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DLC | The New Democrat | July 1, 1998
The Harder They Fall
Liberal Capitalism's Victory Over the Advocates of Seizing "The Commanding Heights"

By Fred Siegel

The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World
By Daniel Yergin and Joseph Stanislaw
Simon & Schuster
(457 pp., $26.00)

Woodrow Wilson would be pleased to know that the world finally has been made safe for democracy. It was Wilson, a staunch proponent of free trade, who began America's century- long struggle against authoritarian alternatives to liberal capitalism and who vied with Lenin for the allegiance of colonized peoples aspiring to freedom. Wilson's insistence that the world's future lay in following an American course was much mocked as the idealist maunderings of a priggish professor cum Presbyterian preacher. His "realist" detractors insisted that power politics and government-run economies would be the defining forces of the 20th century.

With the collapse of the Soviet Union, we have at long last witnessed the triumph of what has been called the "Consumerist Non- believer International" -- the dawning of the Wilsonian world of global trade. But the dour Wilson, who was as ardent a nationalist as he was a free trader, would have considered this an imperfect victory. It's very likely that he would have been deeply troubled by the weakening of national identity and collective purpose in the new global economy.

Daniel Yergin and Joseph Stanislaw's The Commanding Heights can be read as a vindication of Wilson's vision. Their story's broad outlines are well-known: how government mushroomed relative to the market earlier this century and how that pattern reversed itself in our own times. Indeed, the problem of market failure in the early 20th century has been largely replaced by the problem of government failure today. What the authors add to the tale in this very readable book is a wealth of anecdotes as well as concise histories of the emerging Asian and Latin American economies.

"National Champions"

Lenin coined the phrase "the commanding heights" in 1922 when he temporarily relaxed government controls over Soviet agriculture even as he maintained a tight grip on big industry. The phrase symbolized the principle that in the name of economic development and national security it was imperative for government to control key economic sectors such as steel making and transportation -- to take the "commanding heights." Lenin had no idea his battle cry would be appropriated by the British Fabians (socialists who denied the need for violent class struggle) and later transmitted around the world to developing nations. The phrase eventually came to encompass the government policy of promoting home-grown "national champions" (e.g., the French car maker Renault and the Italian petrochemical company ENI) while granting the rest of the economy a measure of freedom.

Clement Atlee, the social worker who replaced Churchill as British prime minister in the closing days of World War II, explained that by seizing the commanding heights, government would place "the welfare of the nation before any section" or narrow interest. After decades of depression and war, capitalism in those days seemed to be on its last legs in Europe. In Germany, the right-of-center Christian Democrats declared that "the capitalist economic system had failed the national and social interests of the German people." Meanwhile, in Britain, the famed historian A.J.P. Taylor declared that "nobody in Europe believes in the American way of life -- that is, in private enterprise."

In postwar France, adherence to central economic planning and Keynesian fiscal policies yielded the period known as Les Trente Glorieuses -- three "glorious" decades of economic growth. When a British heckler went after Prime Minister Harold Macmillan at a 1957 political rally, Macmillan, a Tory Keynesian whose family business had published the fabled economist's writings, responded, "You never had it so good." Macmillan was right: Government- controlled economies in Europe were producing impressive results. To their credit, Yergin and Stanislaw acknowledge as much in their book and do not try to explain away these successes in light of contemporary failures.

The Permit Raj

Although variants of socialism were effective in Europe for a time, they wrought disaster elsewhere. Inspired by the "bright flame" of Soviet civilization, Indian Prime Minister Jawaharlal Nehru rejected both foreign trade and the "village idiocy" of Gandhi in favor of socialist autarchy. The new India generated engineers in abundance but also produced what Yergin and Stanislaw describe as The Permit Raj -- "an almost incomprehensible maze of quantitative regulations, quotas, tariffs, endless permits, and industrial licenses" that stifled the economy while corrupt insiders grew rich.

The Hindustan Fertilizer Corp. was part of the 26 percent of the Indian economy that was state owned. After a dozen years of operation, as Yergin and Stanislaw describe it, the company's "1,200 employees were clocking in every day, as they had since the plant had officially opened" in 1979. The only problem was that the East European-equipped plant "had yet to produce any fertilizer for sale." The machinery didn't work, but "everyone just pretended that it was operating" until the factory was shut down in the post-Cold War reforms of 1991.

Similar pretense was on display in Ghana, which under the leadership of American-educated Kwame Nkrumah gained independence from Britain in 1956. Before coming to power Nkrumah promised that "if we get self-government, we'll transform the Gold Coast into a paradise in 10 years." Influenced by both the Soviet and Indian examples, Nkrumah established himself as "the Great Redeemer" in a one-party state dedicated to ruinous Soviet-scale projects such as the massive Volta River dam. State-run marketing boards, meanwhile, imposed artificially low prices on the country's primary crop, cocoa, to finance the "big man's" schemes. When the farmers stopped farming, as the Soviet experience should have fore-told, the nation was left bankrupt. Increasingly autocratic and beset by a crumbling economy, Nkrumah, the herald of African socialism, was overthrown in a coup in 1966.

The weakness of Soviet-inspired Third World regimes was masked for a time by widespread international hostility to the American war in Vietnam and the seeming success of the Arab oil embargo of 1973-74 (one of whose great beneficiaries was the Soviet Union, a major oil exporter). The impression was that power was shifting from free-market economies in the West to more tightly controlled economies in the Third World. It was and it wasn't.

Developing nations that attached themselves to the world economy began to prosper while those that did not fell behind. Consider the case of the so-called Asian Tigers. As Yergin and Stanislaw note, in "the mid 1950s, Peru's economy had been superior to Taiwan's, and both had had per capita incomes of under $1,000." Taiwan pursued an export strategy while Peru, under a series of socialist leaders, pursued home-grown development. By 1990, Peru's annual per-capita income had fallen to about $500. Taiwan's, meanwhile, had risen to $7,500. In the words of Peruvian novelist and failed presidential candidate Mario Vargas Llosa, "you cannot be a modern man and a Marxist."

What Doomed Socialism?

Why did state-led economies decline? Yergin and Stanislaw are weak here. More a narrative history than an analysis, their book points to several possible explanations. Government bureaucrats, they note, simply were unable to respond to the changes wrought by high-speed, high-tech production. Meanwhile, the cost of the welfare state spun out of control as individuals and interest groups figured out how to "game" its benefits as an alternative to productive work. Finally, the controlled inflation of Keynesianism became an uncontrolled danger to stable prices. As one former Carter administration official put it, "How easy it was to be a liberal back when there was 4.9 percent unemployment and 2 percent inflation. You could spend a point or two on inflation to get unemployment down."

In the post-Soviet world, socialism has retreated back into its European redoubt. The German SPD is once again the world's leading social democratic party, just as it was 100 years ago. If Europe seems to have come full circle, it is in part due to a factor mentioned only in passing in the book: the impact of peace.

Yergin and Stanislaw fail to take full account of the fact that the militarized German economy of World War I served as the model for the Soviet economy. Class warfare and international warfare alike depended on total mobilization. As Franco Bernab, chief executive of the Italian state petroleum firm ENI, explains last year's decision to privatize the company, "a state company has to do with war, [and] national interest economies were adapted to war until 1990." On the other hand, he continues, privatization "is driven by the absence of war and by the opening of the international system." Wilson would have agreed.

There is an underside, though, to the victory of Wilson's cosmopolitan internationalism. The social solidarity that served to reduce intranational differences was, in large measure, a product of the very events, depression and war, that expressed themselves in an expanded government. Today, global trade advances the economy even as it undermines the sense of collective identity all governments depend on.

Wilson often spoke of a politics of the "common good." The challenge for his admirers now is to foster the sense of common purpose and find ways to help those who are at risk of being left behind in the Wilsonian world of global trade.

Fred Siegel is a New York-based senior fellow with the Progressive Policy Institute and the author of The Future Once Happened Here: New York, D.C., L.A., and the Fate of America's Big Cities (The Free Press, 1997).