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

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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.