A Trip to the Market

The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World, by Daniel Yergin and Joseph Stanislaw, New York: Simon & Schuster, 391 pages, $26.00

If you're depressed about the state of politics these days, read The Commanding Heights. Forget about the Republicans' fecklessness for a while. Take a break from Bill Clinton's Rasputin act. Step back and look at the big picture, a picture that spans the whole planet and comes into focus over decades. Look at the big picture and see that our side–the side of human freedom–is winning.

In The Commanding Heights, Daniel Yergin, author of The Prize: The Epic Quest for Oil, Money & Power, and Joseph Stanislaw, Yergin's colleague at Cambridge Energy Research Associates, chronicle the global rise and fall of government control over the economy. Their narrative covers the past half-century, beginning with the Labour Party's big victory in Britain at the close of World War II and concluding with the still-unfolding Asian currency crisis. The theme is a simple one: Through bitter and repeated experience, faith in "government knowledge" and anxiety about "market failure" have given way to trust in "market knowledge" and wariness of "government failure." As a result, market forces are retaking the "commanding heights" of the economy (Lenin's phrase) that governments had stormed and captured.

The Commanding Heights is a solid book, though not a great one. The prose is clear and taut, but lacking in style or wit. With subject matter of such epic sweep, it's a shame the storytelling is so flat. And though the authors pay attention to thinkers as well as doers, their presentation and analysis of ideas is uniformly shallow. All told, The Commanding Heights reads like a gigantic newspaper article.

But it's a well-reported newspaper article, and it gets the story straight. The book rests not only on a fat bibliography but also on extensive interviews with dozens of the key players in the drama: Pedro Aspe, Gary Becker, Stephen Breyer, Domingo Cavallo, Milton Friedman, Alberto Fujimori, Yegor Gaidar, Mahathir Mohamad, Jeffrey Sachs, Margaret Thatcher, and Paul Volcker headline the gaudy list. Yergin and Stanislaw synthesize their research into a well-paced story filled with interesting details and anecdotes, exposing socialism's broken promises and celebrating the market's creative power.

It's hard to believe how far we've come in 50 years. When Winston Churchill was unceremoniously dumped in favor of Clement Attlee in the spring of 1945, the Soviet Union served as the economic (if not political) model for Labour's plans to rebuild Britain. As historian E.H. Carr wrote around that time, "Certainly, if `we are all planners now,' this is largely the result, conscious or unconscious, of the impact of Soviet practice and Soviet achievement." The free market was an anachronism; central planning was the wave of the future. For his part, Attlee referred to belief in the private profit system as "a pathetic faith resting on no foundation of experience."

Things were little different across the Channel. Charles de Gaulle declared in 1945 that "the state must hold the levers of command." Historian A.J.P. Taylor surveyed the intellectual scene of the time and concluded: "Nobody in Europe believes in the American way of life–that is, in private enterprise. Or rather those who believe in it are a defeated party and a party which seems to have no more future than the Jacobites in England after 1688."

Faith in planning seized the imagination of leaders around the world. In India, Jawaharlal Nehru proclaimed that "the Soviet Revolution had advanced human society by a great leap and had lit a bright flame which could not be smothered and that it laid the foundation for a new civilization toward which the world could advance." At least India's leaders were committed to democracy. Elsewhere in the developing world, China, Cuba, and others followed the Soviet model all the way to totalitarian communism.

The founders of the new mixed economies, like their communist cousins, believed that state-owned industries would lead the way toward modernization and growth. The chaos of the marketplace could not be relied upon to mobilize the necessary investments or to create enterprises of sufficient scale. Nationalized industries would be more efficient and more technologically advanced; their joint efforts could be coordinated by central planners to produce full employment and prosperity for all.

In much of the developing world, planning and state ownership were embellished with enforced economic isolation. Foreign investment by Western multinationals was shunned as exploitation or "neocolonialism." Even exports to the industrialized world were seen as a trap. According to the theory of dependencia, which held sway throughout Latin America, international trade locked developing countries into a subservient role as suppliers of cheap farm goods and raw materials. In this view, the benefits of trade flowed one way: from the commodity-producing "periphery" to the industrialized "center." True economic development would come to the Third World only through protectionist "import substitution" policies that encouraged industrialization at home.

Of course, the triumph of statism was not uniform. The United States avoided widespread nationalizations, preferring instead to address perceived market failures through antitrust law and economic regulation. Germany, under the influence of Ordoliberals like Wilhelm Röpke and Alexander Rüstow, rejected top-down planning in favor of corporatist consultation and a "social market economy." And Japan, followed by other countries in East Asia, embraced the world economy in pursuit of export-led growth.

Meanwhile, a tiny intellectual minority resisted the general socialist clamor and maintained allegiance to the free market. Yergin and Stanislaw tell the story, doubtless familiar to many REASON readers, of F.A. Hayek, the Mont Pelerin Society, and the rise of the Chicago school.

Hayek, a socialist in his youth, was converted to the free-market camp by Ludwig von Mises in the 1920s. In the '30s, he attained a kind of professionally suicidal prominence through his futile struggle against John Maynard Keynes's growing influence. Having lost that battle, he began to win the war–first, in 1944, with the popular The Road to Serfdom; and then, in 1960, with his masterwork, The Constitution of Liberty. As Yergin and Stanislaw write: "In the postwar years, Keynes's theories of government management of the economy appeared unassailable. But a half-century later, it is Keynes who has been toppled and Hayek, the fierce advocate of free markets, who is preeminent."

Hayek exerted his influence not only through his writings but also by reaching out to like-minded thinkers. In 1947 he helped organize a meeting of 36 free market intellectuals at a Swiss resort on Mont Pelerin. The gathering turned into an institution–the Mont Pelerin Society–whose biennial get-togethers helped to create an international network of classical liberal scholars.

One of the attendees at that first Mont Pelerin meeting was Milton Friedman of the University of Chicago, who was making his first trip to Europe. Friedman, of course, went on to become the most famous member of the so-called Chicago school of economics, which included George Stigler, Gary Becker, and a host of other free market luminaries (actually, Hayek spent a dozen years at Chicago, though interestingly not on the economics faculty). The intellectual ascendancy of the Chicago school may be measured in Nobel Prizes: Since 1974, eight Chicago professors and another 11 who had some association with the university have won the Nobel Prize in economics.

How did it happen that the ideas of a courageous few ultimately changed the world? Broadly speaking, the past half-century served as a vast and tragic social science experiment, in which the hypothesis of central planning's superiority to markets was tested and decisively repudiated. The fall of the Soviet Union on the one hand, and the rise of East Asia on the other, were the two most important data points that exploded the statist worldview. "Between the fall of the Berlin Wall and the collapse of the Soviet Union in 1991," a senior economic official in India admitted, "I felt as though I were awakening from a thirty-five-year dream. Everything I had believed about economic systems and had tried to implement was wrong."

Yergin and Stanislaw pile example upon example of socialism's shining ideals gone awry. My favorite is their account of the Hindustan Fertilizer Corporation in India: "In 1991, at the time of the economic crisis, its twelve hundred employees were clocking in every day, as they had since the plant had officially opened a dozen years earlier. The only problem was that the plant had yet to produce any fertilizer for sale. It had been built between 1971 and 1979, using considerable public funds, with machinery from Germany, Czechoslovakia, Poland, and a half-dozen other countries. The equipment had looked like a great bargain to the civil servants who made the basic decisions, because it could be financed with export credits. Alas, the machinery did not fit together and the plant could not operate. Everyone just pretended it was operating." After a while, even true believers lose their faith in the face of such evidence.

Of course, the specific events by which the ideas of a few dissident economists came to topple governments and change the course of history looked nothing like a neat and tidy scientific experiment. In the exceptional case, the path from ideas to practice was direct. Yergin and Stanislaw relate a mid-'70s visit by the new Conservative leader Margaret Thatcher to the party's research department. She got into an argument with a staffer who was preparing a paper advocating a middle way between left and right; reaching into her briefcase, she pulled out a copy of Hayek's The Constitution of Liberty and held it aloft. "This," she said, "is what we believe."

Much more often, though, freedom's resurgence received aid from unexpected quarters. Mikhail Gorbachev broke up the Soviet Empire while trying to revive it. Deng Xiaoping unleashed market forces that lifted 200 million people out of poverty in two decades, all in the name of the Communist Party. Carlos Salinas, a creature of Mexico's corrupt PRI who came to power in an apparently rigged election, swept away trade barriers and privatized industries. In Peru, Mario Vargas Llosa was a dedicated believer in economic freedom, but he lost the election; instead, Alberto Fujimori, an obscure agricultural engineer, won the presidency and led his country through dramatic market reforms. New Zealand's sweeping liberalization during the mid-'80s came under a Labour government. Airline deregulation in the United States was launched by Stephen Breyer, now a Supreme Court justice and then a staffer for Sen. Ted Kennedy. And so on.

Indeed, Yergin and Stanislaw's account highlights the crucial importance of sheer accident in the historical process. A flap over a reference to U.S. food aid as "chicken feed" led Gen. Lucius Clay to fire the German director of economic administration in the American and British occupied zones; Clay replaced him with Ludwig Erhard, whose snap elimination of price controls launched the German Wirtschaftswunder. The election of a Polish pope–the first non-Italian in centuries–proved vital in nurturing the Solidarity movement in Poland and sustaining it after the 1981 crackdown. The Falklands War, a third-rate conflict in military terms, catalyzed reform in both the combatant countries; victory gave Thatcher the popular support she needed to launch a full-scale privatization drive, while defeat spelled the end of the generals' rule in Argentina and the eventual embrace of market reforms–by, of all people, a Peronist president, Carlos Menem.

So when you put down The Commanding Heights and descend again into the drift and mediocrity of today's headlines, don't despair. Keep your focus on the larger view that Yergin and Stanislaw have sketched. Remember that over the past half-century, the ideas of liberty have survived near-extinction to gain worldwide acceptance. The struggle between state and market for the commanding heights continues, and doubtless the cause of freedom will suffer setbacks and reverses. Nevertheless, there is firm ground for optimism in the realization that, whether by exceptional leadership, or by assistance from unlikely champions, or simply by accident, good things happen to good ideas.

Contributing Editor Brink Lindsey ([e-mail]) is director of the Center for Trade Policy Studies at the Cato Institute.