“Remember Friday, March, 14 2008: it was the day the dream of global free-market capitalism died,” says the Financial Times‘ Martin Wolf. “For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the U.S., chief protagonist of free-market capitalism, declared this era over.” 
Photo:Matti Mattila, Creative Commons, Flickr
Mr. Wolf argues that market deregulation has reached its limits, echoing Joseph Ackermann, chief executive of Deutsche Bank, who said that he “no longer believes in the market’s self-healing power.
Mr Wolf adds: “If the U.S. itself has passed the high water mark of financial deregulation, this will have wide global implications. Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer. It will be hard, indeed, to persuade such countries that the market failures revealed in the U.S. and other high-income countries are not a dire warning. If the U.S., with its vast experience and resources, was unable to avoid these traps, why, they will ask, should we expect to do better?”
If Mr. Wolf is correct, emerging economies will question the value of free-market capitalism. Market liberalization and integration of emerging economies will inevitably take a back seat, and globalization may sink. This sounds like a ridiculous argument, but history shows us that this scenario cannot be ignored.
“The last age of globalization resembled the current one in numerous ways,” Niall Ferguson, an award winning Scottish historian, writes in the March/April 2005 issue of Foreign Affairs magazine. “It was characterized by relatively free trade, limited restrictions on migration, and hardly any regulation of capital flows. Inflation was low. A wave of technological innovation was revolutionizing the communications and energy sectors; the world first discovered the joys of the telephone, the radio, the internal combustion engine, and paved roads. The U.S. economy was the biggest in the world, and the development of its massive internal market had become the principal source of business innovation. China was opening up, raising all kinds of expectations in the West, and Russia was growing rapidly.”
“World War I wrecked all of this,” Ferguson argues. “Global markets were disrupted and disconnected, first by economic warfare, then by postwar protectionism. Prices went haywire: a number of major economies (Germany’s among them) suffered from both hyperinflation and steep deflation in the space of a decade. The technological advances of the 1900s petered out: innovation hit a plateau, and stagnating consumption discouraged the development of even existing technologies such as the automobile. After faltering during the war, overheating in the 1920s, and languishing throughout the 1930s in the doldrums of depression, the U.S. economy ceased to be the most dynamic in the world. China succumbed to civil war and foreign invasion, defaulting on its debts and disappointing optimists in the West. Russia suffered revolution, civil war, tyranny, and foreign invasion.”
World War I was the catalyst for globalization’s collapse at the start of the 20th century. Will the fallout from the current market crisis, i.e. the end of market deregulation, lead to the collapse of the current age of globalization?
Yes, that sounds absurd and sensationalistic. I don’t really buy the argument, but there are economic parallels that can’t be dismissed.
“With the benefit of hindsight, however, five factors can be seen to have precipitated the global explosion of 1914-18,” explains Ferguson. “The first cause was imperial overstretch. By 1914, the British Empire was showing signs of being a “weary Titan,” in the words of the poet Matthew Arnold. It lacked the will to build up an army capable of deterring Germany from staging a rival bid for European hegemony (if not world power). As the world’s policeman, distracted by old and new commitments in Asia and Africa, the United Kingdom’s beat had simply become too big.”
“Great-power rivalry was another principal cause of the catastrophe. The problem was not so much Anglo-German rivalry at sea as it was Russo-German rivalry on land. Fear of a Russian arms buildup convinced the German general staff to fight in 1914 rather than risk waiting any longer.”
“The third fatal factor was an unstable alliance system. Alliances existed in abundance, but they were shaky.”
“The presence of a rogue regime sponsoring terror was a fourth source of instability. The chain of events leading to war, as every schoolchild used to know, began with the assassination of the Austrian Archduke Franz Ferdinand in Sarajevo by a Bosnian Serb, Gavrilo Princip. There were shady links between the assassin’s organization and the Serbian government, which had itself come to power not long before in a bloody palace coup.”
And finally: “The rise of a revolutionary terrorist organization hostile to capitalism turned an international crisis into a backlash against the global free market. The Bolsheviks, who emerged from the 1903 split in the Russian Social Democratic Party, had already established their credentials as a fanatical organization committed to using violence to bring about world revolution. By straining the tsarist system to the breaking point, the war gave Lenin and his confederates their opportunity.”
As the economic parallels with 1914 suggest, we can’t dismiss the possibility that we are about to enter an age of de-globalization. And while we are on the topic of historical parallels, let’s not forget a quote from Vladimir Lenin, founder of the Russian Communist Party, who said “the best way to destroy the capitalist system is to debauch the currency.”