Market Fundamentalism

Some people never learn. In today's New York Times, Robert Wright writes that Bush's foreign policy is incoherent because it lack sufficient faith in markets. Sounds weird, doesn't it? Well, what Wright is proposing is that free markets and democracy are inextricably linked. Capitalism inevitably creates and in turn requires popular government. So the best way to spread democracy in the world is to spread capitalism. Onward to the libertarian utopia! Down with all trade barriers! To add insult to injury, Wright thinks that Clinton was an advocate of such a policy and the Democrats would do well to imitate him.

Wright betrays a real ignorance about history. Having a strong middle class is certainly a prerequisite for a stable popular government, but it is scarcely a sufficient condition. There have in the past been powerful industrial machines with authoritarian governments: Napoleon III's France, Tojo's Japan, Bismarck's Germany are the first examples to spring to mind. China could one day be another. The implicit political contract is that as long as the government delivers the economic goods (and provides some rationale like nationalism) the middle class will not demand political power. Now in the long run this contract might be unstable, but then again in the long run we are all dead.

Let me quote Wright directly:

Capitalism's pre-eminence as a wealth generator means that every tyrant has to either embrace free markets or fall slowly into economic oblivion; but for markets to work, citizens need access to information technology and the freedom to use it - and that means having political power

Let's play the game of "spot the fallacy." Can you see it? He is arguing that economic liberalization requires political liberalization. Can someone please tell me why authoritarian governments can't permit technological research while prohibiting elections? Now execessively harsh tyrannies with oppressive ideologies (like Communism) are certainly incompatible with such a strategy, but a quasi-fascist system might work quite well.

Furthermore, Wright makes the classic mistake of confusing capitalism with free trade. You can have a wealthy industrial economy with no middle class to speak of. Laissez-faire economics, strictly interpreted, lead either to system breakdown (because of the instability generated by ferocious ups and downs) or to corporatization. Free market capitalism almost inevitably results in large monopolies governed by a tiny elite. These corporations can then cut the legs out from under the small proprietors and prevent unionization, therefore forestalling the formation of a broad middle class. It can also provide political support for authoritarian regimes.

I am unaware of a single example in which laissez-faire capitalism has led to industrial development in any country on earth. Not Japan, not Germany, not France, not Britain and certainly not the United States. In each case the state took an active role in developing the economy. In only the latter two instances were the governments democracies.

Finally, Wright needs to read his Weber. Capitalism is not a force of nature, but a social practice which requires other, background social practices. It exists within, not outside, of society. You can't just write laws and set up corporations and expect the machine to suddenly spring into being. Like democracy itself, the existence of capitalism is predicated on a society prepared for it. Flowers cannot grow on stony soil.

In conclusion, while I do believe that capitalism (properly structured) is a vital adjunct to constructing a viable democratic regime, alone it is not enough. Alone, in fact, it is nothing at all. Did the abject failure of the Washington Consensus teach us nothing?