The Industrial Counterrevolution

In an earlier post I referenced a very fine book mentioned here authored by Brink Lindsey. Drawing upon a more limited portion of the material therein he wrote an article available here. Excerpts follow:

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

The momentum of the Industrial Counterrevolution pushed inexorably toward expanding the power of the national state.

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?

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.

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.

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.

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.

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.

It is customary to view World War I as a tragic accident. 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.

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.

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.

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.

While one can offer alternate narratives, I think this perspective has substantial validity. In some sense this period could be thought of as an exploration of alternative arrangement in political economy. In a starker light, it could be viewed as political failure on a global scale.