Useful survey history
Review essay of Global Capitalism: Its Fall and Rise in the Twentieth Century by Jeffry Frieden
This is a good book if you want an overview of the basics of global capitalism’s development, the world economic system that emerged during the last 250 years. A history like this can reach many conclusions, from triumphalism to normative polemic; they might mix ideology and hidden biases, perhaps even rejecting the whole system for a hypothetical or utopian alternative. Frieden’s message is that openness is the best way to participate in global markets, though he is very aware of the downsides and ambiguities that go with it. The great virtue of this book is how it places the issues in historical context. It is a relatively optimistic take that stops around 2000.
According to Frieden, the system that preceded global capitalism was mercantilism, in which “trade” was conceived largely to strengthen absolutist monarchies, that is, part of the diplomatic and military equation; economic power took the forms of colonialism, piracy, seizures of resources (gold and silver) by private armies serving the crown, and domination of the seas. In the late 18th century, mercantilism was giving way to pre-industrial forms of capitalism; massive trade empires emerged (in slaves, mining, farm produce, and manufactures) that were less and less controlled by the state. Corporations morphed from a semi-public legal entity that required a “grant” or “concession of sub-sovereignty”, into a “democratic right” available to the common man. Obviously, this opened opportunities for entrepreneurs. However, it also decoupled them from intimate, long-term involvement with the state – governmental controls on business direction and operations decisively lost ground. It also resulted in a focus on the short-term credit cycle.
By the late 19th century, the first integral globalist system was in place. With minimal state control, its elements included freedom of international trade, capital movement, and immigration. The backbone of the system was the Gold Standard, according to which national currencies could be freely converted to gold; this was supposed to stabilize exchange rates, facilitating trade and management planing, as well as discipline governments to maintain a rough “balance”. The system was seen as self-reinforcing and the limited number of players – essentially based around the UK and western Europe – ensured cooperation in its maintenance and obeisance to its rules.
The classical economic logic behind the Gold Standard went something like this. If a nation’s trade deficit grew too large, its domestic interest rates had to rise and/or wages had to fall in order to prevent a depletion of its gold reserves. This would lead to an economic depression, but it would also cause a collapse of domestic prices due to lack of demand. Hence, depression should be accepted as the price of restoring national competitiveness – the price of its exports would fall, sparking the demand of trading partners to import produce and manufactures from national producers, which would in turn raise the demand for the national currency and correct the trade imbalance. The virtue of this logic was its easily demonstrable “proof” on a blackboard: supposedly, it was self-correcting and required no intervention by government.
The Gold Standard created a brutal trade regime that conformed roughly to classical ideals. Export industries specialized in accordance with national endowments and advantages, such as diamond mines in South Africa or manufacturing in the UK. When it worked, living standards rose at unprecedented rates in a virtuous cycle of development and industrial dynamism; with investment in innovation, means of transportation and communication improved, factories invested in for gains in efficiency, and massive, highly functional cities would grow.
While the Gold Standard opened access to foreign markets, enhanced the availability of credit, and encouraged international investment, the government lost control over monetary policy, one of the state’s most important tools in the domestic economy. Moreover, there were terrible failures, not only in colonies whose resources were plundered and peoples’ exploited, but in declining nations and empires, such as Turkey, Russia, and China. Finally, as Marx noted, depressions appeared to be growing in severity and duration. Many began to actively look to socialism as the only alternative. Losers included farmers and factory laborers, who bore the brunt of every depression readjustment.
World War I destroyed this system. The principal problem was the end of trust as well as the will to work together. Bent on retribution, the allied powers forced Germany into a reparations scheme that could never be fulfilled. The Russian Revolution had birthed an entirely new economic system, communism. The United States withdrew from the international organizations that its President, Woodrow Wilson, had championed. New players, such as Imperial Japan, were also competing for resources. There were, of course, additional transnational pressures from labor, which found the costs to them of the Gold Standard increasingly unacceptable and only to the benefit of the ruling classes.
Although technological and managerial innovations might have presaged a bright future, Frieden observes, the industrial powers retreated from globalization. The stock market crash of 1929 accelerated this trend, starting with the repudiation of international debts. First, to protect national industries, many countries raised protectionist barriers, slowing trade and transforming investment patterns from within, again to the detriment of farmers. Second, the majority of nation states (fascists, communists, and almost all of Latin America) pursued policies of autarky, which involved an attempt to rely exclusively on their own industries for all of their needs, from manufactures to food. While everyone had to import certain goods that were available only in international markets, e.g. advanced military technology, autarkic policies served to further depress trade (done increasingly by barter) and consumption demand, a downward spiral that Keynes criticized as perpetuating the Great Depression.
Beyond repression and the occasional famine, as Frieden notes, both fascist and communist regimes achieved impressive gains, alleviating the conditions of the working class better (i.e., more equitably, at least on paper) than the capitalist countries could in spite of the latter’s tentative steps toward social democracy. They also reached higher levels of industrial growth via direct government involvement, that is, by investment in heavy industry.
At the end of World War II, the international community seized the opportunity to create a new world order. Under the leadership of the US, the Bretton Woods System was established. The American dollar was to serve as the world’s base currency, tied to gold in order to stabilize exchange rates. While resembling the original Gold Standard regime, the system allowed for more flexible national responses in monetary policies. There were also the GATT negotiations to lower tariff barriers, most interestingly including the “most favored nation status”, whereby the granting of an advantage to one nation extended to all GATT participants. Finally, the World Bank (for development investment) and IMF (to alleviate balance-of-payment emergencies) were created.
Under American control as the world’s premier industrial and financial power, the US was allowed to reap the many advantages of owning the international currency of exchange – in effect, the US would gain the ability to create money for its own benefit.
In the wake of decolonization, many developing countries pursued import substitution policies, a kind of updated attempt at autarky. Frieden is very critical of these policies, arguing that the few that chose export-oriented strategies, such as Korea and Taiwan, achieved superior economic development by competing in international market standards. In a nutshell, Frieden argues that import substitution leads to inferior products, inefficient industrial manufacturing and the like. If pretty typical neoliberal arguments, Frieden is probably correct. In political terms, these countries fell into repetitive cycles of payment crisis, inflation, political upheaval, then authoritarian crackdown and hardline austerity. It was only when they abandoned these policies that many developing countries, including China and India, began to grow more rapidly.
Bretton Woods collapsed, Frieden says, because as a variety of economies achieved phenomenal growth, 1) the international financial system opened up and allowed massive, short-term trading, which put great pressure on the US dollar; 2) the amount of dollars created during the boom years was superior to the supply of gold, in effect rendering conversion impossible. It was Richard Nixon who took the US off the Gold Standard, allowing the dollar to float, yet retaining its role as international currency. While this created volatility in exchange rates and still allowed the US to maintain massive trade deficits by creating dollars, the success of the golden age of growth is, Frieden argues, undeniable: they developed mass production and consumer societies, invested in social democratic safety nets, and balanced free-market growth with active government intervention. While communist societies grew faster for a time, their bureaucratic centralism and lack of economic incentives quickly led to stagnation, particularly for consumers.
Up to about 1975, the book is an outstanding reference history. Unfortunately, when Frieden attempts to bring his narrative up to the present, the book is weaker. During the 1970s, we experienced stagflation, then severe recessions and financial crises as well as the unprecedented appreciation of real estate and the stock market, largely due to monetary policies rather than industrial growth. There was also the information revolution. None of this is covered well, indeed such developments as the “great sucking sound” of manufacturing jobs migrating to low-wage countries or 9/11-related wars are scarcely mentioned. Even though the book is entitled “Global Capitalism”, we do not get a cogent critique of globalization! Finally, the rise of inequality, perhaps the greatest challenge we currently face, is glossed over. Today, we see how inequality and stagnation led to authoritarian populism, the scapegoating of immigrants, etc. It would take another entire 500-page book to address these issues.
One particularly interesting omission is the question of Japan. In the 1980s, Japan was singled out as the most dynamic exemplar of industrial capitalism that had perhaps ever existed, growing so fast that many feared it would dominate the world economy by 2025. Pundits, journalists and academics sought to explain the phenomenon in a plethora of mediocre books on the subject, each more hyperbolic than the last. Japan as Number One, MITI and the Japanese Economic Miracle, Kaizen, to name just a few. Michael Porter, the Harvard guru of competitiveness, produced an international prescriptive framework that featured Japan as the perfect mix of industrial policy and capitalism. Now, Japan is seen as a beleaguered backwater, an also-ran that no one is interested in. With its own mix of authoritarian planning and dynamic entrepreneurship, it seems that China has taken its place as source of economic hysteria, a harbinger of the west’s decline. I wish that Frieden had offered some ideas to put this in perspective, but he didn’t.
Maybe a big part of our current problems is that global capitalism no longer works for countries that have reached a certain level of development. Maybe it can be tweaked, redistributing incomes more equitably. Maybe some form of industrial policy and bigger state involvement would help. Maybe some new form of economic organization would be better. I will have to look elsewhere for answers to these questions.