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    For future answers, take a look at history...
    1998 by Robert Kuttner.

    For future answers, take a look at history...

    By Robert Kuttner

    The swooning stock market, the East Asian collapse, and the Russian implosion have a common genesis. Are all casualties of the great illusion of our era--the utopian worship of free markets.

    Half a century ago, the democracies of the west, chastened by two world wars and a depression, by the brutalities of pure capitalism and the menace of communism, concluded that a market economy needed to be tamed and domesticated, to coexist with a decent, stable, and just society.

    But the stagnation of the 1970s, the resurgence of organized businessas a political force, and finally the collapse of communism, revived an almost lunatic credulity in pure markets and a messianic urge to spread them worldwide.

    Consider the East Asia crisis. For the most part, East Asia has productive workers and firms, households with high rates of savings, even prudent government budgets.

    Some countries did suffer from business-government cronyism. But what wrecked these economies was their sudden exposure to international speculative forces beyond their control.

    Financial speculators first overinvested in their currencies, stocks and businesses--and then abruptly pulled the plug. This sudden vulnerability, in turn, reflected ultra free-market norms imposed by the United States and our proteges at the International Monetary Fund.

    Obviously, the real value of an economy does not fluctuate by eighty percent in a few months. What fluctuates are the guesses of foreign speculators. But in an exposed economy, these become self-fulfilling prophesies.

    The U.S. stock market is a casualty of the same naive market-worship. Just weeks ago, prestigious commentators were still proclaiming a fundamentally "new economy" of permanent prosperity, eerily echoing the 1920s. Supposedly, the combination of degregulation, globalization, low inflation and technology meant stocks had nowhere to go but up.

    In truth, the stock market got dangerously overvalued because markets often misvalue things. Markets misvalue human labor, education and universal health care; they misvalue clean air and water. And occasionally, euphorias break out and markets misvalue stocks.

    Ironically, what has saved the stock market from even steeper collapse is that nemesis of financial-market purists--the good old capital gains tax. Investors are riding out the down market rather than paying a tax on what's left of their gains.

    The same free-market fundamentalists who considered globalization an unmitigated plus now offer this contradictory reassurance: The contagion won't seriously damage us because America is still relatively isolated compared to the poor suckers who took our advice and are now more globally exposed than we are!

    Alas, America is no island. Calamity in Asia, Russia, and Latin America, in part the fruit of our own ideological exports, can't help but affect the U.S. and Europe.

    The most dangerous of all these events is the collapse in Russia. It recalls the West's failure to help Germany recover after World War I, resulting in Hitler and World War II.

    The U.S. spent nine trillion dollars to win the Cold War. But once communism collapsed, we concluded that market forces would do the rest. Western aid to Russia peaked at just two billion dollars a year, a tiny fraction of postwar Marshall aid to Europe.

    There was a historic moment, in the early 1990s, when a "grand bargain" with the emerging post-Soviet Russia was on offer. With serious aid, we could have helped true reformers build an effective democratic state and a modern mixed economy. Instead, the Russians got laissez-faire gangster capitalism. Today, weirdly, the most effective opposition is the Communist Party.

    Economic reconstruction after World War II accepted the necessity of a mixed economy. In that era, the U.S. and the International Monetary Fund recognized that emergent economies could not be the prisoners of private speculative capital.

    The postwar system regulated private money flows and stabilized currencies, to allow nations to develop. Today's IMF perversely demands exposure to speculators as a precondition of assistance.

    Increasingly, nations like Russia and Malaysia are imposing unilateral and defensive controls on capital. But instead of being part of a coherent system of stabilization and development which includes necessary buffers, these ad hoc moves are isolationist and de-stabilizing. Until the economic priesthood of the west revises its ultra-market view of free financial flows, more such moves will follow.

    What we need is a program of stabilization and reconstruction in the spirit of the post-World War II years, with limits on speculative money flows and more development aid. Sometimes it takes a crisis to change official thinking. Let's hope conventional wisdom shifts before crisis turns to catastrophe.


    Robert Kuttner is co-editor of

    The American Prospect

    and an

    EPN Featured Columnist


    Copyright © 1998

    by Robert Kuttner. Readers may redistribute this article to other individuals for noncommercial use, provided that the text and this notice remain intact. This article may not be resold, reprinted, or redistributed for compensation of any kind without prior written permission from the author. If you have any questions about permissions, please contact The Electronic Policy Network at


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