Revenge of the Communists

At the height of U.S.-Soviet collaboration during World War II, Franklin Roosevelt imagined a fusion of economic systems: 60% ours, 40% theirs. The collapse of the Berlin Wall and breakup of the Soviet Union would seem to have consigned this vision to the dustbin of history. But Yale's Jeffrey Garten, marking The unsettling zeitgeist of state capitalism in today's FT, suggests that "the era of free markets unleashed by Margaret Thatcher and reinforced by Ronald Reagan is fading away." Garten brings the surging growth of China, Russia and India into focus as a retooled statism that retains a strong tincture of communist aims and impulses.

While Garten acknowledges that "governments are reacting against the excesses of free markets" - citing "soaring income inequality," unsupervised product quality and poor financial risk management - he sees this turn of the wheel mainly as a negative:

The implications are worrying. While prudent regulation in selected areas can be justified, the new zeitgeist is likely to produce too much government intervention, too fast. We can expect less productivity, less innovation and less growth, since governments have many goals that the private sector does not. These include employment generation, income redistribution and the aggrandisement of political power. The expansion of regulation will also open up new possibilities for trade disruption. For example, countries may block the importation of goods that do not meet their precise national environmental standards.

Since Garten acknowledges "soaring income inequality" as an "excess," one might think he would acknowledge the need for a degree of income redistribution. And many would consider strict enforcement of national environmental standards a good thing. Most Americans, on the other hand, would regard the post-Communist mix of one-party dictatorship and state-controlled capitalism "worrying." But wherever one stands on the free market/state regulation spectrum, Garten has brought a really arresting global trend into sharp focus. He sees state intervention on the rise not only in the post-communist east, but in the US, the EU, China and the WTO.

Even during the Cold War, there was wide variation within the free world in the degree of state control over the economy; France, Japan and Korea achieved high growth rates in economies in which priorities and investment were heavily shaped by the government. It's true that for a long season, chronic economic woes in Japan and Europe seemed to auger a continuing shrinking of the welfare state, state ownership of economic resources, and state regulation. But now, Garten shows, the pendulum is swinging back toward governmental assertiveness. The EU is showing renewed competitive vigor vis-a-vis the U.S., and in the U.S. itself, a still-tentative but emerging confidence in the Democrats seems to point toward universal health coverage, stronger environmental regulation, and rollback of the Bush tax cuts for the wealthy. Plainly, the end of economic history has been greatly exaggerated.