World Economy Then And Now

The world economy seems to be picking up from where it left off in the last half of the 19th century. If a Rip Van Winkle had gone to sleep at the end of about 1870 and woken up in the last few years, he would have found little change in the economy, except for various technological advances in communications which have reduced the costs of international trade and commerce and led to the growing integration of the world economy a process which was well under way after the 19th centurys Great Age of Reform, when Rip had gone to sleep.

 

The terrible events of the century two world wars, a Great Depression and battles against two illiberal creeds: fascism and communism which led to the breakdown of the first liberal international economic order (LIEO) would form no part of his memory. Nor would the various fads in economic policy both national and international make any sense.

He would be surprised by two features though. For unlike the 19th century when there was free movement of goods, money and people, whilst the first two flows are relatively free today there is no longer free movement of labour. This is related to the second surprising feature: welfare states in most advanced countries.

Having gone to sleep in 1870 before the great scramble for Empire by the nations of Europe, and the universal spread of the Romantic movements ideal of nationalism, he would also not be surprised that the territorial imperative which had motivated competition between nation states since the wars of religion ended with the signing of the treaty of Westphalia was being replaced by commercial competition. Second, that as more and more developing countries, particularly India and China, with their vast pools of relatively cheap labour are brought into an integrated world economy, a new international division of labour is emerging, with developed countries mainly providing services and developing ones manufactures. With this division between the head and the body of economic activity, trade is becoming essential for the well-being of all countries. Thus reducing the attractions of nationalism and war.

He would also not be surprised to find that these consensual economic policies echoed those of the standard textbook of 19th century political economy Mills Principles. Though the technicalities in which the discussions were conducted particularly amongst the new breed of economists would surprise him, he would have no difficulty in understanding and endorsing their prescriptions: sound money, Gladstonian finance and a general acceptance of the 19th century policy prescription of laissez faire.

But being of a curious bent he would probably have decided to read some condensed account of what had happened to the world whilst he was asleep. He would have been astounded by the events of this century of a world gone mad. He would have tried to find an explanation of what had gone wrong, and why and when the tide turned to enable the world economy to resume the progress which had stalled after he had gone to sleep. He would also wonder if the coming century would repeat the mistakes of the last, or if that age of universal worldwide peace and prosperity which seemed imminent towards the end of the great 19th century Age of Reform, was now in prospect. These are the themes I will explore on Rip van Winkles behalf.

The breakdown of the 19th century LIEO and the ghastly events which followed were due to the rise of various ideas which questioned the economic and political liberalism that underlay the 19th century Age of Reform. The English political philosopher,Michael Oakeshotts insights are useful in putting these in perspective. He distinguishes between the two major strands of western thought on the State: the State viewed as a civil association, or alternatively as an enterprise association. The former view goes back to ancient Greece, with the State seen as the custodian of laws which do not seek to impose any preferred pattern of ends, but which merely facilitates individuals to pursue their own ends. This view has been challenged by the rival conception of the State as an enterprise association a view which has its roots in the Judaeo-Christian tradition. The State is now seen as the manager of an enterprise seeking to use the law for its own substantive purposes, and in particular for the legislation of

morality. The classical liberalism of Smith and Hume entails the former, whilst the major secular embodiment of society viewed as an enterprise association is socialism, with its moral aim of suing the State to equalise people. Equally, the other major ideological challenge to classical liberalism in this century, fascism (national socialism), also viewed the State as an enterprise association.

Till the rise of centralised nation states in Renaissance Europe, few states had the administrative means to be enterprising. Once the nation-state expanded the tax base and span of government control over its subjects lives, three types of enterprises have been pursued by states. A religious version as epitomised by Calvinist Geneva and in our own times by Khomeinis Iran. A productivist version consisting of nation-building and a distributionist version promoting some form of egalitarianism. Each of these enterprises conjures up some notion of perfection, believed to be the common good.

Adding to these the insights of Eli Heckshers Mercantilism, provides a condensed explanation of the rise fall and rise of economic liberalism during the last 200 years. The precursor of the 19th century LIEO was the system of mercantilism. It arose, as Hecksher has shown, from the desire of the Renaissance princes of Europe to consolidate their power by incorporating various feuding and seemingly disorderly groups which constituted the relatively weak states they inherited from the ruins of the Roman empire, into a nation a productivist enterprise. The same nationalist motive also underlay the very similar system of mercantilist industrial and trade controls that were established in the post-war Third World, whose dominant ideology became some form of nationalism associated with a combination of the productivist and distributivist versions of the State. Historically, both these secular collectivist versions have led to dirigisme and the suppression or control of the market.

In both cases of nation-building, the unintended consequences of the similar system of mercantilist controls instituted to establish order was to breed disorder. As economic controls became onerous, people tried to escape them through various forms of evasion and avoidance. As in 18th century Europe, in the post-war Third World, dirigisme bred corruption. The most serious consequence for the State was an erosion of its fiscal base and the accompanying prospect of the unMarxian withering away of the State. In both cases, economic liberalisation was undertaken to restore the fiscal base, and thence government control over what had become ungovernable economies. In some cases the changeover could only occur through revolution most notably in France.

But the ensuing period of economic liberalism during the Great Age of Reform, was short-lived in part due to the rise of another substantive purpose that most European states came to adopt the egalitarian ideal promulgated by the Enlightenment. Many developing countries also espoused this socialist ideal. The apotheosis of this version of the State viewed as an enterprise association were the communist countries seeking to legislate the socialist ideal of equalising people. The collapse of their economies under similar but even more severe strains than those that beset less collectivist neo-mercantilist Third World economies is now history, though I cannot help remarking on the irony that it took 200 years for 1989 to undo what 1789 had wrought!