DELUSIONS OF GLOBAL CAPITALISM

FALSE DAWN

THE DELUSIONS OF GLOBAL CAPITALISM

by John Gray

The Neoliberal experiment in Mexico and New Zealand

John Gray, False Dawn; The Delusions of Global Capitalism

The Neoliberal experiment in New Zealand is the most ambitious attempt at constructing the free market as a social institution to be implemented anywhere this century. It is a clearer example of the costs and limits of reinventing the free market in the late Twentieth century context than the Thatcherite experiment in Britain . Among the many novel effects of Neoliberal policy in New Zealand has been the creation of an underclass in a country that did not have one before.

The New Zealand experiment is the free-market project in laboratory conditions; uncompromising Neoliberal ideology animated a program of radical reform. The reforms were initiated by a social-democratic party and later became bipartisan; for a while, they were politically unchallengeable. New Zealand has unicameral parliament enjoys an authority and freedom of action unfettered by any constitutional restraints. This governmental power allowed the most far-reaching transformation of a hitherto interventionist state we have yet to witness.

One of the world's most comprehensive social democracies became a Neoliberal state. New Zealand society underwent a profound metamorphosis. The consequences and hazards of the New Zealand experiment are instructive and ominous.

The New Zealand experiment has many similarities with the structural adjustment programs forced on the governments of developing countries as a condition of credit from transnational international institutions. But New Zealand was not a Third World country--it was an advanced social democratic state. Traditions of state intervention in the economy to protect social cohesion are more deeply entrenched in New Zealand than in any other western country, with the exception of social-democratic Sweden .

The initial impetus to the experiment was not doctrinal, it was pragmatic. It was conceived by its civil servants. It came from the perception in the Treasury that New Zealand 's position as a First World country was becoming economically untenable due to international economic competition from highly successful modernized economies in hitherto Third World countries such as Singapore . Neoliberal thought seemed compelling in having radical solutions for economic problems that could not go untreated for much longer.

Undertaken by Labor administrations from 1984 to 1990 and carried on by the National Party thereafter, New Zealand 's inheritance as an egalitarian social democracy and a socially cohesive Keynesian managed economy was uprooted. At present, New Zealand approximates, more closely than any other western country, the pure Neoliberal model of lean government and a free market economy.

Exchange controls were abolished and the currency floated, controls on prices, wages, interest rates, rents and credit scrapped. Subsidies to exports were removed, import licenses abolished and all tariffs massively reduced. Most state-owned enterprises and assets were privatized. In a decisive break with New Zealand 's long-standing Keynesian inheritance, full employment was abandoned as an objective of public policy in favor of the monetarist goal of price stability. These were measures that corresponded closely with those adopted by other Neoliberal governments, particular Mrs. Thatcher's in Britain .

Uniquely in New Zealand , farming assistance and protection were withdrawn. No less exceptional was the deregulation of the labor market, which went far beyond the limitations on trade union power introduced in Thatcherite Britain . By 1991 the system of national collective bargaining had been comprehensively replaced by individual employment contracts in both the public and the private sectors. This created a labor market more thoroughly individualist than any other. An independent central bank was created, with price stability as its sole objective.

The state in New Zealand relinquished responsibility for overall levels of employment in the economy. Indeed, the Neoliberal goal in New Zealand was to remove from the state the levers to pursue that or any other macroeconomic policy.

Equally, the imposition of a Neoliberal model on public services was more far-reaching than in any other country (save perhaps Chile ). Public hospitals were converted into commercial enterprises and compelled to compete with private suppliers of medical care. Education was restructured, with responsibility for the delivery of educational services devolved to local school boards. Schools levied fees for their services and were required to supplement their budgets by commercial activities. Entitlement to welfare benefits of all kinds was rigorously pruned, with the population being stratified into economic categories which determined their levels of subsidy for state services. All state services were marketized, and all of the state's welfare functions reduced. At the same time, expenditure on police, courts and prisons continued to grow.

The result of a decade of radical structural adjustment was a deeply divided society. More generally, in less than a decade, New Zealand had gone from a bastion of welfare interventionism to a Neoliberal's paradise. Real economic and political power had shifted outside the realms of the central state. In this process of what might be termed "the privatization of power", citizens were reduced to consumers in the economic rather than the political market-place. One estimate put 17.8 per cent of the New Zealand population under the poverty line in 1991.

The increase in the numbers of unemployed following the abandonment of Keynesian for monetarist goals in macroeconomic management occurred alongside the adoption of targeting and selectivity and large-scale reductions in welfare entitlements. As the end of full employment forced more and more people into dependency on welfare, the welfare state was itself rolled back. The result has been the emergence in New Zealand of a social stratum that never existed when the country was burdened by a universal welfare state--an economically marginalized, socially excluded underclass of welfare dependents.

The unprecedented growth in that country of an underclass is richly ironic. The message of the American Neoliberals has always been that poverty and the underclass are products of the disincentive effects of welfare, not of the free market. And so, the moral hazards of the welfare state are universal, arising from invariant laws of human psychology--as are the benefits and virtues of the free market.

To be sure, this universal claim has always had trouble accounting for the experience of those anomalous areas of the world beyond the borders of the United States . It has never squared with the experience of the countries of continental Europe, where levels of welfare provision far more comprehensive and generous than those of the United States have long coexisted with the absence of anything resembling an American-style underclass. Where are the lawless underclasses of Austria or Norway , where welfare provision is generous? Where is the underclass in Canada ? Where was the underclass in the old, pre-reform New Zealand ? In the Americocentric world of the Neoliberal, such questions are never asked let alone answered.

In New Zealand , the theories of the American Neoliberal achieved a rare and curious feat--self-refutation by their practical application. Contrary to the Neoliberal's confident claims, the abolition of nearly all universal social services and the stratification of income groups for the purpose of targeting welfare benefits selectively created a Neoliberal poverty trap.

The underclass of the late 1990s is not the product of the moral hazards of universal welfare. Certainly, it is incubated in a culture of dependency; but that culture was partly created by Neoliberal welfare reforms and unregulated labor markets. In New Zealand , as in the United Kingdom , the sudden growth of the underclass is a textbook example of the manufacture of poverty by the Neoliberal state.

Beyond the growth of the underclass, New Zealand has experienced an astonishing growth in economic inequalities of all kinds. The bargaining power of employees in relation to employers was considerably reduced by legislation imposing individual contracts on the labor market. At the same time, reductions in marginal levels of income taxation were implemented, affecting particularly those at the top. The result was that income inequalities increased in New Zealand more than in any other western country.

The shift of power in New Zealand from the institutions of the central state to the institutions of the market did not occur spontaneously. As in mid Victorian England, it occurred as a consequence of a systematic, comprehensive and far-reaching exercise of state power. New Zealand variant of British parliamentary absolutism was deployed to remodel New Zealand 's economy and social life. In the space of a decade a strong central state authority, operating with almost total disregard for democratic process and pluralist politics, and abetted by a private sector elite, revolutionized New Zealand 's economy and its people's lives.

The phases of this revolution included the infiltration of the social democratic Labor Party by Neoliberal ideologues, the acceptance after 1990 of Neoliberal public policy as a bipartisan consensus framing the limits of what was politically possible, the removal in 1989 of the country's Reserve Bank from democratic accountability and the imposition on it of an inflexible duty to stabilize price levels regardless of broader economic conditions, and the locking in of Neoliberal domestic economic policy beyond any possibility of political opposition by tying it into New Zealand's conformity to the provisions of GATT and the WTO.

The restructuring of New Zealand 's economy opened it to unregulated capital flows conferred on transnational capital an effective veto power over public policy. Wherever public policies might be perceived as impacting upon competitiveness, profits and economic stability, they could be quashed by the threat of capital flight. Neoliberal reforms thereby became politically irreversible. The social-democratic objectives of earlier periods of public policy in New Zealand were not merely dismantled, abandoned or reversed, they were removed as options in democratic practice. The goal of this revolution was to insulate Neoliberal policy irreversibly from democratic accountability in political life.

The New Zealand experiment resembles most closely the Great Transformation in nineteenth-century England --as well as in the Thatcherite 1980s and 1990s.

Many of the changes effected in New Zealand 's social and economic life during the Neoliberal period are--as those who engineered them meant them to be--irreversible. In strictly economic terms, the Neoliberal experiment achieved many of its objectives. It forced a restructuring of the economy which, though it could have been achieved without some of the social costs imposed by Neoliberal policies, would have been necessary in any case.

The principal cost of New Zealand 's experiment has been a loss of social cohesion. Its political aftershock has been a meltdown in which the electoral system was repudiated and all the major parties have fragmented. In the 1996 general election the Conservative National party retained power at the price of entering into an unstable coalition with the anti-immigrant, Nationalist party.

In this new political context the democratic legitimacy of the free market project in New Zealand is bound to be challenged. Yet it is highly doubtful that the Neoliberal reforms of the 1980s and 1990s will be overturned-- New Zealand 's dependency on the world's capital markets rules that out. The effects of market fundamentalism in New Zealand may well be tempered over the next few years. Neoliberal rhetoric will be publicly abandoned by nearly all New Zealand 's political parties. The disregard of economic fundamentalists for social stability will be repudiated by politicians. Criticism of the excesses of the Neoliberal experiment in New Zealand will become an integral component of a new political consensus.

Yet the basic structures will remain in place. Popular nostalgia for the old New Zealand will be pervasive; but it will be ineffectual and politically impotent. The country and the world in which it must live have changed too much for any reversion to pre-reform New Zealand to be feasible or to be seriously attempted.

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Market reform versus economic development in Mexico

Within weeks of the debacle in which its currency was devalued and Mexico was in danger of defaulting on its foreign debt, President Clinton assembled a $40 billion bail-out for the Mexican government. In January 1997 President Clinton hailed the bail-out as an unprecedented success. On 15 January 1997, Mexico paid back the remaining portion of the emergency loan of $12.5 billion it received in February 1995. At the same time the Mexican Finance Minister, Mr Guillermo Ortiz, announced that Mexico was negotiating a new three-year borrowing program with the IMF.

Assisting Mexico was perceived to be vital in order to defuse a serious risk to the world's financial institutions. The bail-out may have forestalled substantial further losses by Americans whose pension savings had been invested in Mexico . It thereby limited the damage to American firms such as Salomon Brothers. The salvage operation was judged to be unavoidable if deepening political instability in Mexico was to be prevented. Because President Clinton had staked his political fortunes on the success of NAFTA, the North American Trade Agreement signed between the U.S. and Mexico in 1992, political upheaval in Mexico posed a major threat to his prospects in the 1996 presidential campaign. According to the U.S. Commerce Department, one year after the ratification of NAFTA Mexico had become one of America's three largest trading partners, standing somewhere between Canada and Japan. It bought as many American goods as Russia , China and most of Europe together.

An economic meltdown in Mexico might trigger a rerun of the Latin American debt crisis of 1982, perhaps on a larger and less controllable scale. A full-scale political collapse in Mexico would have incalculable implications for the U.S.

Another reason may have been weightier than any of the others. Mexico was a show-case of Neoliberal market reform. It was the prime site for the American project of engineering the free market throughout the world. Since the early 1980s it has had a political elite obedient to the transnational financial organizations in which American free-market doctrines were institutionalized. Acting under the auspices of the International Monetary Fund, the government had launched a Neoliberal austerity program of reduced government expenditure, wage and price controls and privatization.

American business and political elites were confident that Mexico had modernized. It did not occur to them that economic modernization for Mexico could mean anything other than assimilation into American business culture. They saw the devaluation crisis of 1994-5 as a temporary setback in a coupling of two countries under an American free market regime. Mexico became a Neoliberal experiment that could not be allowed to fail.

In setting aside generations of nationalism and protectionism in Mexico for a free-trade agreement with the United States , the Mexican government was recognizing its economy had become unsustainable. Wagering that the Neoliberal model of economic development was workable Mexico , it was also gambling with Mexico 's political stability. The quintessentially absurd notion that a country which is, in the words of one of Mexico .s most acute political thinkers, .radically, substantially, ferociously different from the United States ' could in less than a decade, be modernized on an American model had become accepted as established fact.

The political risks of Neoliberal economic reform cannot be perceived by those who imagine that the institutions of the free market and democratic government operate in a natural equilibrium. Hardly glimpsed in the United States , these risks had long been understood in Mexico . There were clearly grasped by the principal architect of the free market in Mexico , President Carlos Salinas. His American mentors did not. They were risks that did not exist in the economic philosophy that underpinned American policies towards Mexico .

The fears were well founded. As in other countries in which an attempt was made to engineer free markets the regime which sponsored the experiment became one of its casualties. In the elections of July 1997 the Leftwing PRD mounted a powerful challenge to the Conservative PAN for the status of the main opposition party. The PRI still controlled the senate and remained the largest single party but it lost as many seats as it had done in all of its 68 years in power. The PRI regime was consumed by the policies of economic insecurity that its free market policies had fuelled.

Engineering the free market in Mexico enhanced economic and social inequalities in what had long been one of the world's most unequal societies. In 1992, the richest 10 per cent of Mexicans received 38 per cent of the country's income, the poorest half only 18 per cent. Two-thirds of all income is distributed to 30 per cent of the population. This compares poorly even with post-Reagan America , in which the top 20 per cent of the population received around 55 per cent of the national income. The lowest 30 per cent of the Mexican population receives only 8 per cent of national income. The minimum wage in 1993 was less than half of what it was in 1975. Many surveys rank Mexico as one of the three or four countries containing the highest concentration of the world's wealthiest individuals. The combined fortunes of a dozen individual Mexicans have been estimated to amount to about 10 per cent of Mexico 's gross annual product.

What is more significant than the wealth of the super-rich is the small size of the middle class in Mexico --and the fact that Neoliberal policies have made it even smaller over the past 15 years. Between 1940 and 1980, steady economic growth in Mexico allowed a gradual expansion of the middle classes. As the Mexican political thinker Jorge Castaneda has written:

There is, of course, a middle class in Mexico , but it constitutes a minority: somewhere between a quarter and a third of the population. The majority are poor, urban, brown and often excluded from the characteristics of modern life (public education, decent health care and housing, formal employment, social security, the right to vote, hold public office, and serve on a jury, and so on). It lives, works, sleeps, and worships separately from the small group of the very wealthy and the large but still restricted middle class.

Market reform in Mexico from the early 1980s onwards has tended to widen economic inequalities and reverse the growth of the middle class that occurred in the previous 40 years. This process accelerated with NAFTA, and moved into a new gear with the austerity program instituted in the wake of the devaluation crisis of 1994. As Ai Camp has commented: 'One social issue with important ramifications is the ability of a country's economy and its economic model to produce upward social mobility and to increase the size of the middle class. A great danger in the austerity program is that many Mexicans may lose their status as members of the middle class and, even more likely, will be unable to move from the working class into the middle class.'

The socially destabilizing effects of Neoliberal policies in Mexico have not been restricted to the shrinkage of the middle class. They have significantly worsened the lot of the poorest. In 1984, before the Neoliberal project was really underway, the poorest half of the population received 20.7 per cent of national income; by 1992 that had fallen to 18.4 per cent. There is little doubt that the share of the poorest in the static or declining Mexican national income of 1995-6 fell yet further, though figures are unavailable.

The trade opening promoted by NAFTA resulted in about 40 per cent of grocery shopping being concentrated in American-style supermarkets by the mid-1990s. The arrival of American retailers such as Wal-Mart and K-mart drove small Mexican 'mom-and-pop' stores out of business in their thousands. Policies of economic liberalization such as the privatization of traditional land-tenure arrangements and the dismantling of price supports for agricultural products made rural workers and communities more vulnerable to market fluctuations, such as a collapse in the price for coffee.

The austerity program imposed after the devaluation of 1994 made the situation even worse for both the rural and the urban poor. In 1995 the Mexican economy contracted by 7 per cent. A million jobs were lost--in a country where, because of the growth of the population and its age structure, around a million new workers enter the labor market every year. The banking crisis following the devaluation cost 12% of the country's gross domestic product in 1996, more than twice the sum realized when the banking system was privatized in 1991-2. According to unofficial estimates, open and hidden unemployment may have affected a quarter of the workforce.

The absurdity of Neoliberal reform in Mexico arises partly from the fact that around half of the population constitutes an excluded under class. Increases in wealth that have arisen from market reforms have not trickled down even to the middle classes, still less into the under-world of the poor. 'Trickle-down' theories of prosperity are implausible enough in advanced countries such as the United States and Britain . They are fictions in Mexico .

In conjunction with a stagnation in living standards that has been nearly continuous since 1982, the attempt to construct a free market in Mexico has fragmented the oligarchies which ruled the country for 60 years without establishing properly functioning democratic institutions. The opposition victories of July 1997 are symptoms of the PRI's weakness. They are not yet proof of democracy's strength. Neo-liberal economic policies that were implemented as part of a program of modernization of the PRI regime have instead undermined it.

The American policy of promoting Neoliberal economic reform in Mexico appears to have been based on the conviction that a genuine exponent of free markets had been found in Carlos Salinas. It is hard to know what supported this belief. How could anyone believe that, in a political culture in which deception is a virtue, Carlos Salinas had become a born-again Neoliberal, a fiscal Quaker of the Chicago persuasion? Yet Salinas was consistently promoted by the United States when he was in office and briefly thereafter as potential head of the World Trade Organization.

American policy-makers were blind to the opacity of the political culture they imagined they could transform. They must have believed that, despite all appearances, they were dealing with a culture that was not radically different from their own. They did not understand that, as Mexico 's great writer Octavio Paz has stated, 'the core of Mexico is Indian. It is non-European.'

Paz might have added that, insofar as it is European, Mexican culture and society can be expected to be no less resistant to American values than other European countries. If they noticed these facts at all, American policy-makers interpreted them as evidence of Mexico 's chronic underdevelopment. The Washington consensus was confident that Mexico , along with the rest of the world, would soon 'become like us'.

It must be presumed that the overriding American interest in Mexico is in maintaining its political stability. Yet Neoliberal policies have worked to transform Mexico from an exceptionally stable Latin American country into one facing a highly problematic future. In this sense the economic philosophy guiding recent American policy has worked against the United States ' strategic interests.

The fund managers who invested in Mexico before the devaluation understood that their large profits came from taking a big risk. (One result of the bail-out was to transfer the cost of that risk to the Mexican economy.) They did not understand that much of that risk derived from the inherent absurdities of a program of modernization which aimed to re-engineer Mexican economic life as a variant of the American free market.

Where the Mexican state will go in the wake of Neoliberalism cannot be known. A return to the economic nationalism of the past is not on the cards. In Mexico , perhaps more clearly than anywhere else, free market policies have manifestly failed; but they have left the society which they desolated with few positive options.

* * *

The consequences of engineering the free market

The many resemblances between the effects of free-market policies in the three very different countries of Mexico , New Zealand and the United Kingdom are hardly accidental. In each country the free market acted as a vice within which the middle classes were squeezed. It enriched a small minority and increased the size of excluded under classes. It inflicted serious damage on the political vehicles through which it was implemented. It used the powers of the state without scruple. It fractured societies.

The effects on economic performance differed in the three countries, however. In the case of Britain , the deep restructuring that free markets effected made the British economy more competitive, but that improvement did not reverse nearly a century's economic decline, and its cost in social exclusion was high. Similarly in New Zealand Neoliberal policies achieved a restructuring of the economy, but with much damage to social cohesion. In Mexico they inflicted massive social and political damage with little, if any, benefit to the economy as a whole.

In each of the three countries the political parties that implemented Neoliberal policies have lost power or broken apart. In New Zealand popular discontent with bipartisan support for free-market policies triggered a meltdown of the electoral system and the fracturing of both major parties. In Mexico the PRI regime is losing its hold on power. In Britain major constitutional reforms are a key part of Labor.s agenda. short while, it seemed to have harnessed to its own purposes.

How global free markets favor the worst kinds of capitalism: a new Gresham's Law?

John Gray, False Dawn; The Delusions of Global Capitalism

In monetary theory, Gresham 's Law tells us that bad money drives out good. In a global free market there is a variation on Gresham 's Law: bad capitalism tends to drive out good. In any competition that is waged with the rules of global laissez-faire, that have been designed to reflect the American free market, the social market economies of Europe and Asia are at a systematic disadvantage. They have no future unless they can modernize themselves by deep and rapid reforms.

Sovereign states are waging a war of competitive deregulation, forced on them by the global free market. A mechanism of downwards harmonization of market economies is already in operation.

In economic theory Keynes recognized that the international mobility of financial capital would undercut the full employment policies of national governments. He could not have foreseen that the global mobility of capital would return governments to a world in which national economic management is feasible only at the margin. National governments today can no longer implement the ambitious counter-cyclical policies that lifted their economies out of recession in the post-war period. Fiscal conservatism-.the prudent management of government debt-.is forced on them by world markets.

In this new rivalry American free markets work to undercut both European and Asian social market economies. This is despite the fact that the social costs of business are borne in different ways in European and Asian social markets. Both are threatened by the American model because each business bears social obligations that in the United States it has shed. At the same time, Chinese capitalism is emerging as a rival to the American version because it can go further than the American free market in undercutting social markets in Europe and the rest of Asia .

All the familiar models of market institutions are mutating as global competition is played out through the structures of sovereign states. It is a basic error to think that this is a contest that any of the existing models can win. All are being eroded and replaced by new and more volatile types of capitalism. The chief result of this new competition is the make the social market economies of the post-war period unviable while transforming the free market economies that are its nominal winners.

The social costs which businesses carry in social market economies enable them to function as social institutions without undermining the cohesion of the large societies in which they operate. At the same time these social costs must become burdens in any competition with enterprises operating in free markets. American firms have few such obligations.

In the long haul of history, Europe 's social markets may be as productive as American free markets. In the short run, in terms of rivalry in a global free market, they simply cannot be cost-competitive.

The conditions that confer a strategic advantage to the free market over the social market economies of the post-war period are unregulated global free trade in conjunction with unrestricted global mobility of capital. In a free-trading global market the advantage lies (other things being equal) with firms whose costs are low. This is true whether they are labor costs, regulatory costs or tax costs.

Consider environmental costs. If, in one country, environmental costs are 'internalized' by a tax regime that forces them to be reflected in the costs of enterprises, but those enterprises are forced to compete in a global market with enterprises in other countries that do not carry such environmental costs, the countries that require businesses to be environmentally accountable will be at a systematic disadvantage.

In environmentally sensitive economies tax and regulatory policy is designed so that firms are required to pay for the costs their activities impose on society and the natural world. This has long been the case in the countries of continental Europe . Global free markets put heavy pressure on such policies. Goods produced by environmentally accountable firms cost more than similar goods produced by enterprises that are at liberty to pollute.

Global regulation of environmental standards, though an inspiring ideal, is a Utopian prospect. It is not enforceable where it is most needed--for example, there are few effective measures of environmental protection in Russia or China . In both countries, partly as an inheritance from the period of central economic planning and partly as a consequence of market reforms, environmental degradation is cataclysmic. Yet both countries are being induced to enter the global free market where their goods will have to compete with goods produced in environmentally accountable social markets.

Some of the world's advanced industrial economies are rich enough to resist the downward pressure on environmental standards. They may be able to compensate firms who are losing out in competition with businesses based in low-regulation economies. If advanced societies are able to protect their environments in this way it will be partly because they are able to export pollution by moving production to Third World countries where environmental standards are looser. The advanced countries will remain clean at the cost of other parts of the world becoming dirtier.

The Neoliberal experiments in New Zealand and Mexico

Unregulated global free trade and international mobility of capital

John Gray, False Dawn; The Delusions of Global Capitalism

In the classical theory of free trade capital is immobile. Ricardo's doctrine of comparative advantage--which is still regularly invoked in defense of unregulated global free trade--says that when comparatively inefficient enterprises or industries shrink in any country, others will grow, absorbing the capital and labor released from the declining activities. Within each trading country capital will move to those economic activities in which it is most productive. Ricardian comparative advantage applies internally in trading nations, not externally between them. It implies that in a regime of unrestricted free trade the allocation of resources will be maximally productive within each trading nation, and thereby, by inference, throughout the world. Insofar as the world becomes a single market, efficiency and productivity in every country will be maximized.

Ricardo understood that this could be true only so long as capital is not to any significant extent internationally mobile:

the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connections, and entrust himself with all his habits fixed, to a strange government and new laws, checks the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations.

The contrast between this theoretical requirement of unrestricted global free trade and the realities of the late twentieth-century world needs little comment. When capital is mobile it will seek its absolute advantage by migrating to countries where the environmental and social costs of enterprises are lowest and profits are highest. Both in theory and practice the effect of global capital mobility is to nullify the Ricardian doctrine of comparative advantage. Yet it is on that flimsy foundation that the edifice of unregulated global free trade still stands.

The argument against unrestricted global freedom in trade and capital movements is not primarily an economic one. It is, rather, that the economy should serve the needs of society, not society the imperatives of the market. In terms that are strictly and narrowly economic it is true that a global free market is incredibly productive. Equally, in the contest between free market economies and social market systems free markets are often superior in productivity. There is not much doubt that the free market is the most economically efficient type of capitalism. For most economists that ends the matter. Yet what social market economies do is in no sense irrational. The Japanese practice of employing workers who are not economically productive in a variety of low skill occupations is neither unreasonable nor inefficient, provided that one of the criteria of efficiency by which such a policy is judged is the maintenance of social cohesion by the avoidance of mass unemployment.

As some economists have always recognized, the pursuit of economic efficiency without regard to social costs is itself unreasonable and in effect ranks the demands of the economy over the needs of society. [Social costs, like environmental damage, is a real cost of doing business.]

The economic inefficiencies of restrictions on free trade are so nearly self evident that anyone who is critical of unregulated global free trade is easily convicted of economic ignorance. But the economic argument for unregulated global free trade involves a wild abstraction from social realities. It is true that restraints on global free trade will not enhance productivity; but maximal productivity achieved at the cost of social desolation and human misery is an anomalous and dangerous social ideal.

Social democrats in Britain and other European countries who imagine that the social market economies with which they are familiar can be reconciled with a global free market have not understood the new circumstances in which advanced industrial societies find themselves.

Social market economies developed in a particular economic niche. They are bound to be transformed or destroyed by the industrialization of Asia and the entry into world markets of the post-communist countries. The effect of competition from countries in which a regime of deregulation, low taxes and a shrinking welfare state has been imposed is to force downwards harmonization of policies on states which retain social market economies. Policies enforcing a deregulated labor market and cuts in welfare provision are adopted as defensive strategies in response to policies implemented in other countries. Tax competition among advanced states works to drain public finances and make a welfare state unaffordable. By eroding the revenue base, tax competition can become too much of a good thing. Bidding wars between countries can undermine the collective revenue base. This increases the tax burden on less mobile industries and on labor relative to capital.

Tax rivalry is only one mechanism through which competition among governments for mobile capital and industries works to drive down social provision and raise taxes on labor. The workings of the global bond markets reduce or remove from the world's social markets much of the freedom their governments had in the past to pursue counter-cyclical policies. They force them to return to a pre-Keynesian situation in which they have few effective levers of macroeconomic management. They are condemned to wait out cyclical downturns in economic activity--whatever their social and economic costs.

By penalizing governments which attempt to stimulate economic activity by borrowing or undertaking public works the markets force them back into a pre-Keynesian world in which governments responded to recessions by the disastrous deflationary expedient of expenditure cuts. Thus world bond markets mimic the workings of the Gold Standard. But they do so without replicating its semi-automatic character, which conferred a degree of stability on the economies it governed. They operate in a context of market uncertainties which makes speculative booms and busts (such as the global bond market crash of early 1994) inevitable. The mechanism of the Gold Standard has been replaced by the house rules of a casino.

Global capital markets make social democracy unviable. By social democracy I mean the combination of deficit-financed full employment, a comprehensive welfare state and egalitarian tax policies that existed in Britain until the late 1970s and which survived in Sweden until the early 1990s.

That social democratic regime presupposed a closed economy. Capital movements were limited by fixed or semi-fixed exchange rates. Many of the core policies of social democracy cannot be sustained in open economies. This applies to deficit-financed full employment and the welfare states of the post-war period. It applies equally to social democratic deals of equality. All social democratic theories of justice (such as John Rawls's egalitarian theory) presuppose a closed economy.

It is only within a closed system of distribution that we can know if the principles of justice dictated by such theories are satisfied. More practically, it is only in a closed economy that egalitarian principles can be enforced. In open economies they will be rendered unworkable by the freedom of capital--including 'human capital'--to migrate.

Social democratic regimes presuppose that high levels of public provision could be funded unproblematically from general taxation. That proposition no longer holds. It is not even true of what economic theory understands to be real public goods. The logic of unfettered mobility of capital is that financing public goods becomes harder for all states. In the standard understanding of them, public goods are services enjoyed by all. They cannot be split up or partitioned, and they must be paid for out of taxation if they are not to be under-produced. In the technical literature of economic theory and public administration in which this standard view is found, public goods are such things as law and order, national defense and environmental conservation.

The classic solution to the problems of financing the provision of public goods is taxation. This classic solution breaks down when taxation is not enforceable on mobile capital and corporations. If sources of revenue--capital, enterprises and people--are free to migrate to low-tax regimes, mutually agreed coercion does not work as a means of paying for public goods. The kinds and levels of taxation levied in order to pay for public goods in any state cannot significantly exceed those found in states that are otherwise comparable.

Global mobility of capital and production in a world of open economies has made the central policies of European social democracy unworkable. By so doing they have made today's mass unemployment a problem without a simple solution.

History confirms that free markets are not self-regulating. They are inherently volatile institutions, prone to speculative booms and busts. Throughout the period in which Keynes's thought was a dominant influence it was recognized that free markets are highly imperfect institutions. To work well they need not only regulation but active management. During the post-war era world markets were kept stable by national governments and by a regime of international cooperation.

Only lately has a pre-Keynesian idea been revived to become an orthodoxy: the belief that, provided there are clear and well-enforced rules of the game, free markets can embody the rational expectations that participants form about the future.

In fact, since markets are themselves shaped by human expectations, their behavior cannot be rationally predicted. The forces that drive markets are not mechanical processes of cause and effect. They are what George Soros has termed 'reflexive interactions'. Because markets are constituted by highly combustible interactions among beliefs they cannot be self-regulating.

In standard economic theory the economy can be understood in the same way we understand the workings of a machine; but human societies are forever fluctuating and changeable. Social institutions are composed from human beliefs: a piece of paper counts as money only if we believe it to be money, otherwise it is only a curiosity. Theories which try to model markets on machines miss the most important fact about them: they are figments of human imagination and expectations.

Particularly in financial markets, our expectations about the future rebound upon each other. Financial markets do not tend to equilibrium. Overshoot is their normal condition. This volatility at the core of deregulated financial institutions makes a world economy that is organized as a system of free markets essentially unstable.

The conceit that the business cycle is now obsolete has been given credence by Alan Greenspan, Chairman of the Federal Reserve Bank. Until 1989 Greenspan believed that free markets were rooted in human nature, and only tyranny prevented the rest of humankind embracing them. Commendably, it was Greenspan who, in a lecture to the Woodrow Wilson Center in June 1997, confessed that after 1989 he discovered that much of what we took for granted in our free-market system was not nature at all, but culture. The dismantling of the central planning function does not, as some had supposed, automatically establish market capitalism.

Greenspan has recognized the importance of cultural norms in supporting free markets. But what cataclysm in the market will it take to convince Greenspan that a 'New Era' of stable growth is merely another myth? Global laissez-faire may break down in an unmanageable crisis of the world's stock markets and financial institutions. The enormous, practically unknowable virtual economy of financial derivatives enhances the risks of a systemic crash.

In reality, the idea that a free market economy is a self-stabilizing system is archaic--a curious relic of Enlightenment rationalism. It will be tossed aside when the market reminds today's investors that those who think themselves exempt from history are condemned to repeat it.

Global laissez faire is a moment in the history of the emerging world economy, not its endpoint. Either the present regime will evolve into something its architects could scarcely have envisaged and certainly do not intend, or its institutions will become ineffectual and marginal.

America 's resources as the only remaining global power will not enable it to achieve its objective of projecting free markets worldwide. But they are enough to allow it to veto any reform of global laissez-faire. A regime of global governance is needed in which world markets are managed so as to promote the cohesion of societies and the integrity of states. Only a framework of global regulation--of currencies, capital movements, trade and environmental conservation can enable the creativity of the world economy to be harnessed in the service of human needs.

Whether or not such policies are workable is uncertain. What is beyond serious doubt is that organizing the world economy as a single global free market promotes instability. It forces workers to bear the costs of new technologies and unrestricted free trade. It contains no means whereby activities that endanger the global ecological balance can be curbed. If--as seems clear--global warming is a real threat, the global free market contains no institutions to deal with it. Organizing the world economy as a universal free market is, in effect, staking the planet's future on the supposition that these vast dangers will be resolved as an unintended consequence of the unfettered pursuit of profits. It is hard to think of a more reckless wager.

A global free market is not an iron law of historical development but a political project. The deep flaws of this project have already caused much unnecessary suffering. Yet a global economy modeled on Anglo-American free markets is the avowed goal the International Monetary Fund and similar transnational organizations. Global markets do not advance in smooth, steady waves. They make progress through cycles of boom and bust, speculative manias and financial crises. Like capitalism in the past, global capitalism achieves its prodigious productivity today by destroying old industries, occupations and ways of life--but on a scale that is worldwide.

Today's believers in worldwide laissez-faire think that free markets advance liberal values. They have not noticed that a global free market engenders new varieties of nationalism and fundamentalism even as it creates new elites. By imposing massive instability on developing countries, global capitalism is endangering liberal civilization. It is also making it harder for different civilizations to live in peaceful coexistence. The present international economic system contains no effective institutions for conserving the wealth of the natural environment. The risk is that sovereign states will be drawn into a struggle for control of the earth's dwindling natural resources. In the coming century ideological rivalries between states may well be succeeded by Malthusian wars of scarcity.

The Asian crisis is a sign that global free markets have become ungovernable. A bursting bubble of historic proportions in the United States; deflation entrenched in Japan and emerging in China; depression in Indonesia and several smaller Asian countries; financial and economic crisis and a likely change of regime in Russia--these are not developments that augur stability. They show the instability of the world economy as a whole.

The free market is not--as today's economic philosophy supposes--a natural state of affairs which comes about when political interference with market exchange has been removed. In any long and broad historical perspective the free market is a rare, short-lived aberration. Regulated markets are the norm, arising spontaneously in the life of every society. The free market is a construction of state power. The idea that free markets and minimum government go together, which was part of the stock in trade of the Neoliberal, is an inversion of the truth. Since the natural tendency of society is to curb markets, free markets can only be created by the power of a centralized state. Free markets are creatures of strong government and cannot exist without them.

The free market was engineered in mid-Victorian England in exceptionally propitious circumstances. Unlike other European countries, England had long traditions of individualism. For centuries yeoman farmers were the basis of its economy. But only by Parliament using its power to amend or destroy old property rights and create new ones--through Enclosure Acts in which much of the country's common land was privatized--did an agrarian capitalism of large landed estates come into being.

Laissez-faire came about in England through a conjunction of favorable historical circumstances with the unchecked power of a Parliament in which most English people were unrepresented. By the middle of the nineteenth century, through the Enclosures, the Poor Laws and the repeal of the Corn Law, land, labor and bread were commodities like any other. The free market had become the central institution in the economy.

But the free market lasted in England for barely a generation. From the 1870s onwards, it was gradually legislated out of existence. By the First World War, markets had been largely re-regulated in the interests of public health and economic efficiency, and government was active in supplying a range of vital services, notably schools.

The Neoliberal was able to alter political and economic life irreversibly in the countries in which it gained power--but it failed to achieve the hegemony to which it aspired. In Britain , the United States , Australia and New Zealand , together with some other countries such as Mexico , Chile and the Czech Republic , governments heavily influenced by free market ideas were able to dismantle much of their corporatist or collectivist inheritances. But in every case the initial coalitions that made free market policies politically possible were undermined by the medium-term effects of these same policies.

Selling off social housing--one of the key Thatcher policies--was a success so long as house prices were rising. When they fell abruptly and millions were trapped in negative equity it became a political liability. Privatizing public assets and freeing up markets were politically advantageous only so long as a booming economy masked their deeper impact, which was to compound economic insecurity. When economic downturn made that effect palpable Neoliberal governments began to live on borrowed time. As in the late-nineteenth century, so in the late-twentieth century, the socially destructive effects of free markets have made them politically unsustainable.

That leads on to the second strand: democracy and the free market are competitors rather than partners. 'Democratic capitalism'--the vacuous rallying-cry of neoconservatives everywhere--designates (or conceals) a deeply problematic relationship. The normal concomitant of free markets is not stable democratic government. It is the volatile politics of economic insecurity.

Now and in the past, in virtually every society, the market has been curbed so that it does not thwart too severely vital human needs for stability and security. In late modern contexts, free markets have normally been tempered by democratic governments. The withering away of the free market in its purest mid-Victorian form coincided with the widening of the franchise. As English laissez-faire retreated with advancing democracy, so in most countries the excesses of the 1980s have been moderated--under the pressures of democratic competition--by successor governments. Yet at the global level the free market remains unchecked.

Social democratic governments no longer have the resources to pursue their goals by social democratic means. As a result, in most continental European countries, mass unemployment is a problem without any evident solution. In general terms the contradiction between social democracy and global free markets seems irreconcilable.

Social democratic governments lack the leverage over economic life which they were able to exercise during their period of post-war success. Global bond markets will not allow social democracies to borrow heavily. Keynesian policies are not effective when in open economies from which capital can exit at will. Worldwide mobility of production allows enterprises to locate where regulatory and tax burdens are least onerous.

There are today few effective institutions of global economic governance, and none that is even remotely democratic. Achieving a humane and balanced relationship between government and the market economy remains a distant aspiration.

Though the implosion of Marxian socialism has been welcomed in western countries, especially the United States, as a triumph for free market capitalism, it has not been followed in most formerly communist countries by the adoption of any western economic model.

Conventional opinion perceives the collapse of communism as a victory for 'the West'. In fact, Marxian socialism was a prototypically western ideology. Over the long haul of history, the disintegration of Marxian socialism in Russia and China represents a defeat for all western models of modernization. The breakdown of central planning in the Soviet Union and its dismantlement in China marked the end of an experiment in forced-march modernization in which the model of modernity was the nineteenth century capitalist factory.

Though they support different economic systems, Marxism-Leninism and free-market economic rationalism have much in common.

Both Marxism-Leninism and free-market economic rationalism adopt a Promethean attitude to nature and exhibit scant sympathy for the casualties of economic progress. Both are variants of the Enlightenment project of supplanting the historic diversity of human cultures with a single, universal civilization. A global free market is that Enlightenment project in its latest--perhaps last--form.

Much current debate confuses globalization, a historical process that has been underway for centuries, with the ephemeral political project of a worldwide free market. Properly understood, globalization refers to the increasing interconnection of economic and cultural life in distant parts of the world. It is a trend that can be dated back to the projection of European power into other parts of the world in imperialist policies from the sixteenth century onwards.

Today, the main motor of this process is the rapid diffusion of new, distance-abolishing information technologies. Conventional thinkers imagine that globalization is tending to create a universal civilization by way of the worldwide spread of western--and, more particularly, Anglo-Saxon--practices and values.

In fact, the development of the world economy has been mostly in the other direction. Globalization today differs from the open international economy that was set up under European imperial auspices in the four or five decades before the First World War. In the global market no western power has the supremacy possessed by Britain and other European powers at that time. Indeed, over the longer run, the banalization of new technologies throughout the world works to erode western power and values. The spread of nuclear weapons technologies to anti-western regimes is only a symptom of a larger trend. Globalized markets do not project the Anglo-American free market throughout the world. They throw all types of capitalism--not least the free-market varieties--into flux. Anarchic global markets destroy old capitalisms and spawn new ones, while subjecting all to unceasing instability.

The Enlightenment idea of a universal civilization is nowhere stronger than in the United States , where it is identified with the universal acceptance of western--that is to say, American--values and institutions. The idea that the United States is a universal model has long been a feature of American civilization. During the eighties, the Right was able to co-opt this idea of a national mission in the service of free market ideology. Today the worldwide reach of American corporate power and the ideal of a universal civilization have become indistinguishable in American public discourse.

Yet the claim of the United States to be a model for the world is accepted by no other country. The costs of American economic success include levels of social division--of crime, incarceration, racial and ethnic conflict and family and community breakdown--that no European or Asian culture will tolerate.

The United States is increasingly at odds with other 'western' societies in many of its domestic and foreign policies. In the extremity of its divisions and the militancy of its commitment to free markets, the U.S. is a singularity. Though they continue to share vital interests, Europe and the United States are drawing further apart in their cultures and values. In retrospect, the period of close cooperation extending from the Second World War to the immediate aftermath of the Cold War may well appear as an aberration in the relations of the United States with Europe.

The global free market is an American project. In some contexts American companies have benefited from it, as free markets have reached into hitherto protected economies. But this does not mean that global laissez-faire is a mere rationalization of American corporate interests. A global free market has no long-term winner. It no more works in the interests of the American economy than of any other. Indeed, in a large dislocation of world markets the American economy would be more exposed than many others.

Global laissez-faire is not a conspiracy of corporate America . It is a tragedy--one of several that have occurred in the twentieth century in which a hubristic ideology runs aground on enduring human needs that it has failed to comprehend.

Amongst the human needs that free markets neglect are the needs for security and social identity that used to be met by the vocational structures of bourgeois societies. A contradiction has emerged between the preconditions of an intact bourgeois civilization and the imperatives of global capitalism. This is the seventh strand: the chronic insecurities of late modern capitalism, especially in its most virulent free-market variants, corrode some of the central institutions and values of bourgeois life.

The most notable of these social institutions may be that of the career. In traditional bourgeois societies, most middle-class people could reasonably expect to spend their working lives in a single vocation. Few can now harbor any such hope. The deeper effect of economic insecurity is not to multiply the number of jobs each of us has in a working lifetime. It is to make the very idea of a career redundant.

In the lives of the working majority, an old-fashioned career in which professional seniority tracks the normal life cycle is barely a memory. As a result, familiar contrasts between middle-class and working-class life have diminished reality.

Economic insecurity is increasing in nearly all the world's economies. This is partly a side effect of global free markets, whose workings mimic Gresham 's Law (which says that bad money drives out good) by making socially responsible varieties of capitalism progressively less sustainable. Worldwide mobility of capital and production triggers a 'race to the bottom', in which more humane capitalist economies are compelled to deregulate and trim back taxes and welfare provision. In this new rivalry all the varieties of capitalism that competed during the post-war period are mutating and metamorphosing.

What can be done? The U.S. does not have the hegemonic power needed to make a universal free market a reality, even for a short time. But it certainly has the power to veto reform of the world economy. So long as the U.S. remains wedded to 'the Washington consensus' on global laissez-faire there can be no reform of world markets. Proposals such as a worldwide levy on speculative currency transactions will remain dead letters.

In the absence of reform, the world economy will fragment as its imbalances become insupportable. Trade wars will make international cooperation more difficult. The world economy will fracture into blocs, each riven by struggles for regional hegemony.

'The Great Game', in which world powers struggled a century ago for control of oil in Central Asia , may well recur in the coming century. When states are rivals for control of scarce natural resources military conflicts will be harder to avert. Weak authoritarian regimes will seek to shore themselves up by military adventures. Slobodan Milosevic, the neo-communist leader of what remains of Yugoslavia , may prove a prototype for authoritarian demagogues in many other countries.

As global laissez-faire breaks up, a deepening international anarchy is likely.

As yet there is still no consensus that the world economy is in crisis. Transnational organizations and mainstream political parties see no need for radical reform of the world economy. This continuing default of understanding warrants pessimism about the future. The Asian crisis has not been understood because according to the prevailing view of the world it could not occur. In this world-view free flows of capital promote maximal economic efficiency. They do so even when--as in Indonesia --their effect is to ruin an entire economy. Economic efficiency has been disconnected from human well-being.

A basic shift in economic philosophy is needed. The freedoms of the market are not ends in themselves. They are expedients, devices contrived by human beings for human purposes. Markets are made to serve man, not man the market. In the global free market the instruments of economic life have become dangerously disconnected from social control and political governance.

Within transnational organizations there are signs that free-market fundamentalism is being questioned. The dogma that capital must have unfettered mobility and similar tenets of the ' Washington consensus' are sometimes criticized. Nonetheless, the Anglo-Saxon free market remains the model for economic reform everywhere. The idea that the world economy must be organized as a single, universal market has not yet been challenged.

The ultimate explanation of the power of the free market cannot be found in any economic theory, rather in a recurring utopianism of western civilization. A worldwide free market embodies the western Enlightenment ideal of a universal civilization. That is what explains its popularity in the United States , and makes it peculiarly dangerous at the present time.

Globalization--the spread of new, distance-abolishing technologies throughout the world--does not make western values universal. Growing interconnection between the world's economies does not signify the growth of a single economic civilization. It means that adjustments will be found between economic cultures that will always remain different.

The task of transnational organizations should be to fashion a framework of regulation within which diverse market economies can flourish. At present they do the opposite. They seek to force a revolutionary make-over on the world's divergent economic cultures.

History does not support the hope that global laissez-faire can easily be reformed. It took the disaster of the Great Depression and the experience of the Second World War to shake the hold of an earlier version of free market orthodoxies on western governments. We cannot expect feasible alternatives to global laissez-faire to emerge until there has been an economic crisis more far-reaching than that we have experienced thus far.

Without a fundamental shift in the policies of the United States all proposals for reform of global markets will be stillborn. At present the U.S. combines an absolutist insistence on its own national sovereignty with a universalist claim to worldwide jurisdiction. Such an approach is supremely ill-suited to the plural world which globalization has created. The practical upshot of American policy can only be that other powers will act unilaterally when the instability of global markets becomes intolerable. At that point, the jerry-built edifice of global laissez-faire will begin to crumble.

The global free market is a project that was destined to fail. In this, as in much else, it resembles that other twentieth century experiment in utopian social engineering, Marxian socialism. Each was convinced that human progress must have a single civilization as its goal. Each denied that a modem economy can come in many varieties. Each was ready to exact a large price in suffering from humanity in order to impose its single vision on the world. Each has run aground on vital human needs.

If we take history as our guide, we must expect that the global free market will shortly belong to an irrecoverable past. Like other twentieth-century utopias, global laissez-faire--together with its casualties will be swallowed into the memory hole of history.

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