The Rules of the Game
Only in the last two or three years has doubt about the future of global capitalism become respectable. Until 1998, the experts and pundits who advise governments and shape public opinion on the state of the world economy were uniformly ragingly bullish. There might be some turmoil in Asian currency markets, but it was nothing much to worry about. In Russia, lawlessness might be endemic, public services in ruins, life expectancy and the birthrate in free fall and the majority of the population immured in destitution, but none of this affected the consensus that the country was well on its way to making a successful transition to a Western-style market economy.
It was only when the Russian government defaulted on its foreign debts in the autumn of that year that doubts began to be felt. In the wake of the default came the collapse of a massively leveraged $100-billion hedge fund ironically calling itself Long Term Capital Management. For a while, the fund’s meltdown may have put at risk the stability of the world’s financial system--and it certainly cost a number of well-placed individuals and institutions some very serious money. From that moment onward, the project of building interconnected market economies throughout the world was no longer exempt from criticism.
Where political beliefs are concerned, events are always more compelling than arguments. Global capitalism has always been chiefly a political project. Only secondarily--and often at a long remove--is it a description of economic reality. Conceived in the shallow and ephemeral mood of triumph that followed the fall of the Berlin Wall, “global capitalism” stands for a world made over to match the beliefs and values that prevailed in a few Western countries, above all the United States, in the last decades of the 20th century. For its supporters, it is not any existing state of affairs but an ideal, a credo, virtually a religion. In “The Mystery of Capital,” Hernando de Soto attempts to explain where the project of creating free markets throughout the world went wrong and suggests how it can be rescued from even more far-reaching failures.
De Soto denies that he views capitalism as a credo. But at the end of this impassioned and thoughtful yet narrowly focused and deeply simplistic book, he writes that for him freedom, compassion for the poor and equal opportunity are much more important than any free-market doctrine. He goes on to affirm that, for the time being at any rate, only capitalism allows these goals to be achieved. Like all true ideologues, De Soto displays an impressive freedom from doubt. Capitalism, he writes, is “the only game in town.” In one broad and catholic sense, he is obviously correct. There are no longer two economic systems in the world, centrally planned and market-based, but only varieties of the latter.
In the conflict between central planning and market institutions, the market economies have won. But when he insists that there is no alternative to capitalism, De Soto is doing more than alluding to the fact that, outside of Cuba and North Korea, there are no more command economies. He is making an altogether more controversial claim. His clear message is that one particular variant of capitalism--roughly the free market type that exists in the United States at the present time--is the only way forward for developing societies throughout the world. It is impossible to draw any other conclusion from the book, if only because the history it draws upon is almost exclusively American. Other varieties of capitalism--German, Japanese or Taiwanese, for example--are barely mentioned. Though the point is never argued, it is taken as given that the only model worth considering is American. De Soto makes much of his Third World credentials as a Latin American activist and claims a universal significance for his insights, but there is nothing in his book that will not chime perfectly with the insular prejudices of American conservatives. As a result, the genuinely universal truths he restates are lost in a simple-minded paean to the free market.
De Soto argues that there is nothing in the cultures or histories of post-Communist and developing countries that would make capitalism unworkable in them. The most fundamental reason why capitalism has not been transplanted to many of them is because they have failed to put capital to work. (In this respect, he maintains, their condition does not differ greatly from that of most Western countries two centuries ago.) Countries such as Russia and Egypt have enormous assets, natural and human, but they have not converted them into capital. Their wealth is locked in “dead capital,” much of it extra-legal--in land, houses and businesses that people possess but over which they cannot effectively exercise legal title.
The mystery that De Soto believes he has solved, and which explains the failure of market economies to take root outside Western countries, is the transformation of assets and labor into fungible capital that occurs wherever the legal institution of property has been established. “Two-thirds of humanity,” he writes, “have houses but not titles; crops but not deeds; businesses but not statutes of incorporation. It is the unavailability of these essential representations that explains why people who have adopted every other Western invention, from the paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domestic capitalism work.”
*
The enduring insight that De Soto states here is the vital importance of a law of property. Without clear title, effectively enforced, there is no ownership, only possession. When most people have no enforceable title to the assets they possess, society as a whole remains poor, however wealthy some of its members may be. Without a well-developed law of property, people cannot exchange their assets for mutual benefit, long-term investment is restricted or impossible and wealth cannot grow.
No doubt many factors must be taken into account when explaining economic growth, but De Soto does not exaggerate when he claims that a well-developed law of property is the most important precondition of economic progress. He is right to remind us that the legal institution of property, more than any other single factor, has made possible the current prosperity of Western countries. In doing so, however, he is not unveiling a secret that has remained hidden from the world but is restating an exceedingly familiar truth. The importance of property rights in promoting prosperity was understood and emphasized by many 19th-century English writers, including the great liberal thinker John Stuart Mill, and a century earlier it was one of the key themes of the Scottish Enlightenment, figuring centrally in David Hume’s writings on economic policy. To describe property law as solving “the mystery of capital” is merely to give a new and hyperbolic twist to what has long been a central theme of political theory and political economy.
De Soto performs a valuable service when he notes that a lack of understanding of the institution of property was one of the sources of the West’s failure in post-Communist Russia. But in order to have the property rights required for a modern market economy, one needs a rule of law, and Western advisors underestimated the difficulties of building up the country’s legal infrastructure--if they considered it at all. De Soto does much the same. The implication of his argument is that the obstacles to establishing property rights in Russia came chiefly from intellectual failures. In fact, they arise at least partly from the absence, throughout most of Russia’s history, of a rule of law. In order to create that, a modern state is required--something which, aside from a few decades toward the end of the 19th century and then only patchily, Russia has never had.
Asking why this might be so leads quickly back to precisely the territory that De Soto dismisses as irrelevant--Russia’s distinctive culture. Worse--from De Soto’s point of view--this question opens up the prospect that economic reform in Russia may require highly selective borrowings from Western models, not the mechanical importation of the free market. By suggesting that difficult historical dilemmas can be resolved by applying simplistic ideological models, De Soto reinforces the economic dogmatism that is one of the most harmful tendencies in recent thought.
One of the many virtues of Will Hutton and Anthony Giddens’ “Global Capitalism,” a timely and extremely useful collection, is that none of the contributors claims to have a sure-fire answer to the problems of global capitalism. As befits the difficulty of the subject, a wide variety of views is represented. The book begins with a conversation, set up as a dialogue, between its editors, with Giddens voicing moderate optimism about emerging globalized markets and Hutton focusing on dangers to their stability. Then Paul Volcker, former chairman of the Board of Governors of the Federal Reserve System, cautions in his essay against the idea that the United States can remain unaffected by economic turbulence in other parts of the world, warning particularly against “a tendency in Congress . . . to pull back from international economic leadership, under the illusion that the U.S.A. can be secure in its own strength, lulled by the performance of its economy and booming financial markets.” In an incisive examination of the reforms needed to prevent large-scale crises such as occurred in the autumn of 1998, George Soros displays an insight into the workings of global markets that is rarely found in politicians and professional economists.
Some of the most interesting contributions in “Global Capitalism” come from sociologists. Ulrich Beck considers the interaction between globalization and increasing individualization of lifestyles, while Richard Sennet asks how personal identity is affected by highly flexible patterns of working life which provide no security of employment or status in society. In a short paper of magisterial scope and depth, Manuel Castells argues that, with the rising productivity and falling costs produced by information technology, global capitalism at the turn of the century faces the prospect of deflation. This may result in serious costs for some regions and large potential benefits for others.
These and other contemporary dilemmas, one realizes, will not be resolved by refurbishing old ideologies. Something more difficult is required: undogmatic thought and intelligent improvisation by government, business and society. Unburdened by ideological certainty, socialist or free-market, the contributors to “Global Capitalism” show what it means to begin to understand the novelties and paradoxes of globalization.