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.

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