The Wealth and Poverty of Nations: Why Some are so Rich and Some so Poor. - book reviews

Washington Monthly, March, 1998 by Paul Krugman

On the eve of the storm, the world economy was, to an extent never seen before, truly global. It was linked by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances. But it was also, more importantly, linked together by the almost universal, if sometimes grudging, acceptance of a common economic ideology: the belief that free markets, with secure property rights, were the only way to achieve economic progress; and in articular that a nation hoping to make its way forward needed to welcome foreign trade and foreign investors with open arms. And this shared ideology did indeed lead to unprecedented transfers of Western capital and technology to emerging economies -- transfers facilitated by the fact that everyone knew that any country that strayed from the path would be punished by financial crisis, and would soon be obliged to accept the harsh austerity prescribed by teams of Western technocrats.

The year, of course, was 1913 -- the high-water mark of what economic historians sometimes call the First Global Economy -- and over the decades that followed all of its certainties were lost. By the beginning of the 1950s, long-distance world trade had shrunk to a shadow of its former self, as Third-world economies, pursuing the goal of industrialization through "import substitution," began producing many of their own manufactured goods; private international movements of capital had virtually disappeared in the face of debt defaults, expropriations, and administrative restrictions. And about a third of the world's population lived under regimes that had completely rejected the idea of private property, let alone free markets.

The worldwide rejection of the market that took place in the first half of this century was not a matter of mere accident, or of the mysterious dominance of some misguided ideology. Free-market capitalism had proved, in the eyes of most people who thought about it, to be unstable, unjust, and ineffective. The world between the wars had been wracked by financial crises -- crises in which those countries that broke the rules, going off the gold standard and restricting the free movement of money and goods, had done better than those that tried to maintain the Victorian virtues. Capitalism seemed to be marked by ever-growing inequality, with the rich getting richer while the poor got poorer; and it seemed to condemn less-developed nations to a permanent role as mere suppliers of raw materials to the established industrial powers. The turn away from the market, and toward the state, was based -- or so everyone thought -- on the hard lessons of experience.

It is therefore an astonishing reversal of fortune that, as we approach the century's end, nearly all the world has returned to more or less the same ideology of free markets and sound money that prevailed at its beginning. Understanding why the seemingly inexorable trend toward growing state power has become instead a seemingly inexorable withering of that power is perhaps the most important question of contemporary history. And so I was extremely curious to see what answer Daniel Yergin and Joseph Stanislaw would offer in their widely heralded new book The Commanding Heights: The Battle Between Government and the Marketplace That is Remaking the Modern World.

Alas, while I enjoyed the book, I came away feeling cheated. Indeed, one might go so far as to accuse Yergin and Stanislaw of playing a game of bait-and-switch. They promise to tell us "why" but they never even try to go beyond "what."

Consider, for example, the centerpiece of their book: the rise and fall of the British welfare state. The outlines of that story are well told: After depression and war, the British people demanded and got a state that provided a strong social safety net and job security, in part by nationalizing key industries -- the "commanding heights." Given our current cynicism about government, it is hard to imagine that this statist solution could have had any merits -- but the fact was that for a generation or so it worked pretty well. Perhaps economic growth was slower than it might have been, perhaps Britain's rank as a world power eroded, but given full employment and steadily rising living standards, Harold Macmillan's famous declaration that "you never had it so good" was the simple truth. Then it all began to fall apart: inflation, rising unemployment, disruptive labor disputes -- all preparing the ground for the radical free-market ideology of Margaret Thatcher and her guru, Keith Joseph. And Thatcherism, after a rocky start, did seem to deliver on enough of its promises that its essentials now seem secure despite the return of Labour to power.

So what do we learn from this account? Free-market capitalism was discredited by its failures, replaced with a mixed economy that was legitimized by its successes; then the mixed economy began to work badly, and was replaced by a return to free-market capitalism, which has been legitimized by its successes.... Clearly this leaves all the important questions unanswered. Why do free markets, which seemed to fail so drastically in the 1930s, seem to work pretty well nowadays? Why did the mixed economy, which seemed to work pretty well in the '50s and '60s, fan apart in the '70s and '80s? And, the big question, are we on some sort of pendulum -- will the state rise again?