Globalism and the Liberal Model

Playing the invisible hand that's dealt us

The New York Times, "Economic Scene" , January 31, 2002

As business and political celebrities gather this week for the World Economic Forum, their mood is somber compared with the triumphalism of the 1990's. Not only have the organizers moved the meetings from Davos, Switzerland, to post-Sept. 11 Manhattan, but these international movers and shakers can expect to be confronted by protesters determined to stop global economic integration. The confidence of "Davos man" in the irresistible march of globalization -- and his belief in his own righteousness and cultural cool -- has been shaken.

This somber turn is no surprise to Brink Lindsey, author of the new book Against the Dead Hand: The Uncertain Struggle for Global Capitalism (Wiley). He wrote the book to counter what he calls "equal doses of hype on both sides of the globalization debate."

Mr. Lindsey, who practiced international trade law before founding the Center for Trade Policy Studies at the Cato Institute, also wanted to "try to get some handle on why the process of globalization has now been shown to be so infernally messy."

He argues that the recent expansion of the "global division of labor" is not the inevitable product of technological change or a result of an ideological embrace of free markets. Rather, he said in an interview, it is a "blind pragmatist lurch" away from the worldview and policies that ended the last great era of globalization nearly a century ago.

In 1913, he writes, "merchandise trade as a percentage of gross output totaled an estimated 11.9 percent for the industrialized countries," a level unmatched until the 1970's. Capital flowed across borders, while transportation costs plummeted. Newly developing nations entered the world marketplace.

That trend toward economic integration was halted, Mr. Lindsey argues, when world leaders -- the Davos set of a century ago -- began to misapply the lessons of big business. If large commercial enterprises could advance by planning and control, they reasoned, national economies could be run the same way, with more efficient and humane results than the "chaos" and competition of the marketplace.

Mr. Lindsey hastens to add that this "industrial counterrevolution" took many forms, from the politically benign to the totalitarian. "Just as parents may have children who are very different from one another, in both their practical achievements and their moral character, so did the embrace of centralization result in a diverse multiplicity of offspring," he writes.

The result was a turn from economic openness toward closed national markets, the better to enable political planning and control. Today's globalization is occurring, Mr. Lindsey argues, because political leaders no longer believe that state-directed economic decision making is the path to prosperity.

Contrary to both globalization triumphalists and globalization critics, he sees the process as a result of bottom-up change at the national level. Neither international institutions like the World Bank nor international investors exercise as much influence on policy as they are often credited with.

"A generation ago the prospect of losing foreign investment would not have troubled any self-respecting third world leader," he noted. "They were in the process of nationalizing all the foreign investment in their countries and booting the so-called neocolonialists out."

A result of this change in perceptions is, he writes, not a universal triumph of markets but a struggle: Adam Smith's invisible hand against what he calls the "dead hand" of central planning. Old institutions and habits remain, producing contradictions and turmoil.

Much of "Against the Dead Hand" examines what Mr. Lindsey calls the blowups of recent years, from the Asian debt crisis to Argentina's downward spiral.

The Asian model of state-directed industrial policy depended on insulating investment decisions from normal considerations of profit and loss. Hence the importance of banks, as opposed to public capital markets. Banks are less transparent and easier to control.

In South Korea, for instance, "banks were seen as a social tool to help the chaebol," the big conglomerates. Outside financiers didn't question the conglomerates' investment decisions.

Over time, those no-questions-asked investments destroyed wealth instead of creating it. And single-country financial systems intensified risks. A country's savers had all their assets in its banks' undiversified baskets.

Like other industries, Mr. Lindsey argues, finance should become part of the global division of labor. "It makes no more sense for every country to have its own banking industry than for every country to have its own aircraft industry or its own automobile industry," he said.

Contrary to the naive hopes of some free-market advocates, the book argues, removing government controls isn't enough. Good institutions, particularly a trustworthy judicial system, are essential.

In Argentina, for example, the government of Carlos Saul Menem liberalized the economy but did nothing to restore the independence of the judiciary.

Writing before the recent Argentine crisis, Mr. Lindsey quotes an Argentine lawyer who complained that "the legal system is absolutely vital for our region's economic development, but the politicians are blind to it." Deals collapse every day, the lawyer said, because investors aren't willing to take the risks of an insecure legal environment.

Mr. Lindsey also tells the story of an Australian consultant who was assassinated after he uncovered huge fraud in the Thai sugar business he had been assigned to restructure by a bankruptcy court. Of five suspects arrested, only one was convicted. The other trials have dragged on for years, amid charges of bribery. "The dead hand of crony capitalism still clings tenaciously to power," Mr. Lindsey writes.

Despite his cautionary tone, he believes that economic liberalism will eventually win out. Unlike their predecessors a century ago, today's critics offer only reactionary opposition, not a convincing vision of progress and prosperity.

"There is at present only one viable vision of economic development: the liberal model of markets and competition. It is neither widely loved nor widely understood, but it is all there is," Mr. Lindsey writes. "And so when existing institutions break down so badly that changes become unavoidable, leaders in search of a template for constructive action now turn to the liberal model by default. In this way the dead hand yields, bit by bit, to the invisible hand of the market."