The Commanding Heights: The Battle Between Government and the Marketplace That is Remaking the Modern World.

AuthorKrugman, Paul

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...

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