At the dawn of the 21st century, countries in both the Global South and the former communist bloc were falling over each other to lower their trade barriers, liberalize their capital markets, and encourage their best and brightest to study in the West. Multinational firms were expanding their supply chains to bring workers from Mexico, China, Vietnam, India, and Russia into their fold. The internet had created entirely new ways for information to cross borders. Labor productivity was soaring and global poverty was falling.
U.S. politicians largely embraced this trend. Republicans and Democrats cooperated to negotiate trade agreements with both longtime friends and former foes. All this took place in a context of public optimism: In January 2000, 69 percent of Americans told Gallup they were satisfied with the country’s direction.
Two decades later, things have not quite worked out the way many champions of free trade hoped at the end of President Bill Clinton’s administration. Neither China nor Russia turned into liberal, free market democracies. Two decades of unending war have been peppered by financial crises, populist uprisings, and pandemics. Russia’s invasion of Ukraine and the ensuing sanctions are merely the latest shock to the system.
Countries are now falling over each other to erect new barriers to trade, impose capital controls, and restrict migration flows. U.S. politicians have embraced this trend too: The strongest throughline between the Donald Trump and Joe Biden presidencies has been their hostility to economic openness. All this is taking place in a context of public pessimism: In March, just 22 percent of Americans told Gallup they were satisfied with the country’s direction.
The souring of the 21st century has triggered accusations and recriminations about who bears responsibility for the end of “the end of history.” Free trade advocates note the enormous benefits that economic liberalization has brought to the global economy and decry the rise of neo-mercantilism in the United States and elsewhere. But free trade’s critics offer a challenging rebuttal: They argue the last two decades have exposed the internal contradictions of neoliberalism. As they see it, we’re witnessing the natural response of societies buffeted by the vicissitudes of the free market; economic openness sowed the seeds of its own destruction.
There is a kernel of truth to this. But a kernel of truth is not the whole truth, and globalization’s proponents do not need to completely rethink their priors. The benefits of trade and international engagement persist even in the current era.
Advocates of free markets still have a strong case to make, and they need to make it. This particular argument against an open global economy has been made before. When it triumphed, the result was world war.
To understand the intellectual roots of today’s resistance to free markets, the book to examine is Karl Polanyi’s The Great Transformation.
Polanyi, writing in 1944, wanted to understand how the world had arrived at a low moment of depression, fascism, and war. Where writers like F.A. Hayek saw socialism’s rise as a tragic result of state interference in free markets, Polanyi viewed it as the ineluctable backlash against those same markets’ volatility.
There are three arguments in The Great Transformation that require recognition and response from free market enthusiasts. First, Polanyi pushed back vigorously against the assumption that unregulated markets were the “natural” state of the world. Governments take concerted action, Polanyi noted, to maintain the modern capitalist system.
One present-day example is intellectual property rights. To incentivize innovation and creativity, governments enforce laws that protect trademarks, patents, and copyrights. If the state did not do that, innovation would be lower but diffusion would be much more rapid, as films, software, and pharmaceuticals would be pirated almost immediately. The tradeoff of more innovation for less diffusion might be worth it, but getting there requires purposive government action.
Polanyi’s second argument was that the ultimate result of laissez faire policies is “the demolition of society.” According to The Great Transformation, human beings inevitably resist efforts to turn labor into a commodity. Market liberalization would produce rising inequality. And then, Polanyi’s predictions turned rather gloomy: “Robbed of the protective covering of cultural institutions, human beings would perish from the effect of social exposure; they would die as the victims of acute social dislocation through vice, perversion, crime, and starvation. Nature would be reduced to its elements, neighborhoods and landscapes defiled, rivers polluted, military safety jeopardized, the power to produce food and raw materials destroyed.”
Finally, Polanyi described what he called the “double movement.” If the state consciously tried to create a marketplace disembedded from the rest of society, it would trigger blowback against markets. Exactly how that double movement manifested itself could vary. While socialists might call for expanded state support of the less fortunate, another possible response would be xenophobic nationalism. Polanyi drew a straight line from 19th century globalization to the horrors of the 1930s and ’40s.
How accurate is all this in describing the current moment? If we look at the United States, we can see undeniable similarities. The hidden shocks from liberalizing trade with China and migration from Latin America, combined with the very prominent shock of the 2008 financial crisis, produced a lot of social disruption in the last 15 years. Throw in climate change, a pandemic, and great-power rivalries, and suddenly Polanyi’s hyper
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