, however, the tide began to turn—and not only with the ascensions of Margaret Thatcher and Ronald Reagan. After winning the French presidency in May 1981 on an antiglobalist platform, François Mitterrand proceeded to nationalize thirteen of the country’s twenty largest corporations and most of its banking system. But he could not contend with the economic chaos this created. Rather than suffer further humiliations at the hands of international currency speculators, he pegged the franc to the deutsche mark and France’s fate to the integration of Europe. The postwar consensus had finally begun to collapse.
The Road from Serfdom
State intervention, despite its early successes, was plainly not working. The most extreme example was in Eastern Europe. The Soviet Union’s command p. 20 economy gradually ground to a halt, its infertility symbolized by the dying Aral Sea, once the fourth-biggest freshwater body in the world, now polluted beyond repair by state factories producing substandard cotton, for which there was no market other than the one mandated by bureaucrats. Eventually, by increasing military spending, Ronald Reagan threw down a challenge that the Soviet Union was simply incapable of meeting. But long before the Berlin Wall crumbled, the sheer wretchedness of the communist world had become obvious to most people in the West. By the 1970s, the West Germans might still have been jealous of East Germany’s (pharmaceutically enhanced) athletic excellence at the Olympics, but they took considerable consolation from the tawdry tracksuits and leisure wear of their rivals. “How do you double the value of a Trabant?” West Berliners, smug in their BMWs, joked: “Fill up the gas tank.”
Outside Eastern Europe, people who had previously welcomed the postwar consensus began to worry whether it represented only a less virulent strain of the Soviet disease. Far from picking up the slack created by inadequate private investment, Keynesian demand management crowded out private investors; far from smoothing out the economic cycle, it stoked up recurrent inflation-driven crises. Governments ate up a growing proportion of national incomes, borrowing what they could not squeeze out of taxpayers, and yet they were still unable to fulfill their obligations. From Madrid to Madras, nationalized industries became poster children for inefficiency. Well into the 1980s, Indians, on account of government policy, had access to only their own version of Coca-Cola (a concoction so foul that its American equivalent tasted comparatively like the nectar of the gods), drove around in old Austin cars that had ceased being produced in Britain in the 1950s, and watched their well-trained young science graduates stream overseas to find jobs.
History had repeated itself, albeit in a much gentler manner. Just as the Second World War had been the final, bloody proof of the futility of the economic policies of the previous two decades, the stagflation, social discord, and crummy products of the 1970s were all e
vidence of the bankruptcy of the postwar consensus: The old Austins on the streets of Bombay and the wave of strikes and demonstrations across Europe were all signs of a system in terminal decline. But what was the alternative?
One rather graphic answer was provided by a young woman at a meeting at the Conservative Party’s research department in Smith Square, just around the corner from the Palace of Westminster.[24] A staff member was arguing that the Conservative Party should adopt a middle way between left p. 21 and right—very much the conventional wisdom of the time—when Margaret Thatcher, who had recently been elected leader of the party, interrupted him brusquely. There was no future in resuscitating the Keynesian consensus, she said, and reached into her briefcase to produce a copy of Hayek’s The Constitution of Liberty. “This is what we believe,” she said, flourishing the book.
Friedrich von Hayek was born in Vienna in 1899, the son of a distinguished botanist and second cousin to the philosopher Ludwig Wittgenstein. A tall, austere intellectual, he served as a gunner during the First World War—an experience that turned him into a socialist. Yet as he returned to his studies, he went through a slow, painful intellectual conversion, eventually emerging as a fervent supporter of free markets. His fervor drew its force from two sources: the collapse of the Austro-Hungarian Empire, which left him with a low view of politicians; and the influence of his mentor Ludwig von Mises, the leading figure in the Austrian school of economics, who taught that the market system is a self-adjusting order that is far more intelligent than any caste of experts. In 1931, Hayek took up a professorship at the London School of Economics, where he announced his presence by writing a savage review of Keynes’s Treatise on Money.
Thus began an odd relationship. Hayek and Keynes got on very well in private life, corresponding about mutual enthusiasms, such as antiquarian books. Hayek was certainly not immune to Keynes’s intellectual charms and wrote approvingly of “the magnetism of the brilliant conversationalist with his wide range of interests and bewitching voice.” Keynes also went out of his way to be generous to his opponent, arranging for him to move from London to Cambridge during the Blitz and proposing him for a fellowship of the British Academy. But their academic exchanges could be sulphurous.
Hayek regarded Keynes’s influence on economics as “both miraculous and tragic.” The two parted company most violently over the recession of the 1930s. Keynes regarded public investment as the only way to save capitalism from itself; Hayek argued that it would simply perpetuate the economy’s fundamental maladjustments. Keynes described one of Hayek’s books, Prices and Production (1931), as “one of the most frightful muddles I have ever read.” He went on: “It is an extraordinary example of how, starting with a mistake, a remorseless logician can end in Bedlam.” On the draft copy of another article he scribbled, “The wildest farrago of nonsense yet.”[25]
Hayek became hopelessly marginalized as the Keynesian revolution unfolded. Established opinion praised Keynes as the genius who had saved capitalism from itself and dismissed free-market purists as a bunch of right-p. 22wing nuts. But Hayek was nothing if not persistent. His Road to Serfdom, published in the year the Bretton Woods conference was held, sounded a clarion call to everyone who was uneasy about the growing power of the state. After Keynes’s death, Hayek began to organize the opposition in earnest. He convened a regular meeting of the Mont Pelerin Society, a group of thirty-six fellow travelers, including the young Milton Friedman, who mutually supported each other. In 1950, Hayek moved to join Friedman at the more sympathetic environment of the University of Chicago, though notably as a professor of social and political sciences rather than as a member of the economics department.
The central tenet of the postwar economic consensus was that markets were much more prone to failure than governments were. In his stream of books and papers, Hayek argued the opposite: Yes, markets can fail, but they remain much more subtle and efficient than bureaucrats, who usually could not even understand what was going on around them, let alone predict the future. They drove out productive enterprises through taxes and intervention. Even the most benign form of government intervention—regulation—was prone to “producer capture” as regulators repeatedly became the tools of vested interests. Free trade was an important part of this new heretical creed. Hayek argued that countries needed to lower tariffs in order to subject their industries to the bracing effects of competition, and he repeatedly celebrated places such as Hong Kong, where lenient regulation had turned a barren rock into a mighty regional entrepôt.
Other academics were unconvinced. Even when Hayek was eventually awarded a Nobel Prize in 1974, it was for work done in the 1920s and 1930s, and many economists were openly outraged by the decision. The first country that consciously put Hayek’s arguments into practice was an international pariah, Chile. Following Augusto Pinochet’s coup in 1973, the dictator turned to a group of “Chicago boys” for advice. At first, Hayek’s disciples made some damaging mistakes, selling off state companies too cheaply. But their overall program of reform—privatization, deregulation, and the embrace of global markets—eventually began to work. Chilean family businesses prospered as a result of their links to the world market; previously state-owned companies were forced to shed excess labor and adopt more innovative policies. Chile’s economy grew by more than 6 percent a year from the late 1980s onward.
By that time, however, two other politicians had already brought Friedman, Hayek, and others to the world’s attention: Ronald Reagan and, even more emphatically, Margaret Thatcher. Never exactly a consensus politip. 23cian, Thatcher seemed only to gain strength from the hysterical opposition of the British establishment—at one point, 364 economists took the trouble to write to The Times to urge the government to change policies. Thatcher believed firmly that Britain could regain its former greatness only if it opened its economy to global competition. One of her first acts was to abolish controls on the flow of international capital. A succession of privatizations opened industries that had once been regarded as national champions to foreign ownership. Thatcher argued repeatedly that Britain’s success in attracting investment, notably from the Japanese, was a sign of the country’s vitality.
As Thatcherism and then Reaganism began to work their often cruel magic, other governments liberalized their economies, even when it seemed to go against their most ingrained instincts. In China, Deng Xiaoping genuflected to Marx but struck deals with the multinationals. Having swept over such an easy target as Beijing, Thatcherism even crashed through the portals of Paris. (The French did not embrace privatization, but they did at least air-kiss it.) A growing number of emerging economies followed suit. In 1989, the Argentines elected a messianic Peronist named Carlos Menem, who seemed to want to nationalize everything and print money; once in power, he sold off state businesses and introduced a currency board that remained the centerpiece of the country’s economy up to the peso crisis of 2002.
Like an invading army finding a small breach in a fortress, businesspeople poured through the gap opened up by the politicians. The value of imported and exported manufactured goods, which had been $2 trillion in 1986, ballooned to $5.2 trillion just a decade later.[26] By the early 1990s, the number of transnational corporations as measured by the United Nations Conference on Trade and Development (UNCTAD) had increased to about thirty-seven thousand from seven thousand in the 1960s.[27] Multinationals started acting like integrated global organizations rather than like loose affiliations of national companies that happened to share the same name. In the 1970s, the various national branches of Xerox had so little in common that they almost regarded each other as competitors. But in the 1980s, Xerox decided that its only chance of defeating the competition lay in acting as a single integrated organization. Meanwhile, falling trade barriers and improvements in communications made it much cheaper to establish and manage international production systems. Microsoft, for example, became an international force without moving many of its resources from its “global campus” near Seat
tle.
More generally, a symbiotic relationship developed between politicians p. 24 keen to form free-trade areas and businesspeople keen to exploit them. There were almost one hundred regional trade treaties by the end of the 1990s, up from fewer than twenty-five in 1990. The newcomers included the ASEAN Free Trade Area (or AFTA), which was launched in January 1993 in order to reduce trade barriers in Asia and prevent member countries from cutting each other’s throats by competing for foreign direct investment; Mercosur, a treaty between Argentina, Brazil, Paraguay, and Uruguay established in 1991; and the North American Free Trade Agreement (NAFTA), which brought together the United States, Canada, and Mexico in 1994.
But perhaps the most notable of these was the European Union’s single market of 1992. The single market, like the single currency that followed on its heels, came into being only because the political leaders of France and Germany regarded it as an essential part of “the European project.” Yet much of the momentum was provided by the Continent’s business elite. “1992” was used as the rationale for countless takeovers and reorganizations, as well as for all too many tedious conferences. Businesspeople also bullied governments to loosen their grips on industries, so that they could have greater freedom to compete. The decade after 1985 saw a host of “national champions” either wholly or partially privatized, including Volkswagen, Lufthansa, Renault, Elf Aquitaine, ENI, and Deutsche Telekom. The nightclubs of London filled with Gucci-wearing “Eurotrash” financiers—many of them working for American and Japanese firms that were no less keen on treating the Continent as a single unit.
A Future Perfect: The Challenge and Promise of Globalization Page 6