Globalization’s Latest Last Stand by Robert Skidelsky
As the world increasingly turns away from economic integration and cooperation, the second wave of globalization, like the first wave in 1914, threatens to lead to fragmentation and conflict. To avert catastrophe, strong political foundations must be developed that can sustain a stable international order.
LONDON – Is the world economy globalizing or deglobalizing? The answer would have been obvious in 1990. Communism had just collapsed in Central and Eastern Europe. In China, Deng Xiaoping unleashed capitalist entrepreneurship. And political scientist Francis Fukuyama famously proclaimed the “end of history,” by which he meant the triumph of liberal democracy and free markets.
Years earlier, the British economist Lionel Robbins, a firm believer in free markets, had warned that the shaky political foundations of the post-war international order could not sustain a globalized economy. But in the euphoria and triumphalism of the early 1990s, such warnings fell on deaf ears. After all, this was a “unipolar moment,” and the closest thing American hegemony had to world government. With the victory over the Soviet Union, it was thought, the last political obstacle to international economic integration had been removed.
Blinded by abstractions, economists and political scientists should have paid more attention to history. Globalization, they would have learned, tends to come in waves and then recede. The first wave of globalization, which took place between 1880 and 1914, was made possible by a huge reduction in the cost of transportation and communication. By 1913, commodity markets were more integrated than ever, the gold standard maintained fixed exchange rates, and capital—protected by empires—flowed freely and at low risk.
Unfortunately, this golden age of liberalism and economic integration gave way to two world wars separated by the Great Depression. Trade contracted to 1800 levels, capital flows dried up, governments imposed tariffs and capital controls to protect industry and employment, and the largest economies were divided into regional blocs. Germany, Japan and Italy went to war to form their own blocs.
The second wave of globalization, which began in the 1980s and accelerated after the end of the Cold War and the rise of digital communications, is now rapidly retreating. The global trade ratio fell from a peak of 61% just before the 2008 financial crisis to 52% in 2020, and capital movements have become increasingly restricted in recent years. As the United States and China lead the formation of separate geopolitical blocs and the global economy gradually shifts from interconnectedness to fragmentation, deglobalization appears to be in full swing.
To understand why globalization collapsed for the second time, it is worth reviewing John Maynard Keynes’ memorable description of London on the eve of the First World War. “The projects and policies of militarism and imperialism, of racial and restriction and exclusion, which were to snake out this paradise,” he wrote in 1919, “were little more than amusements [the investor’s and consumer’s] daily newspaper and seemed to exert almost no influence on the ordinary course of social and economic life, the internationalization of which was almost complete in practice.”
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In our time, geopolitics once again threatens to disrupt the international order. Trade, as Montesquieu observed, has a pacifying effect. However, free trade requires strong political foundations capable of relieving geopolitical tensions; otherwise, as Robbins warned, globalization becomes a zero-sum game. In retrospect, the failure to make the United Nations Security Council truly representative of the world’s population may have been the original sin that led to the current backlash against economic opening.
But geopolitics is not the only reason the second wave of globalization has failed. The neoliberal economics that dominated policy making in the 1980s fueled global instability in three ways.
First, neoliberals fail to take uncertainty into account. The efficient market hypothesis – the belief that financial markets correctly price risks on average – provided an intellectual basis for deregulation and blinded policymakers to the dangers of financial liberation. In the run-up to the 2008 crisis, pundits and multilateral institutions, including the International Monetary Fund, were still claiming that the banking system was safe and markets were self-regulating. While it may sound ridiculous in hindsight, similar views mean that banks continue to undervalue economic risk today.
Second, neoliberal economists failed to perceive global imbalances. The quest for market-driven economic integration accelerated the shift of manufacturing production from developed to developing countries. Contradictorily, however, this also led to a flow of capital from poor to rich countries. Put simply, Chinese workers supported Western living standards while Chinese manufacturing decimated Western manufacturing jobs. This imbalance has fueled protectionism as governments respond to public pressure by restricting trade with low-cost producers and contributed to the fragmentation of the global economy into rival economic blocs.
After all, neoliberal economics is indifferent to rising inequality. After four decades of hyper-globalization, tax cuts and tax tightening, the richest 10% of the world’s population owns 76% of total wealth, while the poorest half owns just 2%. And as more and more wealth falls into the hands of tech speculators and scammers, the so-called “effective altruism” movement has invoked Laffer curve-style logic to argue that it would encourage the wealthy to work for charities to donate to causes if they allowed the rich to get richer.
Will the second wave of globalization end in a world war like the first? It’s certainly possible, especially given the lack of intellectual weight among current world leaders. To prevent a further descent into global chaos, we need bold ideas that build on the economic and political legacy of Bretton Woods and the 1945 UN Charter. The alternative could be a more or less direct route to Armageddon.