The Decline and Fall of the First Global Economy

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

Brink Lindsey from the December 2001 issue

(Page 3 of 4)

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."

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