False Dawn: The Delusions of Global Capitalism

False Dawn: The Delusions of Global Capitalism

by John Gray (2)

A powerful and prophetic challenge to globalization from a former partisan of the New Right. In a book that effectively predicted the collapse of the Asian markets, Gray argues that the attempt to impose the Anglo-American-style free market on the world will create a disaster on the scale of Soviet communism. Even America, the supposed flagship of the new civilization…  See more details below


A powerful and prophetic challenge to globalization from a former partisan of the New Right. In a book that effectively predicted the collapse of the Asian markets, Gray argues that the attempt to impose the Anglo-American-style free market on the world will create a disaster on the scale of Soviet communism. Even America, the supposed flagship of the new civilization, is doomed to moral and social disintegration as it loses ground to other cultures that have never forgotten that the market works best when it is embedded in society. False Dawn is one of the most passionate polemics against the utopia of the free market since Carlyle and Marx. John Gray is well known as an important conservative political thinker, influence on Margaret Thatcher whose writings were relied upon by the rise of the New Right in Britain. But in False Dawn he drops a bombshell. Like Robert McNamara who shocked America by reversing himself to criticize the Vietnam War, John Gray has decided that the conservative agenda is no longer viable. Every investor and every American seeking to understand the ripple effect of the Asian collapse and what it means for our collective future must read this book. This edition includes a chapter on the events of the last year, including the economic turmoil in Russia and Asia, and the controversy sparked by its release in Britain.

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Editorial Reviews

Brian C. Anderson
...make no mistake: False Dawn is a hallucinatory vision of our future.
The Wall Street Journal
This book is hard to put down, and economic liberals would do well to test their ideas against it.
Fareed Zakaria
...Gray takes on an immensely important subject, ranges widely and vibrantly and makes some telling criticisms....[His] most sweeping charge is that global capitalism is flawed because it is a utopian idea, a product of Enlightenment visions of a perfect society....Gray...seems unaware that for the vast majority of the world, the greatest danger of globalization is not that it will succeed but that it will fail.
The New York Times Book Review
International Herald Tribune
A work of impasioned intellectual history and political and moral persuasion.
Publishers Weekly - Publisher's Weekly
Oxford professor of politics John Gray has been an acknowledged influence on Margaret Thatcher, and his writings were appropriated by Britain's New Right. It was thus astonishing to U.K. readers that, in False Dawn: The Delusions of Global Capitalism, Gray does an about-face and argues against a market untethered to cultural foundations within particular societies. Updated with a chapter on the controversy it sparked on its U.K. release, the American version further stresses the all-too-apparent instability of global markets.
Library Journal
Gray (political science, Oxford) believes that the attempt to impose an Anglo American-style free market on the global economy will create a disaster on the scale of Soviet communism. From any long and broad historical perspective, he argues, the free market is a rare, short-lived aberration. The socially destructive effects of free markets have made them politically unsustainable. Regulated markets, on the other hand, are the norm, arising spontaneously in every society. Nevertheless, the reform of world markets is unlikely in the near future, and the world will therefore fracture into warring economic blocs. Gray believes that a basic shift in economic philosophy is needed. Markets must be made to serve the people, and not vice versa. Gray's writing is polemical and forceful but often turgid. Recommended for international economics collections in academic libraries.--Harry Frumerman, formerly with Hunter Coll., New York
Kirkus Reviews
A depressingly convincing analysis of an international economy headed for disaster. Gray (European Thought/London School of Economics) considers the contemporary drive for a global free market the last gasp of the Enlightenment. The economist's faith that markets are the ultimate human organizing device has become the final remnant of the belief that world historical development is converging on a single, optimal set of institutions and values. Only in the US do people still believe this can happen, but in the world's dominant economic power, it is a political and intellectual orthodoxy. Gray argues that not only will this utopian vision fail just as surely as did its predecesors, it is more nightmare than dream. The case for the economic advantages of global free trade is convincing, but it also "involves a wild abstraction from social realities." No other society is willing to tolerate the "social dereliction" evident in the American collapse of families and widespread use of incarceration as a means of social control. Indeed, capitalism has taken very different forms in countries with different cultural traditions, and it is only through "an extraordinary blindness to history" that American economists have imagined that Western-style market reform could transform, for example, a non-Western country like Russia. The central problem for the US today, according to Gray, "is that its institutions and policies are predicated on an early modern ideology" ill-suited for "late modern conditions." Unfortunately, he's not optimistic about finding a solution for this problem, leaving the US and the rest of the world in a rather gloomy situation: "a deepening international anarchy is thehuman prospect." Almost as intriguing as the conclusion is depressing, however, is the question of how he could write this book without mentioning his apparent transformation from New Right to Burkean conservative. Listening to this powerful challenge to economic orthodoxy could improve human prospects.

From the Publisher

"False Dawn is a powerful analysis of the deepening instability of global capitalism. It should be read by all who are concerned about the future of the world economy." —George Soros

"A worthwhile book talks to you. A really worthwhile one invites you to talk back. It won't take you many pages to enter into a dialogue with False Dawn." —Bloomberg

"Gray is surely one of Britain's leading public intellectuals . . . [his] economic theory . . . offers a useful reminder that the global economy need not look the same everywhere." —The Wall Street Journal

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Chapter One

From the Great Transformation to the global free market

The collapse of the global marketplace would be a traumatic event with unimaginable consequences. Yet I find it easier to imagine than the continuation of the present regime.

George Soros

The origins of the catastrophe lay in the Utopian endeavour of economic liberalism to set up a self-regulating market system.

Karl Polanyi

Mid-nineteenth century England was the subject of a far-reaching experiment in social engineering. Its objective was to free economic life from social and political control and it did so by constructing a new institution, the free market, and by breaking up the more socially rooted markets that had existed in England for centuries. The free market created a new type of economy in which prices of all goods, including labour, changed without regard to their effects on society. In the past, economic life had been constrained by the need to maintain social cohesion. It was conducted in social markets — markets that were embedded in society and subject to many kinds of regulation and restraint. The goal of the experiment that was attempted in mid-Victorian England was to demolish these social markets, and replace them by deregulated markets that operated independently of social needs. The rupture in England's economic life produced by the creation of the free market has been called the Great Transformation.

    The achievement of a similar transformation is the overriding objective today of transnational organizations such as the World Trade Organisation, the International Monetary Fund and the Organisation for Economic Cooperation and Development. In advancing this revolutionary project they are following the lead of the world's last great Enlightenment regime, the United States. The thinkers of the Enlightenment, such as Thomas Jefferson, Tom Paine, John Stuart Mill and Karl Marx never doubted that the future for every nation in the world was to accept some version of western institutions and values. A diversity of cultures was not a permanent condition of human life. It was a stage on the way to a universal civilization. All such thinkers advocated the creation of a single worldwide civilization, in which the varied traditions and cultures of the past were superseded by a new, universal community founded on reason.

    The United States today is the last great power to base its policies on this enlightenment thesis. According to the `Washington consensus', `democratic capitalism' will soon be accepted throughout the world. A global free market will become a reality. The manifold economic cultures and systems that the world has always contained will be redundant. They will be merged into a single universal free market.

    Transnational organizations animated by this philosophy have sought to impose free markets onto the economic life of societies throughout the world. They have implemented programmes of policies whose ultimate objective is to incorporate the world's diverse economies into a single global free market. This is a Utopia that can never be realized; its pursuit has already produced social dislocation and economic and political instability on a large scale.

    In the United States free markets have contributed to social breakdown on a scale unknown in any other developed country. Families are weaker in America than in any other country. At the same time, social order has been propped up by a policy of mass incarceration. No other advanced industrial country, aside from post-communist Russia, uses imprisonment as a means of social control on the scale of the United States. Free markets, the desolation of families and communities and the use of the sanctions of criminal law as a last recourse against social collapse go in tandem.

    Free markets have also weakened or destroyed other institutions on which social cohesion depends in the US. They have generated a long economic boom from which the majority of Americans has hardly benefited. Levels of inequality in the United States resemble those of Latin American countries more than those of any European society. Yet such direct consequences of the free market have not weakened support for it. It remains the sacred cow of American politics and has become identified with America's claim to be a model for a universal civilization. The Enlightenment project and the free market have become fatefully intertwined.

    A single global market is the Enlightenment's project of a universal civilization in what is likely to be its final form. It is not the only variant of that project to have been attempted in a century that is littered with false Utopias. The former Soviet Union embodied a rival Enlightenment Utopia, that of a universal civilization in which markets were replaced by central planning. The human costs of that defunct Utopia were incalculable. Millions of lives were lost through totalitarian terror, ubiquitous corruption and apocalyptic environmental degradation. An immeasurable price in human suffering was exacted by the Soviet project — yet it failed to deliver the modernization it promised for Russia. At the close of the Soviet era Russia was in some ways further from modernity than it had been in late Tsarist times.

    The Utopia of the global free market has not incurred a human cost in the way that communism did. Yet over time it may come to rival it in the suffering that it inflicts. Already it has resulted in over a hundred million peasants becoming migrant labourers in China, the exclusion from work and participation in society of tens of millions in the advanced societies, a condition of near-anarchy and rule by organized crime in parts of the post-communist world, and further devastation of the environment.

    Even though a global free market cannot be reconciled with any kind of planned economy, what these Utopias have in common is more fundamental than their differences. In their cult of reason and efficiency, their ignorance of history and their contempt for the ways of life they consign to poverty or extinction, they embody the same rationalist hubris and cultural imperialism that have marked the central traditions of Enlightenment thinking throughout its history.

    A global free market presupposes that economic modernization means the same thing everywhere. It interprets the globalization of the economy — the spread of industrial production into interconnected market economies throughout the world — as the inexorable advance of a singular type of western capitalism: the American free market.

    The real history of our time is nearer the opposite. Economic modernization does not replicate the American free market system throughout the world. It works against the free market. It spawns indigenous types of capitalism that owe little to any western model.

    The market economies of east Asia diverge deeply from one another, with those of China and Japan exemplifying different varieties of capitalism. Equally, Russian capitalism differs fundamentally from capitalism in China. All that these new species of capitalism have in common is that they are not converging on any western model.

    The emergence of a truly global economy does not imply the extension of western values and institutions to the rest of humankind. It means the end of the epoch of western global supremacy. The original modern economies in England, western Europe and north America are not models for the new types of capitalism created by global markets. Most countries which try to refashion their economies on the model of Anglo-Saxon free markets will not achieve a sustainable modernity.

    Today's Utopia of a single global market assumes that the economic life of every nation can be refashioned in the image of the American free market. Yet in the United States the free market has ruptured the liberal capitalist civilization, founded on Roosevelt's New Deal, on which its post-war prosperity rested. The United States is only the limiting case of a general truth. Wherever deregulated markets are promoted in late modern societies they engender new varieties of capitalism.

    In China they have spawned a new variant of the capitalism practised by the Chinese diaspora throughout the world. In Russia the collapse of Soviet institutions has not produced free markets but instead a novel variety of post-communist anarcho-capitalism.

    Nor is the growth of a world economy promoting the universal spread of western liberal democracy. In Russia it has produced a hybrid type of democratic government in which strong presidential power is central. In Singapore and Malaysia economic modernization and the growth have been achieved without loss of social cohesion by governments that reject the universal authority of liberal democracy. With luck, a similar government may emerge in China when it becomes fully post-communist.

    A world economy does not make a single regime — `democratic capitalism' — universal. It propagates new types of regimes as it spawns new kinds of capitalism. The global economy that is presently under construction will not assure the free market's future. It will trigger a new competition between remaining social market economies and free markets in which social markets must reform themselves profoundly or be destroyed. Yet, paradoxically, free market economies will not be the winners in this contest. For they too are being transformed out of all recognition by global competition.

    The free market governments of the 1980s and 1990s failed to achieve many of their objectives. In Britain, levels of taxation and state spending were as high, or higher, after eighteen years of Thatcherite rule than they were when Labour fell from power in 1979.

    Free market governments model their policies on the era of laissez- faire — the mid-nineteenth century period in which government claimed that it did not intervene in economic life. In reality a laissez-faire economy — that is to say, an economy in which markets are deregulated and put beyond the possibility of political or social control -- cannot be reinvented. Even in its heyday it was a misnomer. It was created by state coercion, and depended at every point in its workings on the power of government. By the First World War the free market had ceased to exist in its most extreme form because it did not meet human needs — including the need for personal freedom.

    Yet, without diminishing the size of the state or reinstating the social institutions that supported the free market in its Victorian heyday, free market policies have encouraged new inequalities in income, wealth, access to work and quality of life that rival those found in the vastly poorer world of the mid-nineteenth century.

    In nineteenth-century England the damage done by the free market to other social institutions and to human well-being triggered political counter-movements that changed it radically. A spate of legislation, provoked by different aspects of the free market in action, re-regulated it so that its impact on other social institutions and on human needs was tempered. Mid-Victorian laissez-faire showed that social stability and the free market cannot be compatible for long.

    England had a market economy before and after the brief mid-Victorian experiment in laissez-faire. In each case markets were regulated so that their workings were less inimical to social stability. Only during these eras of laissez-faire — in mid-nineteenth century England and, in some parts of the world, the 1980s and 1990s of this century — has the free market been the dominant social institution.

    The managed market economies of the post-war era did not emerge through a series of incremental reforms. They came about as a consequence of great social, political and military conflicts. In Britain the Keynesian and Beveridge settlement was made possible by the imperatives of a war of national survival that tore up pre-war social structures by the roots.

    In nineteenth-century England, the free market ran aground on enduring human needs for economic security. In the twentieth century, the liberal international economic order perished violently in the wars and dictatorships of the 1930s. That cataclysm was the precondition of post-war prosperity and political stability. In the 1930s the free market proved to be an inherently unstable institution. Built by design and artifice, it fell apart in confusion and chaos. The history of the global free market in our time is unlikely to be much different.

    There is no prospect of Britain returning to Keynesian economic management, of the United States reviving a Rooseveltian New Deal, or of any continental countries (aside perhaps from Norway and Denmark) renewing the levels of social provision associated with European Social and Christian Democracy.

    The continental social market that spawned German post-war prosperity will be among the most notable casualties of global free markets. It will suffer this fate along with American liberal capitalism, which assured prosperity in the United States and throughout the world for a generation after the Second World War.

    Some national governments may be able to use the freedom of manoeuvre they still retain to devise policies which in some degree reconcile the imperatives of global markets with the needs of social cohesion, but the narrow margin of reform that is still open to some sovereign states will not allow any of them a return to the past.

    The transnational organizations that oversee the world economy today are vehicles of a post-Keynesian orthodoxy. At the level of sovereign states, they claim that the management of national economies by the control of demand is neither feasible nor desirable. All that is needed for free markets to coordinate economic activity is a framework providing monetary and fiscal stability. The Keynesian policies of the post-war era are rejected as unnecessary or harmful. At the global level, according to these transnational organizations, free markets are equally self-stabilizing. They need no overall governance to prevent economic and social dislocation.

    Economic globalization — the worldwide spread of industrial production and new technologies that is promoted by unrestricted mobility of capital and unfettered freedom of trade — actually threatens the stability of the single global market that is being constructed by American-led transnational organizations.

    The central paradox of our time can be stated thus: economic globalization does not strengthen the current regime of global laissez-faire. It works to undermine it. There is nothing in today's global market that buffers it against the social strains arising from highly uneven economic development within and between the world's diverse societies. The swift waxing and waning of industries and livelihoods, the sudden shifts of production and capital, the casino of currency speculation -- these conditions trigger political counter-movements that challenge the very ground rules of the global free market.

    Today's worldwide free market lacks the political checks and balances which allowed its mid-Victorian precursor in England to wither away. It can be made more humanly tolerable for the citizens of states which pursue innovative and resourceful policies, but such reforms at the margin will not render the global free market much less unstable. Today's regime of global laissez-faire will be briefer than even the belle époque of 1870 to 1914, which ended in the trenches of the Great War.

Engineering the free market in early Victorian England

The free market that developed in Britain in the mid-nineteenth century did not occur by chance. Nor, contrary to the mythic history propagated by the New Right, did it emerge from a long process of unplanned evolution. It was an artefact of power and statecraft. In Japan, Russia, Germany, and in the United States throughout decades of American protectionism, state intervention has been a key factor in economic development.

    Laissez-faire is not a necessary condition of successful industrialization or of sustained economic growth. The political institutions that have gone with steady economic growth and rapid industrialization throughout most of the world have been those of a developmental capitalist state. The English case, in which laissez-faire, free trade and industrialization coincided, is sui generis.

    Indeed, even in nineteenth-century England, state intervention on a most ambitious scale was an indispensable prerequisite of a laissez- faire economy. A precondition of the nineteenth-century British free market was the use of state power to transform common land into private property. This was engineered through the Enclosures that occurred from the Civil War up to early Victorian times. These appropriations tilted the balance of ownership in England's agrarian market economy away from cottagers and yeoman farmers towards the great landowners of the late eighteenth and early nineteenth centuries. Ideologues such as Hayek, who developed grand theories wherein market economies emerge by a slow evolution in which the state plays little role, not only generalized wildly from a single case, they misrepresented that case.

    As Barrington Moore summarizes the history of the Enclosure movement: `... it was Parliament that ultimately controlled the process of enclosure. Formally the procedures by which a landlord put through an enclosure by Act of Parliament were public and democratic. Actually the big property owners dominated the proceedings from start to finish.' He comments: `The span of time when these changes were most rapidly and thoroughly taking place is not absolutely clear. It seems most likely, however, that the enclosure movements had gathered greatest speed during the Napoleonic wars, to die out after 1832, by which time it had helped to change the English countryside beyond recognition.'

    It is hyperbolic to suggest, as Barrington Moore does, that the Enclosures transformed England from a peasant society to a market economy. A market economy pre-dated the enclosure movement by centuries. Yet the Enclosures helped form the nineteenth-century agrarian capitalist economy of large landed estates. The mid-Victorian free market was an artefact of state coercion, exercised over several generations, in which property rights were created and destroyed by Parliament.

    The British state in which the free market was thereby engineered — unlike most of those in which it is being presently being constructed — was pre-democratic. The franchise was small and the overwhelming majority of the population was excluded from political participation. It is doubtful if the free market would ever have been engineered if working democratic institutions were in place. It is a matter of historical record that the free market began to wither away with the entry of the broad population into political life. As the more clear-sighted ideologues of the New Right have always recognized, the unfettered market is incompatible with democratic government.

    The late-twentieth-century free market experiment is an attempt to legitimate through democratic institutions severe limits on the scope and content of democratic control over economic life. The pre-democratic preconditions of the mid-Victorian free market tell us a good deal about its prospects of political legitimacy today.

    Among the measures which created the free market none was more important than the Repeal of the Corn laws, which established agricultural free trade. The Corn Law of 1815, which followed on protectionist legislation going back in various forms to the seventeenth century, was repealed in 1846 in a dramatic victory for the advocates of free trade.

    Repeal of the Corn Laws represented a defeat for the landed interest and a triumph for laissez-faire thinking. The proposition that a market economy must always be subject to ultimate political oversight and control with the aim of safeguarding social cohesion had been until then an article of political commonsense — certainly among Tories. Free trade was little more than a radical theory. In England thereafter this was reversed. Free trade became the common property of the political classes of all parties, and protectionism a wild heresy, until the disasters of the 1930s.

    Not much less significant in the formation of the free market was Poor Law Reform. The Poor Law Act of 1834 was a decisive piece of legislation. It set the level of subsistence lower than the lowest wage set by the market. It stigmatized the recipient by attaching the harshest and most demeaning conditions to relief. It weakened the institution of the family. It established a laissez-faire regime in which individuals were solely responsible for their own welfare, rather than sharing that responsibility with their communities.

    Eric Hobsbawm captures the background, character and effects of the welfare reforms of the 1830s when he writes:

The traditional view, which still survived in a distorted way in all classes of rural society and in the internal relations of working-class groups, was that a man had a right to earn a living, and, if unable to do so, a right to be kept alive by the community. The view of middle-class liberal economists was that men should take such jobs as the market offered, wherever and at whatever rate it offered, and the rational man would, by individual or voluntary collective saving and insurance make provision for accident, illness and old age. The residuum of paupers could not, admittedly, be left actually to starve, but they ought not to be given more than the absolute minimum — provided it was less than the lowest wage offered in the market, and in the most discouraging conditions. The Poor Law was not so much intended to help the unfortunate as to stigmatize the self-confessed failures of society ... There have been few more inhuman statutes than the Poor Law Act of 1834, which made all relief `less eligible' than the lowest wage outside, confined it to the jail-like work-house, forcibly separating husbands, wives and children in order to punish the poor for their destitution.

    This system applied to at least 10 per cent of the English population in the mid-Victorian period. It remained in force until the outbreak of the First World War.

    The central thrust of the Poor Law reforms was to transfer responsibility for protection against insecurity and misfortune from communities to individuals and to compel people to accept work at whatever rate the market set. The same principle has informed many of the welfare reforms that have underpinned the re-engineering of the free market in the late twentieth century.

    In the era of the New Right, as in early mid-Victorian England, the unintended consequences of earlier welfare institutions were sufficiently serious to make welfare reforms politically unavoidable and indeed desirable. The nineteenth-century system of supplementing wages from local rates created a large system of outdoor poor relief which was not indefinitely sustainable. By the 1980s some of the institutions of the Beveridge welfare state no longer corresponded to late modern patterns of family and working life. They were in danger of institutionalizing poverty rather than ending it. New Right policymakers seized on these dangers to reshape welfare provisions to match the imperatives of deregulated markets.

    No less important than Poor Law reform in the mid-nineteenth century was legislation designed to remove obstacles to the determination of wages by the market. David Ricardo stated the orthodox view of the classical economists when he wrote, `Wages should be left to fair and free competition of the market, and should never be controlled by the interference of the legislature.'

    It was by appeal to such canonical statements of laissez-faire that the Statute of Apprentices (enacted after the Black Death in the fourteenth century) was repealed and all other controls on wages ended in the period leading up to the 1830s. Even the Factory Acts of 1833, 1844 and 1847 avoided any head-on collision with laissez-faire orthodoxies. `The principle that there should be no interference in the freedom of contract between master and man was honoured to the extent that no direct legislative interference was made in the relationship between employers and adult males ... it was still possible to argue for a further half-century, though with diminishing plausibility, that the principle of non-interference remained inviolate.'

    The removal of agricultural protection and the establishment of free trade, the reform of the poor laws with the aim of constraining the poor to take work, and the removal of any remaining controls on wages were the three decisive steps in the construction of the free market in mid-nineteenth-century Britain. These key measures created out of the market economy of the 1830s the unregulated free market of mid-Victorian times that is the model for all subsequent neo-liberal policies.

    The reform of welfare institutions to compel the poor to take whatever work was available, the scrapping of wage councils and other controls on incomes, and the opening up of the national economy to unregulated global free trade, have been central and fundamental neoliberal policies during the 1980s and 1990s throughout the world. In every case the core of the free market that has been constructed is a deregulated labour market. In Britain, the United States and New Zealand, as well as countries such as Mexico which have had structural adjustment imposed on them by transnational financial institutions, the outcome has been an approximation to a free market in which labour is traded freely as a commodity just like any other.

    In many ways the establishment of the free market in nineteenth-century England was an historical singularity. It was generated, for a while with some success, in peculiarly fortunate historical circumstances. In the rest of Europe, nothing like the English free-market experiment was tried. The nineteenth-century English project, like its modern equivalent, could not have advanced as far as it did if it had not gone with the flow of large economic and technological changes.

    The statecraft which constructed the free market in England turned to its purposes the effects of a centuries-long development. In the course of this historical movement, market forces had come to be a dominant force in social life. Market exchange there had always been, and in England a market economy had existed for several hundred years; but it was at this juncture in history that the truly free market came into being, thereby creating a market society.

    Karl Polanyi notes that, `Ultimately ... the control of the economic system by the market is of overwhelming consequence to the whole organization of society; it means no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system.' Here Polanyi makes a distinction between societies in which economic activities, including all the phenomena we group together under the category of market exchange, are inseparable from other areas of social activity, and societies in which markets form a separate realm, distinct and independent from all others.

    In pre-modern traditional societies, prices often have the status of conventions, many goods cannot be bought or sold, exchange is tied up with locality and kinship, and `the market' has not yet emerged as a distinct social and cultural institution. In such societies, there is no such thing as `the market'.

    In market societies, by contrast, not only is economic activity distinct from the rest of social life, but it conditions, and sometimes dominates, the whole of society. In several countries in northwest Europe in the early modern period, markets developed and freed themselves in varying degrees from the remnants of the social controls of medieval life. Yet in no country apart from England did the social institution of the free market come into existence. The countries of continental Europe were market economies but not market societies. They have remained so to this day.

    Where market societies have emerged, Polanyi observes, it has not been as a result of chance or evolution but through the artifice of recurrent and systematic political intervention.

The step which makes isolated markets into a market economy, regulated markets into a self-regulating market, is indeed crucial. The nineteenth century ... naively imagined that such a development was the natural outcome of the spreading of markets. It was not realized that the gearing of markets into a self-regulating system was not the result of any inherent tendency of markets ... but rather the effect of highly artificial stimulants administered to the body social in order to meet a situation which was created by the no less artificial phenomenon of the machine.

    Here we must modify Polanyi's Marxian interpretation. We need to take the full account of the exceptional character of social conditions in England in the early nineteenth century. Unlike any country in continental Europe, England had long possessed a highly individualist legal culture of property ownership. Land had long been traded as a commodity, labour had long been mobile, the immobility of village life common in many continental European countries was rare or unknown, and family life was closer to modern nuclear families than to pre-modern extended families. England was not, as other European countries still were in the nineteenth century, a peasant society.

    In this regard, Alan Macfarlane may be right to maintain that `one of the major theories of economic anthropology is incorrect, namely the idea that we witness in England between the sixteenth and nineteenth centuries the "Great Transformation" from a non-market, peasant society where economics is "embedded" in social relations to a modern market, capitalist system where economy and society have been split apart? This view,' Macfarlane continues `is most clearly expressed in the work of Karl Polanyi ... when Adam Smith founded classical economics on the premise of the rational "economic" man, believing he was describing a universal and long-evident type, he was eluded. According to Polanyi, such a man had only just emerged, stripped of his ritual, political and social needs ... [But] it was Smith who was right and Polanyi who was wrong, at least in relation to England. "Homo economicus" and the market society had been present in England for centuries before Smith wrote.' Macfarlane concludes, however, that `Polanyi's insight that Smith was writing within a particular social environment is correct when we realize that in many respects England had probably long been different from almost every other agrarian civilization we know.'

    The free market was — and remains — an Anglo-Saxon singularity. It was constructed in a context not found in any other European society: it existed in full-blown form for only about a generation. It could never have been created at all if ownership and economic life had not long been thoroughly individualist in nineteenth-century England. It was an experiment in social engineering undertaken in exceptionally propitious circumstances.

    Revising Polanyi's account of the Great Transformation to take account of these considerations does not restrict its application to our current circumstances. It enhances its relevance. It illuminates even more clearly the hubris of seeking to transplant worldwide a social institution that has figured only briefly in the history of one strand of capitalism — once in the nineteenth century, in the English paradigm case, and again in the 1980s of this century, in Britain, the United States, Australia and New Zealand, as a consequence of neo-liberal policies.

    Taking a longer historical perspective, it is hardly surprising that these Anglo-Saxon countries are the only ones in which the free market has existed for even a short period. For, as Macfarlane notes, `the only areas that had never had peasantries at all were those colonized by England: Australia, New Zealand, Canada and North America'. These Anglo-Saxon countries were societies in which a culture and economy of agrarian individualism preceded industrialization. They incubated an economic culture in which the free market could for a short time be established, but which nonetheless presupposed exceptional legal, social and economic conditions, along with the ruthless use of the powers of a strong state. Even in these favourable environments, the free market proved so humanly costly and so disruptive of the life of society that it could not be rendered stable. It is the disappearance of the nineteenth-century free market, not its emergence, that occurred as a result of a slow historical evolution. In that evolution the unplanned workings of democratic political institutions were decisive.

    The free market that existed in England from the 1840s to the 1870s could not be reproduced. In the strictly economic terms of rising productivity and national wealth, the mid-Victorian period was one of boom. But it was a boom whose social costs were politically insupportable.

    As the democratic franchise was extended, so was state intervention in the economy. From the 1870s to the First World War, a Spate of reforms was implemented, limiting market freedoms for the sake of social cohesion (and sometimes economic efficiency). By 1870 the `patently interventionist' Education Act was passed. These reforms did not represent the execution of any comprehensive design. But by the close of the century they had put an end to the brief episode of laissez-faire in England. With the outbreak of the First World War the foundations of the welfare state had been laid in Britain.

    Free trade survived until the impact on Britain of the Great Depression, persisting as a dogma long after its utility as an ideology had been exhausted. It was abandoned only when the loss of Britain's comparative advantage in international trade became intolerable. As Corelli Barnett has put it, `It was only the coming of another great emergency, the world slump, which finally broke the taboo of liberal economic doctrine in Britain. Free Trade itself was abandoned in 1931. It was nearly a hundred years since it had opened the way to British dependence on overseas markets and supplies for its very existence ...' In the mid-nineteenth century free trade was adopted by Britain for several reasons, including the comparative advantage Britain still possessed in world markets as the first industrialized country. The power of laissez-faire ideas in Britain reflected that advantage.

    Laissez-faire thinking was supplanted by the `New Liberal' thinkers such as Hobhouse, Hobson, Bosanquet, Green and Keynes who were ready to harness the powers of the state to moderate the effects of market forces, to relieve poverty and promote social welfare. In the first decade of this century the New Liberals found in Lloyd George their first and greatest political architect.

    The slow growth of welfare legislation in the last quarter of the nineteenth century was succeeded by a swift advance towards a welfare state. Both the philosophy and the policies that had created the free market were discarded. The economic insecurities of the free market interacted with the imperatives of party competition in an emerging democracy. The result was to kill off the political influence of laissez- faire.

    Yet the classical liberal illusion of the free market as a self-regulating system still lingered through the interwar years. It inspired the deflationary expenditure cuts which deepened the Great Slump. Even the growth of fascist movements which fed on Europe's post-war economic dislocations was not sufficient to shake the faith in self-correcting markets. It took the catastrophe of the Second World War to jolt economic orthodoxy into accepting Keynesian ideas.

    The managed economies of the post-war period did not arise from an intellectual conversion from laissez-faire, however. They grew out of a horror of the economic collapses and dictatorships that had led to the Second World War and from the resolute refusal of voters in Britain to return to the social order of the interwar years.

    The idea of a self-stabilizing international economic order perished in the totalitarian dictatorships, forced migrations, Allied saturation bombing and the measureless horror of the Nazi genocide. In Britain, the idea was killed by the experience of a war economy, far more efficient than that of Nazi Germany, in which joblessness was unknown and nutritional and health standards higher for the majority than they had been in peacetime.

    Laissez-faire made an anachronistic and ephemeral return to political life during the 1980s and 1990s. The declining productivity and social and industrial conflicts of British corporatism were the catalysts for the intervention of the International Monetary Fund in the management of the British economy in 1976. That intervention began the swift unravelling of Britain's post-war Keynesian economic consensus which culminated with Margaret Thatcher's rise to power in 1979.

    Mrs Thatcher's government captured the spirit of the age and responded to some of Britain's needs. In their earlier years the Tories completed, as Labour could not, the dismantling of British corporatism that was a precondition of economic modernization; but this necessary response to a particular national dilemma degenerated into a universal ideology. Thatcher became an icon of the global free market, and her policies were emulated throughout the world.

    The fate of the regime of deregulation and marketization which was installed in many countries in the 1980s is likely to be similar to that of the nineteenth-century English free market. But it will be harder now than it was then to moderate the social costs of free markets. The leverage of national governments over their economies is much weaker. If social markets are to survive or be rebuilt they will need to be embodied in new and more flexible institutions.

    Large and widening economic inequalities threaten the political stability of the free market at both national and global levels. It is not easy to see how the American-led concert of the great powers on which today's global market relies can withstand a prolonged setback in the world economy. The policies of crisis management that have averted catastrophe in the recent past will not now be adequate.

    A breakdown of the present global economic regime could well result from current policies. Those who imagine that great errors of policy are not repeated in history have not learnt its chief lesson — that nothing is ever learnt for long. We are at present in the midst of an experiment in utopian social engineering whose outcome we can know in advance.

The false dawn of the global free market

The laissez-faire policies which produced the Great Transformation in nineteenth-century England were based on the theory that market freedoms are natural and political restraints on markets are artificial. The truth is that free markets are creatures of state, power, and persist only so long as the state is able to prevent human needs for security and the control of economic risk from finding political expression.

    In the absence of a strong state dedicated to a liberal economic programme, markets will inevitably be encumbered by a myriad of constraints and regulations. These will arise spontaneously, in response to specific social problems, not as elements in any grand design. The parliamentarians who passed Factory Acts in the 1860s and 1870s were not reconstructing society or the economy according to a plan. They were responding to problems of working life — danger, squalor, inefficiencies — as they became aware of them. Laissez-faire withered away as the unintended consequence of a multitude of such uncoordinated responses.

    Encumbered markets are the norm in every society, whereas free markets are a product of artifice, design and political coercion. Laissez- faire must be centrally planned; regulated markets just happen. The free market is not, as New Right thinkers have imagined or claimed, a gift of social evolution. It is an end-product of social engineering and unyielding political will. It was feasible in nineteenth-century England only because, and for so long as, functioning democratic institutions were lacking.

    The implications of these truths for the project of constructing a worldwide free market in an age of democratic government are profound. They are that the rules of the game of the market must be insulated from democratic deliberation and political amendment. Democracy and the free market are rivals, not allies.

    The natural counterpart of a free market economy is a politics of insecurity. If `capitalism' means `the free market', then no view is more deluded than the belief that the future lies with `democratic capitalism'. In the normal course of democratic political life the free market is always short-lived. Its social costs are such that it cannot for long be legitimated in any democracy. This truth is demonstrated by the history of the free market in Britain, and it is well understood by more farsighted neo-liberal thinkers who plan to make the free market global.

    Those who seek to design a free market on a worldwide scale have always insisted that the legal framework which defines and entrenches it must be placed beyond the reach of any democratic legislature. Sovereign states may sign up to membership of the World Trade Organisation; but it is that organization, not the legislature of any sovereign state, which determines what is to count as free trade, and what a restraint of it. The rules of the game of the market must be elevated beyond any possibility of revision through democratic choice.

    The role of a transnational organization such as the WTO is to project free markets into the economic life of every society. It does so by trying to compel adherence to the rules which release free markets from the encumbered or embedded markets that exist in every society. Transnational organizations can get away with this only insofar as they are immune from the pressures of democratic political life.

    Polanyi's description of the legislation that was required to create a market economy in the nineteenth century applies with equal force to the project of the global free market today, as has been advanced through the World Trade Organisation and similar bodies.

Nothing must be allowed to inhibit the formation of markets, nor must incomes be permitted to form other than through sales. Neither must there be any interference with the adjustment of prices to changed market conditions — whether the prices are those of goods, labour, land, or money. Hence there must not only be markets for all elements of industry, but no measure or policy must be countenanced that would influence the action of these markets. Neither price, nor supply, nor demand must be fixed or regulated; only such policies and measures are in order which help to ensure the self-regulation of the market by creating conditions which make the market the only organizing power in the economic sphere.

    To be sure, this is an unrealizable fantasy; its pursuit by transnational bodies has produced economic dislocation, social chaos and political instability in hugely different countries throughout the world.

    In the conditions in which it has been attempted in the late twentieth century, reinventing the free market has involved ambitious social engineering on a massive scale. No reformist programme today has a chance of success unless it understands that many of the changes produced, accelerated or reinforced by New Right policies are irreversible. Equally, no political reaction against the consequences of free-market policies will be effective that does not grasp the technological and economic transformations that such policies were able to harness.

    Reinventing the free market has effected profound ruptures in the countries in which it has been attempted. The social and political settlements which it has destroyed — the Beveridge settlement in Britain and the Roosevelt New Deal in the United States — cannot now be recreated. The social market economies of continental Europe cannot be renewed as recognizable variants of post-war social or Christian democracy. Those who imagine that there can be a return to the `normal politics' of post-war economic management are deluding themselves and others.

    Even so, the free market has not succeeded in establishing the hegemonic power that was envisaged for it. In all democratic states the political supremacy of the free market is incomplete, precarious and soon undermined. It cannot easily survive periods of protracted economic setback. In Britain the unintended consequences of neo-liberal policies themselves weakened the New Right's hold on political power. The delicate coalition of electoral and economic constituencies that the New Right mobilized in support of its policies was soon scattered.

    It was dissolved partly by the effects of New Right policies and partly by the forces that are loose in the world economy at large. New Right policies offered those who voted for them a chance of upward social mobility. Over time they undid the social structures in which such aspirations were framed. Moreover, they imposed heavy costs and risks on some aspirants to property-ownership. Those who have been immobilized by negative equity in their homes can hardly be expected to be enthusiastic about the regime of deregulation that landed them in their difficulties. The economic insecurities which New Right policies exacerbate were bound to weaken the initial coalitions that supported and benefited from these policies. Labour's landslide victory in May 1997 resulted partly from these self-undermining effects of the Tories' New Right policies.

    However, the dislocations of social and economic life today are not caused solely by free markets. Ultimately they arise from the banalization of technology. Technological innovations made in advanced western countries are soon copied everywhere. Even without free-market policies the managed economies of the post-war period could not have survived — technological advance would have made them unsustainable.

    New technologies make full employment policies of the traditional sort unworkable. The effect of information technologies is to throw the social division of labour into a flux. Many occupations are disappearing and all jobs are less secure. The division of labour in society is now less stable than it has been since the Industrial Revolution. What global markets do is to transmit this instability to every economy in the world, and in doing so they make a new politics of economic insecurity universal.

    The free market cannot last in an age in which economic security for the majority of people is being reduced by the world economy. The regime of laissez-faire is bound to trigger counter-movements which reject its constriants. Such movements — whether populist and xenophobic, fundamentalist or neo-communist — can achieve few of their goals; but they can still rattle to pieces the brittle structures that support global laissez-faire. Must we accept that the world's economic life cannot be organized as a universal free market and that better forms of governance by global regulation are unachievable? Is a late modern anarchy our historical fate?

    A reform of the world economy is needed that accepts a diversity of cultures, regimes and market economies as a permanent reality. A global free market belongs to a world in which western hegemony seemed assured. Like all other variants of the Enlightenment Utopia of a universal civilization it presupposes western supremacy. It does not square with a pluralist world in which there is no power that can hope to exercise the hegemony that Britain, the United States and other western states possessed in the past. It does not meet the needs of a time in which western institutions and values are no longer universally authoritative. It does not allow the world's manifold cultures to achieve modernizations that are adapted to their histories, circumstances and distinctive needs.

    A global free market works to set sovereign states against one another in geo-political struggles for dwindling natural resources. The effect of a laissez-faire philosophy which condemns state intervention in the economy is to impel states to become rivals for control of resources that no institution has any responsibility for conserving.

    Nor, evidently, does a world economy that is organized as a global free market meet the universal human need for security. The raison d'être of governments everywhere is their ability to protect citizens from insecurity. A regime of global laissez-faire that prevents governments from discharging this protective role is creating the conditions for still greater political, and economic, instability.

    In advanced economies that are competently and resourcefully governed, ways may be found in which the risks imposed on citizens by world markets can be mitigated. In poorer countries, global laissez- faire produces fundamentalist regimes and works as a catalyst for the disintegration of the modern state. At the global level, as at that of the nation-state, the free market does not promote stability or democracy. Global democratic capitalism is as unrealizable a condition as worldwide communism.

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George Soros
False Dawn is a powerful analysis of the deepening instability of global capitalism. It should be read by all who are concerned about the future of the world economy.

Meet the Author

John Gray is a political philosopher and former professor of European thought at the London School of Economics. He is the author of False Dawn: The Delusions of Global Capitalism, Two Faces of Liberalism, and Al Qaeda and What It Means to Be Modern, all published by The New Press. He lives in London.

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