The Decline and Fall of the First Global Economy

How nationalism, protectionism, and collectivism spawned a century of dictatorship and war.

The buzzword is of relatively recent vintage, but the reality it describes is nothing new. Globalization, by any other name, was in full swing a century ago. Indeed, it was remarkably advanced, even by contemporary standards.

In 1913, merchandise trade as a percentage of gross output was about 12 percent for the industrialized countries. They did not match that level of export performance again until the 1970s. The volume of international capital flows relative to total output reached heights in the early 20th century that have not been approached since. In that earlier time, capital flows out of Great Britain rose as high as 9 percent of gross domestic product; by contrast, the seemingly staggering current account surpluses of Japan and Germany in the 1980s never surpassed 5 percent of GDP. It is fair to say that much of the growth of the international economy since World War II has simply recapitulated the achievements of the era prior to World War I.

The first world economy was made possible by the staggering technological breakthroughs of the Industrial Revolution. Most obviously, new forms of transportation toppled the age-old tyranny of distance. For inland transport, the significance of the railroad is difficult to overestimate. In 1830, a journey from New York to Chicago took three weeks; just one generation later, in 1857, that same trip took only two days. The second half of the 19th century witnessed an explosion of railroad construction around the world. Great Britain's railway mileage more than tripled, from 6,621 miles in 1850 to 23,387 miles in 1910; over the same period, mileage in Germany grew nearly tenfold, from 3,637 miles to 36,152 miles; the United States, astonishingly, experienced a nearly thirtyfold increase, from 9,021 miles in 1850 to 249,902 miles in 1910. The railroads knitted countries into truly integrated national markets and facilitated the penetration of foreign goods from port cities into the interior.

Meanwhile, another technology was uniting those national markets into a global whole. Although the steamship was first developed early in the 19th century, further innovations in subsequent decades -- the screw propeller, steel hulls, the compound engine -- transformed what had been primarily a river vessel into cheap and reliable ocean transport. The effect on freight costs was nothing short of spectacular: An index of freight rates along Atlantic export routes fell by 70 percent in real terms between 1840 and 1910.

The Industrial Revolution's burst of technological creativity thus demolished the natural barriers to trade posed by geography. At the same time, it created entirely new possibilities for beneficial international exchange. In the core of the new global economy, the factories of the North Atlantic industrializing countries pumped out an ever-widening stream of manufactured goods desired around the world. Those factories, in turn, relied on access to cheap natural resources and raw materials. And in the less advanced periphery of Asia, Africa, and Latin America, new technologies allowed those natural resources and raw materials to be grown or extracted more cheaply than ever before.

So arose the initial grand bargain on which the first global division of labor was based: The core specialized in manufacturing, while the periphery specialized in primary products. For Great Britain, the first industrial power, manufactured goods constituted roughly three-quarters of its exports. The sprawling United States, on the other hand, straddled both core and periphery. The urbanized East took industrialization to a new level and carried America past Great Britain in economic development. The West, meanwhile, followed the path of other temperate "regions of European settlement" (Canada, Australia, New Zealand, and Argentina) and specialized in the production of grains, meats, leather, wool, and other high-value agricultural products. Finally, the South roughly followed the tropical pattern of development, focusing on such products as rubber, coffee, cotton, sugar, vegetable oil, and other low-value goods.

While far-flung foreign trade is as old as human history, this was something new. No longer was such commerce a marginal matter, limited to a few high-value luxuries. Now, for the first time, specialization of production on a worldwide scale was a central element of economic life in all the countries that participated. Between 1870 and 1913, exports as a percentage of national income doubled in India and Indonesia, and more than tripled in Thailand and China. Japan's transformation was especially dramatic. After Commodore Perry's black ships arrived in 1858, Japan turned from almost total isolation to free trade. In a mere 15 years, its export share multiplied an astonishing 70 times, to 7 percent of gross domestic output.

Industrial Counterrevolution

But it was not to last. The global economic order that arose and flourished in the waning years of the 19th century was swept away by the great catastrophes of the 20th: world wars, the Great Depression, and totalitarian dictatorships. Only in the past couple of decades has a truly global division of labor been able to reemerge.

What happened? Why did the first episode of globalization end so badly? These questions are more than mere historical curiosities. They have a vital bearing on the controversies that swirl around globalization today. According to contemporary critics of global trade, the sad fate of that earlier epoch reveals the inherent dangers of unregulated markets. Then as now, they argue, economic forces had slipped all proper constraints; then as now, the ideology of laissez-faire ran roughshod over social needs. The consequences in the past were tragic: The excesses of unchecked markets, with their brutality and volatility, ultimately triggered the catastrophes of totalitarianism, depression, and war. Today, the resurgence of utopian faith in markets threatens a new cycle of disasters.

William Greider adopts this line in his book One World, Ready or Not (1997). In particular, Greider cites the historical analysis of Karl Polanyi, author of the 1944 book The Great Transformation. Polanyi argued that the catastrophes of his time could ultimately be traced back to the evils of laissez-faire: "The origins of the cataclysm lay in the utopian endeavor of economic liberalism to set up a self-regulating market system." Greider contends that we are once again on the road to ruin: "Today, there is the same widespread conviction that the marketplace can sort out large public problems for us far better than any mere mortals could. This faith has attained almost religious certitude, at least among some governing elites, but, as Polanyi explained, it is the ideology that led the early twentieth century into the massive suffering of global depression and the rise of violent fascism."

Greider is by no means alone in resurrecting Polanyi: He has emerged in recent years as a kind of patron saint of globalization's critics. George Soros notes his intellectual debt in his acknowledgments at the beginning of The Crisis of Global Capitalism. Dani Rodrik, of Harvard University and author of Has Globalization Gone Too Far?, refers to him frequently. John Gray, a professor at the London School of Economics who wrote False Dawn: The Delusions of Global Capitalism, titled his first chapter "From the Great Transformation to the Global Free Market."

These arguments are an almost perfect inversion of the truth. The tragedies of the 20th century stemmed, not from an over-reliance on markets, but from a pervasive loss of faith in them. In the wake of the Industrial Revolution and the arrival of mechanized mass production, a powerful new idea began to take hold and remake the world in its image. That idea, reduced to its bare essence, was that the economic revolution of industrialization both enabled and required a revolution in social organization: the eclipse, partial or total, of markets and competition by centralized, top-down control. The intellectual and political movements spawned by this idea emerged in the last quarter of the 19th century and utterly dominated the first three-quarters of the 20th. This 100-year historical episode, though composed of diverse and widely varying elements, possesses enough coherence to merit a name, and the one I suggest is the Industrial Counterrevolution. (I first discussed the idea of an Industrial Counterrevolution in "Big Mistake" [February 1996], which focused exclusively on the American history of this global phenomenon.)

The Industrial Counterrevolution was protean, and in its many guises captured minds of almost every persuasion. It transcended the conventional left-right political spectrum: Both progressives who welcomed the social transformations wrought by industrialization and conservatives who feared them were united in their calls for a larger state with expanded powers. The Industrial Counterrevolution swept up reformers and revolutionaries, the religious and the anticlerical, social activists and big businessmen, workers and capitalists. The political forms that bore its imprint were many and varied: the welfare and regulatory state; the mixed economy of social democracy; the business-led associative state; Keynesian fine-tuning; the Galbraithean new industrial state; the developmental states of the Third World; and the totalitarian states, whether communist, fascist, or Nazi.

The name "Industrial Counterrevolution" is fitting on two levels. First, as a matter of historical development, the movements grouped together under this common heading were both inspired by and reacting against the economic and social transformations effected by industrialization. In the United States and Europe, the centralizing impulse first began to register during the 1870s, just as modern technological society was bursting onto the scene. In later-developing countries, the ideologies of centralization almost invariably supplied the matrix for modernization.

Second, in analytical terms, the common intellectual thread that runs through all of these movements -- namely, the rejection or demotion of market competition in favor of top-down control -- represents a direct assault on the principles of social order that gave rise to industrialization and are truest to its full promise. Of course, the partisans of the Counterrevolution thought quite the opposite: They believed that their political programs and industrialization rode together on the same great wave of history.

It is impossible to understand the collapse of the first world economy, or the rise of the present one, except in relation to the Counterrevolution's centralizing impulses. For the story of globalization and the story of the Industrial Counterrevolution are mirror images of one another: In the early decades of the 20th century, the rise of collectivism spelled the demise of the global economy; in the past couple of decades, the loss of faith in the collectivist dream has allowed globalization to resume its course.

Here I examine the first half of that cycle: the destruction of the global economy by the forces of runaway centralization. In particular, I want to focus on the critical decades leading up to World War I. For it is clear enough that the final breakdown of international economic integration during the calamitous 1930s was an extended consequence of the Great War. What is less well known is how the collectivist delusion helped to lead the world toward that awful conflict -- and thus toward all the horrors that followed in its wake.

Cobden's Dream

At the midpoint of the 19th century, a very different future appeared to be on the horizon. The liberal creed of cosmopolitanism, free trade, and peace promised to define the shape of things to come. As in so much else, Great Britain led the way. In the decades after Waterloo, it made gradual but significant progress in dismantling its protectionist policies. Seizing this political opening, a pair of textile manufacturers, Richard Cobden and John Bright, led their country to bolder action, organizing the Manchester-based Anti?Corn Law League into a national mass movement of middle-class urban interests against the landed elite. Their seven-year campaign achieved victory in 1846 with the repeal of the Corn Laws and the elimination of all duties on imported grains.

From its testing ground in Great Britain, free trade began to spread into continental Europe. The major breakthrough, again featuring Richard Cobden, was the Cobden-Chevalier treaty of 1860 between Great Britain and France. A flurry of European trade agreements followed. Building on its tradition of the Zollverein, a customs union of German states, the newly unified Germany steadily pursued a liberal trade policy. By the mid-1870s, average tariffs on manufactured goods had fallen to between 9 and 12 percent on the continent -- compared to effective rates of 50 percent or more at the close of the Napoleonic Wars.

The liberal champions of free trade did not view their cause solely or even primarily as a commercial matter. In their view, free trade carried profound implications for the whole field of international relations. Free trade, they believed, could pave the way toward a new and modern form of international order -- one that would replace the pointless and destructive dynastic struggles foisted upon the people by kings and aristocracies. Peaceful cooperation among nations, not mere economic efficiency, was the grand prize for which they strove.

Cobden outlined this larger vision in a speech in Manchester on the eve of the Corn Laws' repeal: "I believe that the physical gain will be the smallest gain to humanity from the success of this principle….I have speculated, and probably dreamt, in the dim future -- ay, a thousand years hence -- I have speculated on what the effect of the triumph of this principle may be….I believe that the desire and the motive for large and mighty empires; for gigantic armies and great navies -- for those materials which are used for the destruction of life and the desolation of the rewards of labour -- will die away; I believe that such things will cease to be necessary, or to be used when man becomes one family, and freely exchanges the fruits of his labour with his brother man."

Cobden and other Victorian free traders are often faulted for their naive faith in the healing powers of commerce. And indeed, some in that camp did fall prey to the facile assumption that major wars were no longer possible in the new global economy. But Cobden himself, as the above passage makes clear, was under no illusions as to the difficulty of subduing the powers of destruction. He saw the task as a monumental and centuries-long project.

However tempered by realism, though, the Cobdenite vision of the future was clearly optimistic. Though the challenges ahead were still daunting, the remaking of the world had begun. The sterile futility of conflict among nations was slowly but surely giving way to interdependence, peace, and prosperity -- with commerce the steam-powered engine of that beneficent change.

Nationalism, Socialism, and Tariffs

The free traders' sunny cosmopolitanism all too quickly gave way to a very different vision of the international scene. As the Industrial Counterrevolution began to gather momentum, the prospect of a world at peace started to recede. A new prospect, dark and menacing, came in its stead to the fore -- one of rival nations, rival races, pitted in fundamental and irresolvable conflict, engaged in a grim and merciless struggle for supremacy or submission. This radical and ruinous shift of perspective did not merely coincide with the spreading enthusiasm for centralization and top-down control; rather, the two developments were interconnected and mutually reinforcing.

First, the momentum of the Industrial Counterrevolution pushed inexorably toward expanding the power of the national state. This was true despite the fact that the most potent and influential of all the counterrevolutionary movements -- Marxist socialism -- was deeply internationalist in orientation. Marx himself was thoroughly cosmopolitan: He conceived of the coming socialist revolution and the workers' paradise it would establish as worldwide phenomena that would overwhelm dynastic, national, and racial distinctions as thoroughly as they did the historically fundamental distinctions of class. He had no interest in augmenting the strength of current states, which he condemned as tools of capitalist oppression.

Recall, however, that Marx's great contribution was a powerful theoretical and historical conception of why collectivism was inevitable. Marx had little to say as to how collectivism would actually work in practice, and he had even less influence over the ultimate course of events. The worldwide proletarian uprising never came, and in the absence of that hoped-for event, the overwhelming drive toward centralization that Marx did so much to engender fastened itself upon the instrumentality at hand: the national state.

Consider, for example, the fate of the German Social Democrats, Europe's first socialist party of political significance. Their original leaders were orthodox Marxists who preached international revolution, not domestic statism. Over time, though, electoral success spoiled the Social Democrats' doctrinal purity. In the 1890s, after their stunning gains in the Reichstag precipitated Bismarck's fall and the repeal of the repressive Socialist Law, new leaders like Georg Vollmar and Eduard Bernstein pushed the party toward "revisionism," or support for gradual reform and cooperation with the existing state. The domestication of the Social Democrats culminated in August 1914, when every single party member in the Reichstag voted in favor of war credits for the Kaiser's army.

Many other emerging centralizing movements embraced an expanded national state from the outset. Edward Bellamy, American author of the utopian fantasy Looking Backward and a major influence on subsequent Progressive and New Deal intellectuals, called his philosophy "nationalism" to distinguish it from Marxist-style socialism. In Great Britain, the Fabians advocated incremental reform and a political strategy of "permeation," or working through established political parties. And in Germany, the conservative, Bismarckian "state socialists" were unabashed in their devotion to the national state. Characteristic in this regard was the economist Gustav Schmoller, who proclaimed the state to be "the most sublime ethical institution in history."

Furthermore, the growing enthusiasm for national economic planning was fundamentally at odds with the new international division of labor. After all, if centralized decision making is more efficient than markets, why allow international markets to persist? Inflows and outflows of goods and capital, if unregulated, will only disrupt the best-laid plans of the national authorities. What good is it to set minimum wages in a particular industry if the workers who are supposed to benefit then lose their jobs because of competition from cheaper foreign goods? Or what if the authorities seek to encourage downstream processing industries, but the domestic producers of the raw inputs prefer exporting them at a high price to selling them cheaply at home?

A new collectivist case for protectionism thus began to emerge. If a nation's economic life is to come under central control, that control must extend to the nation's connections with the outside world. In outlining his vision for a "nationalist" utopia, Edward Bellamy was quite clear on this point: "A nation simply does not import what its government does not think requisite for the general interest. Each nation has a bureau of foreign exchange, which manages its trading. For example, the American bureau, estimating such and such quantities of French goods necessary to America for a given year, sends the order to the French bureau, which in turn sends its order to our bureau. The same is done mutually by all the nations." George Bernard Shaw, a Fabian pamphleteer as well as a playwright, took a similar view. In Fabianism and the Fiscal Question, he wrote that if protectionism means "the deliberate interference of the State with trade" and "the subordination of commercial enterprise to national ends, Socialism has no quarrel with it." On the contrary, Shaw asserted, socialism must be considered "ultra-Protectionist." And in Germany, the state socialists waged a blistering attack on free trade as a part of their larger campaign against laissez-faire and "Manchesterism."

It is true that many partisans of centralization, especially on the Left, resisted the protectionist logic of their position. Free trade appealed to their internationalist sympathies; also, a low-tariff policy was generally associated with cheap bread and thus was widely considered favorable to the working class. (How times have changed!) The momentum of centralization, though, generally prevailed over tradition and class interests. In the end, the fortunes of collectivism and protectionism rose together. In the middle of the 19th century, enlightened opinion was almost uniformly in favor of free trade; by the end of the century, protectionism had once again become intellectually respectable.

With that renewed respectability came a significant retreat from free trade in actual practice. In Germany, the breakthrough came in 1879, with Bismarck's "iron and rye" tariff. In France, the Meline Tariff raised duties to the equivalent of 10 to 15 percent for agricultural goods and over 25 percent for industrial products. Tariffs also climbed in Sweden, Italy, and Spain during the 1880s and 1890s. In the United States, tariff rates rose during the Civil War and stayed high for the rest of the century. They got a further boost with the McKinley Tariff of 1890. In Latin America, rates of protection ascended steadily during the final quarter of the 19th century. Tariffs in Russia were punishingly high and never came down.

The direct impact of resurgent protectionism on the new world economy should not be overestimated. Average tariff rates rose, but were still relatively modest on the eve of World War I: under 10 percent in France, Germany, and Great Britain; between 10 and 20 percent in Italy; between 20 and 30 percent in the United States; and between 20 and 40 percent in Russia and Latin America. Such non-tariff barriers as quotas or exchange controls were barely in evidence. Protectionist measures did slow the pace of globalization (and blocked it for certain regions and sectors), but did not stop it. Despite increasing obstacles, the internationalization of economic life flourished in the decades before World War I.

Nevertheless, the drift toward protectionism did contribute to a new international atmosphere of conflict and tension. In Bellamy's utopia, national planners could somehow control their imports and exports without so much as a cross word from abroad. But in reality, restrictions on trade inevitably set nations against each other. When governments interfere with their citizens' ability to do business with the citizens of other nations, they must expect such acts to be seen abroad as provocative. They are, after all, reducing the prosperity that other countries might otherwise enjoy. High tariffs in one country throttle export industries abroad; embargoes deprive other nations of needed raw materials, products, and capital. These restrictions can be matters of life and death if the dependence on foreign products or markets is great enough.

The implications of trade barriers for international relations are thus enormous. In a world of free trade, citizens of one country can exploit the benefits of a broader division of labor through peaceful commerce. But in a world where severe trade restrictions are endemic, such benefits can be attained only through warfare -- through defeat of the foreign sovereignty that blocks access to the desired products or markets. Free trade makes war economically irrational; protectionism, carried far enough, makes it pay.

These grim implications were abundantly clear in the circumstances of the late 19th century. The enriching possibilities of international specialization had never been greater, and were increasing daily due to incessant technological breakthroughs. At the same time, however, countries were beginning to close their borders. While the level of protectionism was still within reasonable limits, it was widely believed that barriers would only increase with time. Making matters worse, the great powers of the core were rapidly consolidating political control over the periphery in a mad rush of imperial land-grabs. The world appeared to be fracturing into great imperial blocs, each one more or less closed off from the others. It seemed as though the countries that controlled these blocs would reign supreme; those without enough territory to combine self-sufficiency with prosperity would be doomed.

Under these conditions the Cobdenite cosmopolitan vision looked hopelessly outmoded. Expanding opportunities for a far-flung division of labor were not ushering in an age of peace; on the contrary, they were propelling nations toward inevitable and bloody conflict. What had wrought this dreadful turn of events? It was the expectation that countries would find it in their interest to close their economies to the outside world. And what created that expectation? It was the growing sense that national economic planning was the wave of the future. The drive toward centralization had thus transformed the legacy of the industrial revolution from that of world peace to one of a world at war. It is indeed fitting to call this transformation an Industrial Counterrevolution in international affairs.

The result was that collectivism and militarism became mutually reinforcing. Aggressive nationalism was needed to secure and safeguard the full blessings of collectivism; at the same time, collectivization was needed to render the nation fit for military conflict. From this basic feedback loop issued the great tragedies of dictatorship and total war.

Shadow of the Reich

The links that connected the dreams of central planning and the nightmares of the 20th century were forged, to a greater or lesser extent, by many of the disparate movements of the Industrial Counterrevolution. But those who pursued this fatal logic most explicitly and consistently, and to the most powerful historical effect, were the state socialists of Imperial Germany. The Bismarckian program integrated all the necessary elements: collectivism in domestic affairs, protectionism in commercial policy, and aggressive nationalism and militarism in matters of state. William Dawson, a sympathetic English observer of the German scene, distilled the essence of the new Reich into a single sentence: "As State Socialism is the protest of Collectivism against Individualism, so it is the protest of Nationality against Cosmopolitanism."

The leading theorists of state socialism, the so-called Kathedersozialisten, were fervent supporters of belligerent nationalism. Gustav Schmoller, perhaps their brightest light, was emphatic in his rejection of the Cobdenite vision. For him, the international sphere was inevitably and properly a zone of never-ending conflict: "All small and large civilized states have a natural tendency to extend their borders, to reach seas and large rivers, to acquire trading posts and colonies in other parts of the world. And there they constantly come into contact with foreign nations, with whom they must, quite frequently, fight. Economic development and national expansion, progress in trade and an enhancement of power are in most cases inextricably connected."

Adolf Wagner, another prominent voice, was even more truculent. Wagner asserted that the "decisive fact" in international relations was "the principle of power, of force, the right of power, the right of conquest." Weaker nations, he contended, would meet "the fate of all lower organisms in the Darwinian struggle for existence."

Schmoller and Wagner called upon Germany to steel itself for the coming struggle of nations. To that end, they were ardent supporters of a protectionist trade policy. Wagner, in particular, stressed the link between national security and protecting German agriculture. Dependence on foreign food supplies could be crippling in the event of war, he noted; furthermore, protectionism would preserve the large peasantry that supplied the backbone of a strong army.

The two scholars also urged an aggressive program of territorial expansion. Germany, they wrote, needed more space to ensure a high standard of living in an age of vast and autarkic empires -- and to settle the country's rapidly increasing population. Schmoller called for creating a German country with 20 to 30 million inhabitants in southern Brazil. Wagner dismissed "idle pretensions like the American Monroe Doctrine" as an obstacle to German colonization. In addition to overseas adventures, Schmoller and Wagner foresaw a dominant German role in European affairs. Both expressed the view that German hegemony should extend throughout what came to be referred to in pan-German circles as Mitteleuropa.

To assume its rightful station, Germany would have to rely ultimately on its military prowess. Schmoller wrote that "the high standard of living of the English worker would be unthinkable without Great Britain's sea power," and that Germany should follow her example by building a strong navy. Wagner, for his part, called military power "the first and most important of all national, and may I add, of all economic necessities." The army, he claimed, was "a truly productive institution" because of "the connection between national might, security, honor and economic development and prosperity."

The writings of these renowned professors served as a blueprint for Germany's disastrous course toward war. They and others like them fostered the intellectual climate in which Germany's leaders made the fateful decisions that crushed liberalism domestically and heightened tensions internationally. They stoked the strident and reckless nationalism that intoxicated the German people and had them spoiling for war. They saw and made the connection between collectivism at home and belligerence abroad.

And they provoked imitators. The German example and threat served to promote collectivist domestic policies in Great Britain under the banner of "national efficiency." German influence extended in similar fashion to British attitudes about international affairs. The "national efficiency" push for social reform was inextricably connected with a newly assertive imperialism.

The connections ran in both directions. On one hand, social reforms were touted as strengthening the empire. Lord Rosebery, a Liberal imperialist and leading spokesman of the "national efficiency" cause, argued, "An Empire such as ours requires as its first condition an imperial race -- a race vigorous and industrious and intrepid." But, he continued, "in the rookeries and slums which still survive, an imperial race cannot be reared." Meanwhile, the empire was defended as an essential support for working-class living standards. Nobody put this case more bluntly than Joseph Chamberlain, champion of the protectionist "tariff reform" movement: "If tomorrow it were possible, as some people apparently desire, to reduce by a stroke of the pen the British Empire to the dimensions of the United Kingdom, half at least of our population would be starved."

And so in Britain, as in Germany, collectivism at home went hand-in-hand with an expansionist foreign policy. The Cobdenite vision of peaceful coexistence and non-intervention yielded to one of great empires locked in a "struggle for existence" -- a phrase that Joseph Chamberlain employed repeatedly in his speeches. The British Empire -- which had been acquired, in the famous phrase, in "a fit of absence of mind" -- came to be seen as a prized asset, even a life-or-death necessity. And its health demanded the centralization of economic decision making. In other words, the conditions of external competition required the suppression of competition internally.

Britain, unlike Germany, did not succumb to economic nationalism. Chamberlain led a well-organized campaign to convert the empire into a vast, protectionist trading bloc, and for a time it appeared he would succeed. In the end, though, he lost the campaign for working-class support to the New Liberals, who combined imperialism and social reform with continued allegiance to free trade. The election of 1906, a sweeping victory for the Liberals, effectively squelched the tariff reformers.

Their near-success, though, was enough to stoke fears abroad that the British Empire would soon be closed to outsiders. This prospect contributed to Germany's spiraling economic nationalism and militarism, which in turn provoked an accelerating British military buildup. (The latter prompted Winston Churchill's famous quip, "The Admiralty had demanded six ships: the economists offered four and we finally compromised on eight.") As Britain and Germany armed to the teeth, it became increasingly likely that some chance event would spark a major confrontation. On June 28, 1914, the assassination of Archduke Franz Ferdinand and his wife ignited that spark.

It is customary to view World War I as a tragic accident -- a senseless war about nothing in particular, or at least nothing that makes any sense to us now; a war that nobody wanted but into which all were dragged by a ruinous system of entangling alliances. It is true that the outbreak of war at that particular time did hinge on a maddening and heartbreaking sequence of contingencies. But at a deeper level, the war was no accident. It was a product of the ideas of the Industrial Counterrevolution: ideas of centralization that merged into statism, ideas of statism that merged into aggressive nationalism, ideas of nationalism that merged into plans for military conquest.

And its baleful consequences extended far beyond the awful slaughter in the trenches. The Russian Revolution and the rise of fascism were direct outgrowths of the Great War. Less obviously, so was the Great Depression. Postwar efforts to reconstitute the old international economic system, in particular the gold standard, were enacted under the badly distorted and volatile conditions of the time, leading ultimately to disastrously deflationary monetary policy in the United States and Europe. In the 1930s, the combination of economic catastrophe and predatory totalitarianism -- both aftershocks of the Great War -- spelled the end of the first global economy and precipitated a second global war. So ended the descent into fire and chaos that began with the guns of August.

The Contradictions of Collectivism

When critics of global trade claim that the phenomenon's first, failed episode should be seen as a warning against reckless faith in markets, they are standing history on its head. In truth, the first global economy was destroyed by the antithesis of economic liberalism -- namely, the misbegotten dream of central planning and social engineering that inspired the Industrial Counterrevolution in all its variants. The collectivist delusion was flatly incompatible with an international division of labor: When the former was ascendant, the latter could not survive. For collectivism invariably attached itself to the ready means of the nation-state, and once so ensconced, it helped to stoke aggressive, beggar-thy-neighbor nationalism. In a world of centralized and increasingly regimented states whose interests could not help but clash, conflict was inevitable. And when war came, its terrible fury hatched new monsters: ruinous economic disruption and barbaric totalitarianism. The gossamer bonds of trust and mutuality that sustain a global marketplace had no chance against such an onslaught.

In the years after World War II, there was a partial reconstruction of the international economy, led by the United States, Western Europe, and Japan. But the continued ascendancy of the Industrial Counterrevolution made true globalization impossible. After all, the bulk of the world's population, located in the Communist bloc and the so-called Third World, lived under rabidly collectivist regimes that rejected the very idea of an international market economy. Only in the past couple of decades has the counterrevolutionary momentum exhausted itself in disillusionment and failure. And as overweening state control has receded -- with the opening of China, the fall of the Soviet empire, and many Third World countries' abandonment of state-dominated models of development -- market connections have been reestablished. The death of the dream of centralized control has marked the rebirth of globalization.

But the collectivist past continues to cast long shadows. The move toward more liberal policies has occurred amidst the ruins of the old order, and so has had to contend with grossly deformed conditions. The transition, as a consequence, has been wrenching and often brutally painful. And that transition is far from complete. The world economy is littered still with the wreckage of discredited systems, constraining the present and obscuring the future. Life has left the old regime, but the dead hand of its accumulated institutions, mindsets, and vested interests continues to weigh heavily upon the world. Against that dead hand -- which includes, among other things, the ideologically distorted misunderstanding of globalization's past -- the cause of freedom must contend for many decades to come.