OXFORD REVIEW OF ECONOMIC POLICY, VOL. 15, NO.

TWENTIETH-CENTURY POLITICAL
ECONOMY: A BRIEF HISTORY OF
GLOBAL CAPITALISM

JEFFREY D. SACHS
Harvard University

Modern capitalism emerged in the early nineteenth century in western Europe and the European offshoots
of the Americas and Oceania. Recognizing the unparalleled dynamism of the new socio-economic system,
Marx and Engels predicted in 1848 that capitalism would spread to the entire world. By the end of the
twentieth century, that prediction was confirmed: capitalism had indeed become global, but only after a
tortuous and violent course of institutional change in many parts of the world. This paper provides a brief
account of the emergence of global capitalism, and discusses some of the reasons why the diffusion of
capitalism has been so conflictual and violently contested.

I. INTRODUCTION restoring central planning or comprehensive state

ownership. The governments of the world have
When communism collapsed in Eastern Europe in embraced Adam Smith as never before, at least on
1989, the running quip was that socialism was simply the rhetorical level.
the longest road from capitalism to capitalism. The
socialist detour, which carried along roughly one- It is not just the post-communist economies that are
third of humanity as of the mid-1980s, has nearly going through deep institutional change at the cen-
vanished by the end of the twentieth century, the tury’s end. Virtually the entire developing world has
result of de-communization in Eastern Europe, the been abandoning key assumptions of state-led de-
collapse of the Soviet Union in 1991, and China’s velopment adopted in the wake of national inde-
adoption of market reforms after 1978 (even if pendence by state-builders such as Nasser, Sukarno,
under one-party rule). Though the post-communist Ataturk, and Nehru. Even the long-independent
societies face enormous economic, social, and po- states of Latin America came to view themselves as
litical challenges, not one has the announced goal of semi-colonial or ‘dependent’ economies in the wake

90 © 1999 OXFORD UNIVERSITY PRESS AND THE OXFORD REVIEW OF ECONOMIC POLICY LIMITED
 J. D. Sachs

of the Great Depression, and they too adopted statist become bourgeois themselves. In one word, it creates a
models of development similar to those of the post- world after its own image.
colonial nations. Those statist models are now being
abandoned, though heated debates continue about In this light, 1989 can be seen as a watershed
the appropriate role of the state in the economy. predicted by Marx, though one that arrived perhaps
a century later than Marx might have expected.
By the end of the twentieth century, almost all of the
world nations—even the very poorest countries— Let’s be clear, however. The rest of Marx’s predic-
have adopted the basic framework of modern capi- tions, about the demise of capitalism following the
talism, though few societies have done so without immiserization of the masses, turned out to be wildly
deep and continuing controversy. The twenty-first off base. These errors in forecast can be traced to
century opens with a recognizable international Marx’s reliance on a very crude labour theory of
system that can be fairly characterized as global value, according to which Marx claimed that the
capitalism, though it is a system fraught with social income of capitalists resulted from the exploitation
conflict and political contestation at the national and of labour. Marx fundamentally misunderstood that
international levels. As has been true for much of economic value is created not only by labour, but
the past two centuries, capitalism continues to be also by entrepreneurship, saving, and technological
viewed in much of the world, especially the poorer progress. Marx’s most deadly legacy, indeed, was
countries, as a system of exploitation rather than as the interpretation that gaps in income between rich
a reliable path to economic prosperity. Many gov- and poor are caused by exploitation rather than
ernments are turning to capitalist institutions out of differences in productivity. This Marxist attack on
the exhaustion of alternative models, or in order to wealth as ill-gotten exploitation fuelled most anti-
curry favour with powerful nations, rather than out capitalist ideologies of the twentieth century.
of any particular conviction that market reforms will
solve long-standing problems of economic back- Standing at the end of the twentieth century, we can
wardness. survey the traumas that accompanied the transfor-
mation to global capitalism. Capitalism did batter
Though 1989 was hailed everywhere as the collapse down the Chinese walls, and often with guns rather
of Marxism, in one sense it represented the fulfil- than cheap commodities. The first conflict of the
ment of one of Marx’s most famous predictions. modern capitalist era, the Opium Wars between
Writing in The Communist Manifesto in 1848, Britain and China (1839–42), was fought to make
Marx and Engels portrayed the newly emergent the world safe for free trade in narcotics. Other
capitalist system of western Europe as historically wars of colonial conquest followed, especially in
unprecedented in its dynamism and productivity, so Africa and Asia. But even when countries (or at
dynamic and productive in fact, that the whole world least their ruling élites) had their own choices to
would become capitalist, forced to change in re- make, they rarely adopted capitalist institutions as a
sponse to the awesome capacity of Western econo- first resort. Despite the clear association of modern
mies. capitalism with the richest countries in the world,
most of the poorer countries rejected capitalist
They wrote: models until they had tried a number of alternatives.
Many of those detours—especially socialism and
The bourgeoisie, by the rapid improvement of all instru- national socialism—imposed horrific costs on these
ments of production, by the immensely facilitated means societies and on others that got in their way.
of communication, draws all, even the most barbarian,
nations into civilization. The cheap prices of its commodi-
ties are the heavy artillery with which it batters down all
This article tries to shed some light on the patterns
Chinese walls, with which it forces the barbarians’ in- of diffusion of capitalist institutions during the twen-
tensely obstinate hatred of foreigners to capitulate. It tieth century. Modern capitalism was born in the
compels all nations, on pain of extinction, to adopt the Industrial Revolution in Great Britain at the end of
bourgeois mode of production; it compels them to intro- the eighteenth century, and was spread throughout
duce what it calls civilization into their midst, i.e., to western Europe and European offshoots in the

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Americas and Oceania in the first half of the more a threat to political power or the social order
nineteenth century. What determined the diffusion than an opportunity for economic development.
or rejection of these institutions in other parts of the Similarly, political institutions were typically based
world during the twentieth century? Did capitalism on traditional authority structures rather than ra-
depend on social and cultural institutions unique to tional law. Property was often seen as the natural
Europe; or was the fate of capitalism outside of claim of a patrimonial state, with private ownership
western Europe determined more by political and merely a provisional claim to be made at the suffer-
economic factors rather than social factors? ance of the monarch. Cultural and religious institu-
tions reinforced political and economic hierarchies,
by linking one’s place in the division of labour to
II. THE CHALLENGE OF EUROPEAN birthright, or to membership in a particular religious
CAPITALISM or ethnic group. Finally, concepts of Western sci-
ence had not yet penetrated deeply in non-Western
Modern capitalism emerged as a social system in societies.
western Europe in the first half of the nineteenth
century. The western European capitalist societies As economic historians since Simon Kuznets have
were distinguished by four features. On economic stressed, modern economic growth took off in west-
grounds they were the first societies in history in ern Europe and its offshoots at the end of the
which economic activities were predominantly or- eighteenth century, while not taking off elsewhere
ganized via market exchange, based on private for a century or more, thereby creating within a
property relations in labour, capital, land, and ideas. couple of generations an historically unprecedented
On political grounds these societies were based on gap between western Europe and the rest of the
notions of citizenship and the rule of law, at least in world in material well being, industrial power, and
comparison with most other societies where an military force. Much as Marx and Engels predicted,
individual’s legal standing depended on birthright, a considerable amount of nineteenth and twentieth
and where sovereign power was exercised without century history can be read as the playing out of this
juridical constraint. On social grounds, these socie- profound imbalance in economic and military power,
ties had substantially abandoned formal structures a confrontation between a dynamic capitalist west-
of hierarchy based on birthright, such as the distinc- ern Europe (and its American and Oceanic off-
tions of nobility and serfdom of pre-nineteenth shoots) and a much less dynamic non-European
century continental Europe, or analogs of caste and world. Everywhere in the old world—Africa, the
orders found in most other societies. Finally, in the Middle East, Russia, South Asia, Central Asia, East
sphere of ideas and belief systems, western Euro- Asia—western Europe’s power led to confronta-
pean societies were increasingly secularized and tion with much weaker societies. In vast parts of the
grounded in a modern scientific outlook. world, the result was direct imperial rule by Euro-
pean powers. In other parts of the world, the result
Societies outside of western Europe, other than in was an attempt, successful or unsuccessful, to re-
European colonies in the Americas and Oceania, cast traditional empires (Russia, China, Ottoman,
shared few of these characteristics. Economic insti- Japan) increasingly in a Western institutional im-
tutions were rarely organized around market ex- age—with market reforms, financial systems, com-
change and private property. In many societies, a mercial law, modern infrastructure (telegraphy,
substantial proportion of rural labour was bound to railroads, internal canals, and oceanic ports), and
the land through institutions of serfdom or slavery. even parliaments.
The rights of capital ownership were heavily cir-
cumscribed by suspicious state authorities. Free- As is well known, only Japan among the old-world
dom to engage in international trade was often empires was able to manage a comprehensive and
severely hamstrung, for example in China and Ja- dramatic capitalist makeover. The Meiji Restora-
pan. Intellectual property was almost everywhere tion of 1868, carried out under the shadow of
seen as a natural prerogative of the sovereign rather Western military threat and a series of unequal
than private inventors. New ideas (such as the treaties imposed by Western powers, constituted
printing press in Islamic societies) were viewed as the most successful and comprehensive capitalist

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revolution in world history, a veritable ‘shock therapy’ his fortunes with the good faith of the townspeople of any
of capitalist reform in which market institutions and substantial municipality in any continent that fancy or
private property replaced long-standing feudal rela- information might recommend. He could secure forth-
tions. Elsewhere, as in Russian in the era of Great with, if he wished it, cheap and comfortable means of
transit to any country or climate without passport or other
Reforms (1858–65), or the Ottoman Empire (from
formality, could despatch his servant to the neighbouring
the 1840s onward), or the Ch’ing Dynasty (espe- office of a bank for such supply of the precious metals as
cially in the 1890s–1900s), the reforms were partial, might seem convenient, and could then proceed abroad
typically introducing market reforms but often at the to foreign quarters, without knowledge of their religion,
cost of state instability. All three empires ended up language, or customs, bearing coined wealth upon his
collapsing—China in 1911, and the Russian and person, and would consider himself greatly aggrieved
Ottoman empires in the wake of the First World and much surprised at the least interference. But, most
War, after teetering precariously in the preceding important of all, he regarded this state of affairs as normal,
decades. Much of the rest of the world did not even certain, and permanent, except in the direction of further
get this far, succumbing in the nineteenth century to improvement, and any deviation from it as aberrant,
scandalous, and avoidable.
direct imperial rule. This was true, of course, of all
of the African continent with a couple of exceptions
(Ethiopia, Liberia), most of South-east Asia (with
the notable exception of the buffer state of Siam, III. THE LONGEST ROAD FROM
wedged between British Burma and French CAPITALISM TO CAPITALISM
Indochina), the Indian subcontinent, and Central
Perhaps the greatest surprise of twentieth century
Asia (largely falling prey to the Russian Empire,
political economic history is what did not happen.
itself a victim of collapse).
Looking out on the world described by Keynes, one
would have confidently predicted as of 1910 that the
By the opening year of the twentieth century, the
world would continue on a path of uninterrupted
European imperial powers (now joined by an impe-
progress and global integration, presumably under
rial United States, owner of Puerto Rico and the
European political leadership and tutelage. Indeed
Philippines following the Spanish–American War)
such predictions were widespread, for example in
had indeed created a world in their image. Five-
the best-selling volume The Great Illusion by Sir
sixths of the world’s inhabited land area was effec-
Norman Angell, published in 1910. Angell rightly
tively under political control of Europeans (counting
argued that in a world of advanced technology and
Russia, the Americas, and Oceania). This world
unprecedented economic integration, war among
was linked together by global trade, financed heavily
the leading countries of Europe would be suicidal
by British banks and capital markets, and with gold
and completely irrational—surely incapable of de-
and silver monetary standards that were nearly
livering any benefits that could offset the horren-
universal, and that provided the monetary frame-
dous human and economic costs. These conclusions
work for the rapidly growing international com-
proved to be true, but Angell erroneously concluded
merce. This global system, centred on western
that such suicidal costs would be enough to deter
Europe, was elegantly described by John Maynard
European states from entering into armed conflict.
Keynes in the opening pages of The Economic
Enter they did in 1914, with costs that greatly
Consequences of the Peace.
exceeded even the dire forecasts given by Angell.
What an extraordinary episode in the economic progress The First World War shattered the global capitalist
of man that age was which came to an end in August 1914! system based on European imperialism. It took
. . . The inhabitant of London could order by telephone, another three-quarters of a century until a compa-
sipping his morning tea in bed, the various products of the rable global system would arise to take its place.
whole earth, in such quantity as he might see fit, and
reasonably expect their early delivery upon his doorstep;
The unprecedented butchery of the First World War
he could at the same moment and by the same means
adventure his wealth in the natural resources and new had several major consequences. First, the Euro-
enterprises of any quarter of the world, and share, without pean powers were gravely weakened by the war,
exertion or even trouble, in their prospective fruits and financially and politically. As Keynes predicted in
advantages; or he could decide to couple the security of 1919, the trade and financial imbalances left by the

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war and the harsh peace that followed created tion of the collapse of capitalism as an historically
instabilities throughout the 1920s that contributed to determined process.
the Great Depression of the 1930s, and to the
resurgence of German militarism under the Nazi In the rest of Europe, the 1920s were occupied with
banner. Second, the Ottoman and Russian empires, rebuilding the foundations of the capitalist economy.
long weakened by their inability to keep up with The states of Central and Eastern Europe—Ger-
western Europe, succumbed to the war itself. Both many and the successor states of the Habsburg
collapsed in the wake of battlefield losses and empire—had to overcome military defeat, heavy
financial disarray that resulted directly from the debts, and the burdens of reparations payments.
strains of wartime finance. Even the less tottering The turmoil contributed to a series of hyperinflations,
Habsburg Empire of Central Europe similarly col- the first true hyperinflations in world history (using
lapsed, partly as the result of military defeat, but the accepted definition of inflation of at least 50 per
mainly out of the design of the victors to support cent per month). These were fitfully extinguished in
national self-determination among the ethnic groups the course of the decade. France, too, needed
that comprised much of the empire. Third, Bolshe- stabilization, though from inflation rates consider-
vism established its beachhead as Lenin rushed to ably below hyperinflationary proportions. Great
seize power in the vacuum of Tsarist Russia’s Britain famously botched its return to peacetime
collapse. Interestingly, the overseas colonies of economics by adopting an overvalued currency as it
Europe, in Africa, the Middle East, and Asia re- hurriedly re-established the pre-war gold parity of
mained intact, despite the profound weakening of the pound sterling in 1925.
the metropole powers. The European powers were
able to hold on to their overseas possessions until By the start of 1929 one might have had some
after the Second World War. Some new lands even justifiable confidence that pre-First-World-War nor-
fell into European hands through the dismember- malcy was indeed being re-established, except with
ment of the Ottoman Empire’s Middle Eastern the anomaly of Bolshevik Russia. Even Germany
possessions. Other colonies—such as Germany’s seemed to be making some recovery after two
holdings in Africa—changed hands as victors took emergency loans and partial restructuring of repa-
the spoils of war. rations obligations. But then the Great Depression
erupted, ushering in the most fateful collapse of
The Bolshevik success in Russia must be judged as capitalist economies during the 200 years from the
one of the great ‘contingent’ events of history, that start of the Industrial Revolution till today. The
is a decisive turning point not firmly rooted in causes of the Great Depression continue to be
underlying social and political conditions, but rather debated. Some see the decade of depression as a
reflecting the accidents of history. Up until the First confirmation of Keynes’s 1919 warnings about the
World War, the Tsarist regime was fitfully reform- instability that would follow a Carthaginian peace in
ing and Russia was fitfully industrializing. Without Central Europe. Others see it as the result of
the war itself, peaceful transformation seemed to be clinging too long to laissez-faire doctrines in a world
likely. The war bled the state, and exhausted the of large-scale industry. Still others see a concatena-
society. But even so, after 4 years of military tion of errors by the major central banks of the day.
hardship, revolutionaries like Lenin lacked broad
support. The Bolsheviks were a fringe party without All of these explanations have some merit, but none
the ability to mobilize mass political backing. But puts adequate stress on another crucial feature of
they had the advantage of ruthlessness, daring, and the era. The world’s major currencies were all
brutality. In the anarchy of Tsarist bankruptcy, food linked to gold, and it was the gold standard that
riots, and the flood of ill-fed and ill-clothed troops prompted all of the major countries of the world
returning from the front, political order collapsed, economy to adopt simultaneous contractionary
and Lenin seized his moment. As he himself wrote monetary policies, even in the face of sharply rising
later, his success was a matter of hours. Any delay unemployment. As a backdrop to the Great Depres-
or missed timing, and all would be lost. This is, of sion, the world’s monetary gold supplies had not
course, the very opposite of Marx’s original concep- been increasing rapidly enough to support the growth

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of world income. There were no major gold discov- Hitler gained the position of Chancellor not through
eries in the world after those of the 1890s. The the ballot box, but in a cabinet reshuffle. The later
shortfall of monetary gold was especially acute at electoral strength of the Nazis, manipulated through
the end of the 1920s as the countries of Europe great street violence and propaganda, only followed
established gold parities at exchange rates that Hitler’s rise to power.
overvalued their national currencies, i.e. at rates
that assigned too high a gold backing to each unit of The Second World War finished the European
currency. When financial troubles brought down conflagration started in the First World War, again
several banks in Europe and the United States in the with several profound consequences for the global
early 1930s, wealth holders scrambled to protect economy. This time the destruction in Europe was
their wealth by converting some money balances so profound that the European imperial powers
into gold, and all of the major central banks suddenly were too exhausted and discredited to maintain their
faced extreme pressures on their scarce gold re- hold on their empires. From the 1940s to the 1980s,
serves. Even though unemployment was already the European empires were unwound. The French,
rising throughout Europe and the United States, the in particular, fought bitterly to hold on to many of
central banks simultaneously pursued very their possessions. Other powers essentially aban-
contractionary monetary policies (even rejecting doned their claims, as did Britain in India in 1947. Still
the lender-of-last-resort function as domestic banks others fought for a while, only to realize the futility
failed), thereby leading the industrial nations into a of attempting to hold on to power, as in the case of
simultaneous steep downturn. These can be termed the Dutch in Indonesia. The second major conse-
monetary errors, but in fact the central banks were quence involved the upheavals of Asian power.
playing their assigned roles of the era. On top of this Japan had launched its own wars of conquest in
monetary collapse came a spiral of trade protection- Asia in the 1930s, to construct a ‘co-prosperity
ism, as each country attempted to hoard scarce sphere’ under Japanese domination. Japan’s attack
foreign exchange and gold supplies. on China destabilized the fragile and corrupt Nation-
alist regime, and thereby opened the way to com-
The economic crisis in Europe was of course the munist power after a three-year civil war (1946–
opening for the rise of Nazism in Germany. And yet, 9). Japan’s military defeat also led to the end of
even in the shadow of the Great Depression, Hit- Japanese colonial rule in Korea and Taiwan, the
ler’s rise to power was in many ways as contingent latter becoming the refuge of the defeated Chinese
and accidental as Lenin’s. Both seized fleeting Nationalist government.
opportunities to gain a foothold of power, and then
ruthlessly used violence to consolidate power in the
midst of a power vacuum brought on by general IV. THE POST-WAR TRIPARTITE
crisis. Just as the Bolshevik success depended on WORLD
seizing the precise moment in the October Revolu-
tion, so careful historians have shown that Hitler’s The victorious United States hoped for the emer-
rise to power in January 1933 was another tragic gence of a new world political and economic system
accident of history. By the start of that year, the after the Second World War, based on the newly
Great Depression was actually easing in Germany. established international institutions of the United
The reparations burden too had been relaxed, though Nations (including the World Bank and the Interna-
of course not sufficiently to insure against disaster. tional Monetary Fund), national sovereignty after
The leading German newspapers on 1 January 1933 the dismantling of European empires, and open
opened the new year with confident assertions that international trade. This vision never came to frui-
the Nazi rise to power had been decisively thwarted, tion. Rather quickly the wartime alliance of the
that the tide of popular support had peaked and was United States, United Kingdom, and the Soviet
on the wane. And yet, just 30 days later, Hitler was Union dissolved into a bitter rivalry and competition
proclaimed Chancellor, the result of Hitler’s stun- between the capitalist democracies and the Soviet
ning ability to out-intrigue a number of intriguers to communist state. Indeed, the Soviet Union soon
power that were competing for positions in the imposed one-party communist rule throughout East-
German government. It must be remembered that ern Europe. The divisions deepened further with the

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communist victory in China in 1949, and the out- been colonized, indeed governed, first by multina-
break of war on the Korean peninsula the next year. tional companies (the British East India Company in
the case of India) rather than by European govern-
The USA strongly supported a return to democratic ments, the affection for multinational firms was also
capitalism in western Europe and Japan, through wanting, to say the least. It was hard to judge in 1950
extensive aid programmes and military backing. Aid that the colonial era was decisively over, and that
was predicated on the adoption of market institu- multinational firms no longer represented the risk to
tions, especially those that supported European sovereignty that they once did.
integration and Japan’s return to an open trading
system. By 1958, Europe had re-established con- The new state-builders had other considerations as
vertible currencies as the monetary underpinning of well. They looked back at the Great Depression as
open, market-based international trade. Japan’s a harbinger of continued capitalist instability. In-
currency became internationally convertible by 1964. deed, the new doctrines of Keynes argued that such
The USA, Europe, and Japan also pursued step-by- instability was inbuilt in the capitalist system. Who
step trade liberalization through a series of negotia- could know that the Great Depression was a once-
tions on tariff reductions. in-two-hundred-year phenomenon, more the acci-
dent of a dying gold standard than an intrinsic
The struggle between the first (capitalist) world and feature of industrial capitalism. By contrast, it seemed
the second (socialist) world was made considerably that the Soviet Union had found a way to avoid
more complex by the actions of the developing business cycles. Had it not continued to industrialize
countries, especially the dozens of newly independ- throughout the 1930s? The Soviet Union had tri-
ent states that had gained independence from Euro- umphed over German fascism, and the scientific
pean colonial rule. While the USA hoped that these merits of state planning seemed evident. Of course,
countries would join the first world, as capitalist few knew at that point about the millions of lives
societies, in the struggle against communism, most slaughtered in Soviet collectivization campaigns,
of the newly independent countries opted for politi- purges, and forced industrialization.
cal non-alignment and an economic third way be-
tween capitalism and communism. Thus, the term The final element of anti-market sentiment involved
‘third world’ refers not only to poor countries in the perception that free markets would condemn
general, but also in most cases to a political choice laggard economies to servitude in the world trading
of ‘third way’ between capitalism and socialism. It system, selling primary commodities while depend-
is ironic that the term ‘third way’ has been later ing on the advanced countries for manufactured
appropriated by left-of-centre parties in the USA goods. The leaders of the post-colonial states, and of
and Europe to signify capitalism with institutions of the Latin American societies, equated state power,
social support (such as income transfers, health naturally enough, with industrialization. They feared,
insurance, pension support). The original ‘third way’ however, that they were too far behind economi-
was considerably less capitalistic in orientation than cally to accomplish industrialization on the basis of
the programmes flying this banner in recent years. free-market competition. They needed to protect
infant industries behind tariff walls, and to foster
The third-world leaders had many considerations in them with state support, such as public ownership,
mind. Most of them viewed the capitalist countries subsidies, and protection against ruinous competi-
not as trading partners, but as political and economic tion. Thus, many developing countries adopted sys-
predators, former colonial masters who would look tems of state-led industrialization, based on import-
for new opportunities of exploitation. It is good to substitution of industrial goods. This semi-market
remember that national movements often fought path, somewhere between capitalism and socialism,
their colonial overlords through political and eco- was seen as the surest way to the end result of
nomic campaigns of self sufficiency. The idea of industrialization.
turning around after independence and trading freely
with former colonial overlords struck many of the A handful of post-colonial countries went in a
new leaders as suicidal. And considering that coun- different direction. After experiments with state-led
tries such as India and much of Africa had actually import substitution in the 1950s, both Korea and

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Taiwan adopted market-based export-oriented in- crushed by ideological opposition from the Commu-
dustrialization strategies in the 1960s. Other East nist Party. Hungary and Poland both tried to ‘jump
Asian economies followed suit, including Hong Kong start’ their flagging economies by heavy foreign
and Singapore in the 1960s, most of South-east Asia borrowing in the 1970s, ostensibly to purchase
(Indonesia, Malaysia, and Thailand) in the 1970s foreign technologies. This borrowing spree failed to
and 1980s, and the Philippines in the 1990s. These re-invigorate the socialist economies, but did land
development strategies were surely not laissez- these countries in international bankruptcy. It was
faire, but they were market-based in the following Poland’s slide into state bankruptcy in 1979 that
senses: industrial enterprises were privately owned; triggered the rise of the Solidarity trade-union move-
the currency was convertible for purposes of inter- ment. That movement was repressed by martial law
national trade; tariff rates were kept low on interme- in 1981, but survived the repression to lead Poland
diate and capital goods, thereby allowing domestic to political freedom in 1989. The Soviet Union ended
enterprises to purchase needed inputs on world up following the Polish and Hungarian slide into
markets; and foreign firms were courted for the bankruptcy during the reform period of Mikhail
purpose of spurring technology transfer. Foreign Gorbachev (1985–91). That episode too ended in
firms participated in the domestic economy via financial crisis, and the end of communist rule.
foreign direct investment, joint ventures, and
outsourcing arrangements (in which domestic firms The Third World fared little better than the Second
assembled final products using inputs and technical World. State-led industrialization turned out to be a
specifications supplied by the foreign companies). morass. Contrary to the hopes of infant-industry
protection, the enterprises built up by the strategy of
The tripartite world ran its course from the 1950s to import substitution did not become efficient or inter-
the 1980s. The advanced capitalist economies of the nationally competitive. They could be kept alive only
USA, Europe, and Japan not only recovered rapidly through continued trade protection and state subsi-
from the wartime devastation, but then continued dies. Moreover, the failure of these countries to
rapid economic growth and dynamic change into the achieve dynamic export growth (in contrast to the
1970s and onward. Trade barriers were repeat- East Asian experience) was the Achilles heel of the
edly lowered among these countries. European whole project. These countries needed foreign ex-
integration deepened step by step, culminating in change in order to import foreign technology, capital
the European Union single market in the early goods, and intermediate inputs used in the produc-
1990s, and monetary union at the end of the tion of manufactured goods. But with sluggish ex-
1990s. The growth of trade consistently outpaced port growth from traditional sectors (such as mining
the growth of gross domestic product (GDP), so that and agriculture), the foreign-exchange earnings of
the ratio of trade to GDP rose consistently in the the economy were never sufficient to the import
First World. needs. Like the Second World countries mentioned
earlier, the Third-World countries went into debt to
The Second World succumbed to chronic economic overcome the shortfall of export earnings. The
stagnation by the 1960s. Technological change out- result was the same: state bankruptcy. By the early
side of the military sector was excruciatingly slow. 1980s, almost all of the post-colonial countries of
The division of labour was locked in place by Africa and Asia, except for the manufacturing
planning decisions taken decades earlier. More and exporters of East Asia, had fallen into state insol-
more, Eastern Europe and the former Soviet Union vency. So, too, had the countries of Latin America,
came to resemble a vast industrial museum of the other region that championed the model of
enterprises and technologies of the 1930s and 1940s. import-substitution.
The region missed entirely the shift towards serv-
ices and information technology that started in the
First World in the 1950s and 1960s. Growth was V. THE AGE OF GLOBAL CAPITALISM
extensive (simply replicating existing structures of
division of labour) rather than based on technologi- Much of the world arrived at capitalist institutions
cal and structural change. Some early experiments the hard way, having passed through decades of
in reform in the Soviet Union in the 1960s were colonial rule, only to be followed by misguided

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adventures of socialism or state-led industrializa- and far reaching, they were sometimes character-
tion. Even countries that had maintained their inde- ized as gradualist, because the state-enterprise sec-
pendence, such as China, Turkey, and Russia, re- tor continued to operate without much change. This
jected the models of capitalism on offer from the was possible, in China’s circumstances, since state-
rich countries of western Europe. Capitalism seemed enterprise employment constituted just 18 per cent
too dangerous, or too tough a path to follow, starting of the Chinese work force.
from so far behind in the process of industrialization.
The reformist regime of Mikhail Gorbachev tried to
By the 1980s, however, these alternative models emulate the Chinese reforms in critical areas. The
had failed, typically leading to profound macroeco- Gorbachev reforms attempted China’s ‘trick’ of
nomic instability and state insolvency. In Latin freeing a non-state sector, while preserving the
America, the turn towards market reforms began in operation of the state-enterprise sector. The Soviets
Chile in 1973, in the aftermath of a brutal coup that were especially enamoured of China’s success in
overturned a left-wing government intent on estab- combining market reforms with continued one-
lishing socialism. Other countries began to follow party rule. But China’s experience did not easily
suit in the 1980s, following the onset of the debt translate to Soviet circumstances. In the Soviet
crisis. In Eastern Europe, the debt crisis would also Union, for example, the state-enterprise sector ac-
have been the spur to rapid change, but change was counted for more than 90 per cent of the labour
crushed in the region until the late 1980s. India force. It was not possible to reform the economy
began very gradual market reforms in the 1980s, while preserving (China-style) the state sector.
and these picked up speed in 1991, when India too Gorbachev’s reforms ended up unleashing consid-
came to the edge of the financial abyss. In the erable financial instability, while doing little or noth-
impoverished countries of Sub-Saharan Africa, ing to spur market-based growth. The Soviet Union
market reforms came in the context of the IMF– itself collapsed in December 1991, and the struggle
World Bank structural adjustment programmes of for market reforms continued in the 15 successor
the 1980s and 1990s. states.

The most dramatic reforms came in China, begin- By the 1990s, then, almost the entire world had
ning 2 years after Mao’s death in 1976. With the end adopted the fundamental elements of a market
of the Maoist inspired chaos of the cultural revolu- economy, including private ownership at the core of
tion, peasants throughout the vast country began the economy, a currency convertible for interna-
demanding their rights to family land plots, thereby tional trade, shared standards for commercial trans-
overturning the collectivist agricultural system of actions (for example as codified in the agreements
Maoist socialism. Within a couple of years, hun- of more than 120 country members of the World
dreds of millions of Chinese households returned to Trade Organization), and market-based transac-
traditional family peasant farming. Deng Xioaping, tions for the bulk of the productive sectors of the
the new paramount leader, wisely encouraged the economy.
state apparatus to ratify its support for this surge of
grass-roots change. Deng then led several other key The narrative has put the stress on political and
market-based changes, including the rights of peas- institutional choices in the emergence of global
ant communities to establish non-agricultural enter- capitalism, but we must also remember that global
prises (known as township and village enterprises, technological changes have helped to induce coun-
or TVEs), and the right of foreign investors to tries to these choices. Most economies in the Sec-
establish export-oriented, labour-intensive manu- ond and Third Worlds would have done better to
facturing firms in designated regions on China’s adopt market reforms at an earlier stage, but the
coast. The combination of agricultural reform, the benefits of market reforms have probably increased
TVE sector, and especially labour-intensive export- through time, as a result of technological progress in
led growth (in the tradition of the rest of East Asia), transport, communications, and computing. This
fuelled a powerful surge in China’s economy, mak- revolution in information technology has made pos-
ing it one of the fastest growing countries in the sible the globalization of production itself, according
world. Even though these reforms were dramatic to which major multinational enterprises operate

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simultaneously in many countries, using their vari- tarian governments tend to lose their hold in peace-
ous sites as nodes of a globally integrated production time, since the role of the powerful state as protector
system. Developing countries that successfully at- of society is diminished. This weakening of authori-
tract foreign direct investment and thereby become tarian tendencies also creates important opportuni-
part of those global production systems have bene- ties for increased penetration of market forces in
fited with faster economic development. domestic politics.

(ii) Ideas versus Interests

VI. LESSONS OF INSTITUTIONAL
CHANGE Modern political economy tends to see most political
and institutional choices in terms of the material
This very brief précis has touched on many of the interests of the leading actors. Is not ‘public choice
great questions of modern history. Why have some theory’ nearly Marxist in its emphasis on the mate-
countries opted for capitalism, and others for social- rial foundations of political conflict and choice?
ism? Is the rise of Lenin, or Hitler, or Mao, to be History suggests, however, that there are crucial
understood as the workings of great forces of times when leading state actors truly have inde-
history, or the workings of historical contingency pendence of choice, when their actions are not
and accident? Are the great institutional changes simply a complex vector sum of underlying political-
the result of interests, culture, power, ideas, or economic forces. Our narrative suggests at least
accident? Do the rise and fall of institutions in three such episodes. First, the emergence of social-
politics and economics reflect a Darwinian process ism in Russia was much more accident than Marxist
of natural selection, in which the ‘fittest’ institutions historical necessity (it is often rightly noted that
survive and spread, and the failures are winnowed Marx expected socialism to come first to Germany,
out? We of course cannot answer such profound not to a backwater like Russia). Hitler’s rise to
and difficult questions here, but we can reflect on power was similarly accidental. Third, the choice of
some of the evidence thrown up by the 200 years of state-led industrialization in the post-colonial coun-
modern capitalism and its rivals. tries of the Third World reflected ideological
choices much more than existing economic inter-
(i) Markets, War, and Peace ests.

Global capitalism has emerged twice, first as a There is a shared characteristic of these episodes:
European imperial system at the end of the nine- the normal basis of state power had collapsed or
teenth century, and second as a global system of virtually collapsed in each case. Lenin exploited the
sovereign nations at the end of the twentieth cen- vacuum of the collapse of Tsarist rule in the wake
tury. Both episodes involved a gradual incorporation of the First World War. Hitler exploited the collapse
of many parts of the world into a common system. of economic institutions in the midst of the Great
In the nineteenth century, that incorporation was Depression (and even then succeeded only by a
partly voluntary (for example, the spread of free concatenation of accidents and intrigues). The post-
trade in Europe; the export-led development of colonial nation builders emerged to power in a
Latin America) and partly coercive, through colo- vacuum of authority left by the departing colonial
nial rule. In the late twentieth century, it has been masters. I would venture the argument that normal
mostly consensual, though sometimes under the interest-group politics offers the better description
pressures of state bankruptcy. of institutional change when governments are sta-
ble, but that ideas and individual leadership (for good
These two periods share a key distinctive charac- or ill) play a much more decisive role when political
teristic: they were times of peace among the leading power has collapsed. In those circumstances, soci-
economies (from the Napoleonic wars till 1914 in ety’s fate is up for grabs. Early victors in the struggle
the last century, and since 1945 in this one). Ex- for power can then consolidate their grip on power
tended periods of peace cause nations to reduce (remember that power is an increasing-returns-to-
their fears over foreign encroachments, and to shift scale activity: a little bit can go a long way, when it
towards expanded commercial relations. Authori- is mustered against yet weaker forces).

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(iii) Capitalism and its Discontents servative’s doctrine, the preserve of the rich over
the poor. But in actual history, capitalism has chal-
Since the rise of Britain as an industrial power, lenged traditional authority, of the landed nobility,
capitalism has demonstrated its ability to ‘deliver the upper castes, religious authorities, or foreign con-
goods’. Capitalism fuelled the rise of continental querors who ruled over indigenous populations. The
western Europe in the first half of the nineteenth élites of such highly stratified societies often opted
century. It similarly fuelled the rise of the United for bastardized capitalism, or rejected capitalism
States. It powered Japan to industrialization after altogether, in order to avoid the social and economic
the Meiji Restoration of 1868. One would have mobility that would be unleashed by market forces,
thought that capitalism would have been an alluring and that could therefore endanger their dominant
model for the world, and that the adoption of capi- social and economic positions.
talist institutions would have come much more
rapidly and readily than it did. The fourth obstacle was that capitalism itself failed
to deliver at a crucial historical juncture: the Great
This article has hinted at some of the reasons for the Depression. The importance of the Great Depres-
long and twisted course of the diffusion of capitalist sion in international economic history is probably on
institutions. The first obstacle to diffusion was con- par with the importance of the First World War in
ceptual. Since Marx, if not before, the gains of the political history. The Great Depression taught many
capitalist economies (and of the rich within those lessons, most of them wrong. Keynes, the greatest
societies), have been viewed as ill-gotten exploita- political economist of the century, made a grave
tion. This was an easy interpretation. After all, the mistake when he titled his text The General Theory
rich countries did indeed grossly exploit the rest of of Employment, Interest and Money. He left the
the world, via slavery, colonial rule, military pres- impression that the Great Depression was a ‘gen-
sures, and the like. Yet the causality was mostly the eral’ situation of market economies, not a one-time
other way around: exploitation was made possible fluke of grotesque proportions. He failed to make
by superior power and wealth, and was not the clear that it occurred because of the international
cause of that superior power and wealth. Still, the gold standard, a monetary arrangement that Keynes
exploitation theory of development was convenient: had heatedly attacked and abhorred, but strangely
it allowed the laggard states to see themselves as under-emphasized in The General Theory. In any
victims needing to sever relations with the rich event, the Great Depression left the world deeply
countries, rather than as societies in need of reform. sceptical about self-organizing market systems. It took
The image of victimization in anti-capitalist ideolo- decades more to revive robust confidence in market
gies has remained strong for two centuries. economies.

The second obstacle was the period of colonial rule

itself. The capitalist institutions hardly practised VII. NO END OF HISTORY
what they preached in their imperial possessions.
Who but the Europeans introduced statism, coer- We are at the end of the twentieth century, and at
cion of labour, and other pervasive non-market the end of this article, but certainly not at the end of
mechanisms into much of Africa? The colonial history, not even of economic institutional history. If
inheritance in many cases (though not all) was not peace underpins the global economy, we must
conducive to a market-based rule of law. Moreover, remember that predictions of continued and inevita-
as already noted, the post-colonial élites in the Third ble peace are, sadly, no more guaranteed than they
World viewed open trade and investment as a were at the beginning of this century. The world is
veritable threat to hard-won national independence. filled with hot spots and confrontation, though fortu-
nately rarely among the leading nations in recent
The third obstacle was the revolutionary nature of years. Much will also depend on whether global
capitalism itself, in comparison with the stratifica- capitalism can ‘deliver the goods’, not just in the
tion of traditional societies. In the late twentieth USA and Europe, but in the rest of the world. There
century, capitalism was often viewed as a con- are some positive signs—mainly the dynamism of

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India and China in their eras of market reform—but ing (school and universities, public and private re-
also many danger signs, especially in Africa, but also search centres, major multinational firms with sub-
in much of Latin America and the post-communist stantial research and development activities) will
nations. It is also good to bear in mind that economic take on increasing importance in our societies. Such
institutions evolve along with technological change. institutions have never followed the textbook model
The advances in information technologies and bio- of private corporate organization. Social learning
technologies are apt to create demands for new and scientific advance has always relied on a com-
social and economic institutions. Indeed, one can plex and evolving interplay of public and private
say that as we move more and more to a science and institutions. We are indeed primed for further insti-
knowledge-based economy, the institutions of learn- tutional innovation in the future.

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