Frieden: Will Global Capitalism Fail Again?

Frieden, J. 2006. Will Global Capitalism Fall Again? Presentation for BRUEGEL's Essay and Lecture Series. Brussels, June.

"Over the past thirty years, the world economy has become increasingly integrated. Despite continued conflict over globalization, most people--especially in the industrialized nations--appear to accept that an international system in which goods and capital can move quite freely among countries has become the normal state of affairs, and is likely to continue for the foreseeable future" (7).

However, while there is agreement that a certain kind of phenomena is occurring, there is no consensus as to whether or not this change is occurring for the better. Many look back to the most notable previous era of globalization, that occurring in the years previous to 1914, and note that the system produced stable economic growth, high degrees of convergence over a great many of years. Understanding if our current economic system will fail requires that we possibly explore how the previous system failed.

"Why could the first era of global capitalism not be restored? It was not for lack of trying. For twenty years after World War I ended, statesmen and diplomats engaged in round after round of conferences and consultations. The nations of the world signed treaties, created international organizations, and committed themselves to new obligations, in unprecedented measure. Yet nothing seemed to work" (11).

"The underlying sources of weakness in the international economic order after 1918 were political" (11).

"International political problems introduced great instability into the inter-war political economy, but I would focus attention on an even more important source of conflict: domestic politics. For in addition to international political conditions conducive to a functioning, integrated international economy, there are also domestic political requisites. And in my view, the principal problems that affected and infected the international economy in the inter-war period were domestic and political" (12).

"The classical international economy of the gold standard era rested upon a consensus among elites about the priority of international economic commitments. In virtually every country, for virtually all of this period, economic and political leaders agreed that governments needed to ensure that their economies would adjust quickly to changing international economic conditions, rather than the other way around. They agreed on requiring the domestic economy to pay the price necessary to realize the benefits of integration into the world economy. And what was that price? What did it mean for the national economy to, as they said, 'take the strain?' Typically it meant allowing, or forcing, prices, profits, and wages to drop in response to adverse terms of trade or other shocks" (12).

Domestic politics did not represent such a constraint on elites controlling the flexibility of prices, wages in the interest of global economic stability. This was mainly because countries were either only slightly democratic or not democratic, and that organized labor had yet to establish itself firmly.

"To summaries and generalize, the first age of globalization worked because it was economically and politically feasible for governments to do what was necessary to sustain their international economic commitments. IT was not restored after World War I because these enabling conditions were no longer present. Keynes drew his conclusions early on: it was, he said exceedingly dangerous 'to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses'" (14).

"Despite the warnings from Keynes and others, when difficulties arose in the 1920s, and especially in the 1930s, there was initially little or no political viable response" (15).

"The lessons of history are rarely simple. But there are some things we can learn from the experiences of the past century, especially from how the first era of global capitalism fell and how it rose again. In the aftermath of the age of globalization that ended in 1914, attempts to restore and sustain the system led to a resounding failure and a terrible backlash. While that backlash may not have been justifiable, it was at least understandable" (30).

"Compromises between globalism and nationalism, and between social reforms and markets, permitted the Western economies to grow rapidly and stably after World War II...Today capitalism is at least as global as it was in the decades before 1914, which raises the specter of a return to the failures that ended that earlier episode of global capitalism. And so the central challenge of our portion of the twenty-first century will be to avoid a repetition of past tragedies, of both sorts...This will require a delicate balancing act...The first part of it is to build and sustain a functioning, integrated, international political and economic order...The second part of the balancing act is to create and sustain domestic political and economic conditions that allow enduring support for international commitments" (31).