What’s wrong with global capitalism?

False Dawn: Delusions of global capitalism
by John Gray
Granta Books £17.99

While reading John Gray’s False Dawn, a diatribe against global capitalism, I had to keep reminding myself that I was reviewing a book, not a person. Gray’s intellectual gyrations have become legendary. I am told he was a socialist in the 1970s. He was a Thatcherite in the 1980s. (The Iron Lady once said to me: “What ever happened to John Gray? He used to be one of us.”) Then he adopted the fashionable communitarianism. Judging from his latest book, he is what Marx would have called a “Reactionist” – with hope extinguished, but with a lively apprehension of disaster. He plays each role with passion and panache. But with so much here today, gone tomorrow, it is hard to know how seriously to take his arguments.

These are very much hit-and-miss. Half-way through reading False Dawn, an economist friend of mine exclaimed in exasperation “This is the worst book I have ever read. In almost every sentence there is a mistake, every statement is questionable.” I would put it more generously. For one thing, Gray can write.

His prose crackles with analytic energy. There are intermittent flashes of good sense. He says things about the varieties of capitalist forms, and the requirements for a civilized life, which are wise and true. He understands perfectly well that our future may be neither paradisaical nor hellish, but something in between. Then all of a sudden he goes off the rails, leaving the reader with a violent feeling of resistance to his exaggerations, distortions, and his whole intellectual personality.

This is a great pity, because Gray is writing about a centrally important subject. It has become almost a cliche to say that globalization is reconnecting the last decade of the twentieth century to the first decade, putting paid to the pathological and even benign forms of statism which dominated the intervening years. As The Economist quipped: “Communism was a long detour from capitalism to capitalism.” The question is whether the new globalism, based on markets, will auto-destruct like the old globalism did.

A brief summary of Gray’s thesis would go like this. Since the 1980s, there has been a determined attempt by something called the “Washington consensus” to impose free-market liberalism on the world. The collapse of Communism created the illusion that America had “won” the ideological war. It was an illusion, according to Gray, because laissez-faire economics can no more be realized than can Communism. They are twin stems of what he calls the “Western Enlightenment project” – the belief that the world can be reshaped according to the dictates of reason. Both are failed or failing utopias. Just as Communism failed to realize the brotherhood of man, global capitalism will fail to bring about universal harmony. It does not spawn a “single” global economy but a congeries of rival, resentful, rancorous national capitalisms which will become locked in a life-and-death struggle. Today’s regime of global markets, Gray tells us, will be briefer than even the belle epoque of 1870 to 1914, since a regulatory framework for the world’s diverse economies “figures on no historical or political agenda”. He writes, “We stand on the brink of a tragic epoch, in which anarchic market forces and shrinking natural resources drag sovereign states into ever more dangerous rivalries. A deepening international anarchy is the human prospect.” One cannot get much gloomier than that. In the attempt to interpret the post-Communist world, Gray plays Jeremiah to Fukuyama’s Pangloss.

Before discussing the nature and substance of Dr Gray’s argument, let me say a word about its auspices. Gray stands in a long line of critics of capitalism.

He does not add anything to Karl Marx’s superb passages on capitalism in the Communist Manifesto, published 150 years ago. “The bourgeoisie”, Marx wrote, cannot exist without constantly revolutionizing the instruments of production, and thereby the relations of production, and with them the whole relations of society. Uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois era from all other ones.

All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new formed ones become antiquated before they can ossify. All that is solid melts into air, all that is holy is profaned . . . .

This powerful caricature captures a likeness which we can all recognize, namely the insatiable restlessness of capitalist civilization. And Marx was equally prescient about its globalizing propensities: “The need of a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe.”

A more direct borrowing is from The Great Transformation (1944) by Karl Polanyi. Gray follows Polanyi in distinguishing between markets “embedded” in social relations, which Polanyi saw as “natural” to human society, and the attempt to create a “free” market system which pulverizes all social relations. It is the latter which is utopian and has to be “created by state coercion”.

Curiously, Gray omits the essence of Polanyi’s distinction between “social” and “free” markets. “Social” markets are confined to goods, whereas the free-market system incorporates the factors of production. It was the attempt to subject land, labour and capital to the logic of buying and selling which, for Polanyi, constituted the core of the nineteenth-century liberal project; and the resistance to this attempt which eventually produced the social-democratic welfare state. As John Gray tells it, dismantling society’s defences against free markets is at the heart of the contemporary “neo-liberal” project.

Both Marx and Polanyi were optimists. But the consolation of optimism is no longer possible for Gray. Capitalism does not pauperize the worker as Marx thought it would, but constantly enlarges the numbers of the affluent; more and more people and countries move up the income ladder. So Marx’s own terminus, the revolution, is cut off. Gray reworks the Marxist categories in describing the delayering, down-sizing effects of the new information technology: “The result is a re-proletarianization of much of the industrial working class and the de-bourgeoisification of what remains of the former middle classes.” But his is not a revolutionary scenario. It is capitalism, not Communism, which abolishes classes. Since all global markets make social democracy unviable, we are left with a world of disoriented masses, ready to be mobilized under the banner of xenophobic nationalism. The historical model for this sort of relapse is fascism.

The most obvious thing about this kind of argument is its excessively abstract character. I once chaired a debate between Gray and the Harvard economist Jeffrey Sachs, at which Gray accused Sachs (and his kind) of ignoring the historical particularities of different societies. But what struck me (and others) was that Gray was right up in the air, whereas Sachs actually knew a great deal about the different societies whose governments he had been advising. Like many whose reverence for history and culture is essentially Olympian, Gray’s knowledge of the historical and cultural terrain is very sketchy. For example, he implies that it was the stresses and strains of capitalist civilization which brought about the destruction of the first globalist “project” in 1914, without bothering to consider whether autocratic rule in Germany, Austro-Hungary and Russia might have had something to do with it. Those who argued that trade would have a pacifying effect never neglected the importance of responsible government. Today’s world is much more democratic than that of 1914, and I know of no case of democracies going to war with each other.

Gray’s account of the dislocating effects of capitalist civilization is also highly overwrought. The market system brings great benefits to most of its participants, but it is an inherently difficult discipline, which goes against deep-seated tribal instincts. The possibility of anti-market movements is therefore always there. But Gray fails to make a distinction, crucial to any sensible discussion of this matter, between stress and instability. Indeed, he conflates the two all the way through. Most people are fairly adaptable, and a sizeable minority welcome challenges. They are also very adept in preserving old forms of life in new conditions. What is lethal for a market-based order is violent instability, because this severs the connection between effort and reward. Keynes understood this better than anyone, and it is an insight we need to regain – for example, in our international monetary arrangements. The fluctuations of the dollar, the yen and the yuan certainly contributed to East Asia’s financial crises. But a general rant does nothing for clear thinking.

Gray discusses the impact of free-market economics in various parts of the world. His general conclusion is that they have produced, or contributed to, social breakdown and rising inequality wherever they have been tried. It is far from clear whether he attributes these consequences to globalization per se, to new technologies, or to the “intellectual fashion” for free markets, and what the relationship between these three things might be.

On the one hand, we are told that globalization has created competing capitalisms subject to a kind of Gresham’s Law, with the bad driving out the good. The paradigmatic “bad” economy is the United States. Gray’s hatred of American capitalism is visceral; free markets there are apparently responsible for the policy of “mass incarceration” – a phrase repeated many times with evident relish. At any rate, having reproletarianized its own people through down-sizing, delayering and other heinous practices, “American free markets work to undercut both European and Asian social market economies”, which are burdened with social costs. What is it about America that drives everyone else down? Gray argues that, “in the contest between free market economies and social market systems, free markets are often superior in productivity”. He talks about American productivity “steadily rising”. Yet on the previous page he writes, “US employment has grown as fast as it has partly because US productivity (he means “growth of productivity”) has been low – around half that of most European countries”. Elsewhere Gray claims that “the root cause of falling wages and rising unemployment is the worldwide spread of the new technology”. He then states correctly that “wage rates in any economy are determined by its domestic labour market, not by wage rates in other countries”. It is not possible to reconcile these various assertions. If Gray were thinking clearly or honestly about these things, he would be forced to admit that globalization has not had much effect on patterns of domestic income distribution. Nor has it been “global markets . . . which make social democracy unviable”. Globalization has nothing whatsoever to do with the crisis of the welfare state. Rather, this crisis reflects “tax resistance”, an increased unwillingness to pay for social programmes by the average taxpayer. Nowhere in this book is the important phenomenon of “tax resistance” treated properly.

Gray’s most serious mistake is to attribute to free-market policies the pains and dislocations involved in admittedly often botched attempts to escape from previously controlled economies experiencing crisis or breakdown. This vitiates a large part of his discussion of the effects of free-market capitalism in Russia, New Zealand and Mexico. His account of post-Communist Russia, while factually accurate, is almost worthless as interpretation, because he makes no allowances for the extent to which the system had ceased to function under Gorbachev.

He states that a major shift in New Zealand’s policy “may have been unavoidable”, but makes no mention of the stagnant and debt-ridden state of the New Zealand economy when the reforms began fourteen years earlier. The adjustment costs – worsened by poor sequencing of reforms – were a by-product of liberalizing an economy which had become one of the most over-regulated and inefficient in the Western world. Contrary to Gray’s assertion that “income inequalities increased in New Zealand more than in any other western countries”, the increase in income inequality which occurred with rising unemployment has, in fact, been arrested since the labour market was freed up in 1991 and unemployment started falling.

Similarly, the calamities which have befallen Mexican society are not the consequence of the so-called “neo-liberal” project, but the product of many years of state intervention in, and massive regulation of, the Mexican economy, a “project” that was no longer sustainable by 1982. In particular, the number and type of state-owned industries reached ridiculous proportions by the end of Lopez Portillo’s regime. Gray attributes the revolt of Chiapas to neo-liberalism. In fact, the misery of this region was a direct consequence of decades, if not centuries, of arbitrary government intervention.

It is not the individual mistakes or questionable interpretations which are depressing but the cumulative effect of the whole. Hayek was once asked why he didn’t review Keynes’s General Theory. There was no point, he replied. “By the time I would have finished my review, he would have changed his mind.” In fact, Keynes did not change his mind. But I hope John Gray will change his. He has a great contribution to make – if only he can steer a steadier course.